Nonetheless, of all the possible links between financial stability and the other objectives of macroeconomic policy, it is the one between the two key functions of central banks - price stability and financial stability - which has received most attention. And this for very good reasons. For a start, we know from experience that inflation brings about distortions in the allocation of resources, and such misallocation is incompatible with the achievement of financial stability on a sustainable basis. We have also learnt that the efficiency of monetary policy depends on the effectiveness of the transmission channels. Central banks can only influence short-term interest rates. The ultimate impact on prices of monetary policy decisions travels over time through various channels in the financial system, and uncertainty could ensue if these do not function efficiently. Another reason for this focus of attention could be that while the supervisory function has been relocated outside central banks in many countries, responsibility for the maintenance of systemic stability remains with central banks. The relationship between financial and monetary stability is not, however, necessarily limited to complementarities. In a situation characterised by both rising inflationary pressures and tight liquidity conditions, for example, a decision to raise interest rates would be consistent with the central bank’s price stability objective but could also affect the profitability of credit institutions. It is thus hardly surprising that one of the topical issues facing central banks today concerns the appropriate weight that should be given to financial stability considerations in the formulation of monetary policy.

This assurance should also facilitate the further development of the financial sector in these countries, as foreign banks and other financial services providers seek to tap what is soon to become an enlarged market of almost 500 million people, either directly by setting up shop in these countries or indirectly through the cross-border provision of financial services. The advantages for financial stability of a diversified financial structure are well-documented. Suffice it to recall that because different financial market segments react differently to economic shocks, the presence of different types of intermediaries and markets functioning alongside each other should strengthen the financial system’s capacity to absorb liquidity shocks emanating from specific institutions or market segments. For accession countries, the scope for diversification presented by EU membership is significant, not only because the financial sector tends to be small relative to their economic size, but more so because intermediation in these countries is dominated by the banks. In fact, a recent ECB report concludes that the financial sectors of accession countries could assimilate a fifteen-fold increase in absolute 3 terms. Financial integration in the euro area, moreover, may also promote financial stability in the accession countries through the advantages inherent in a single currency area. For a start, the disruption arising from currency risk is eliminated, domestic economies become immune to currency misalignment episodes that disturb trade and currency risk premiums disappear from interest rates.