Ladies and Gentlemen you will agree with me that we have come a long way since the time when many viewed the financial system simply as a sideshow, or a passive channel that allocated scarce resources to the most efficient uses. Today, almost everyone agrees that the financial system is essential for development. Improving the financial system can lead to higher growth and reduce the likelihood and severity of crises. It is essential that we have a clear understanding of the causes of business cycles and the working of monetary policy. In thinking about financial reform, we need to treat liberalization as a means rather than an end. Instead of pushing for immediate deregulation, we should try to understand the important role authorities play in financial markets. These steps will not only result in a better and more stable allocation of domestic capital, but also help countries to develop their capital markets with the requisite financial systems. In view of this I encourage you all to join hands with authorities in your countries in improving financial infrastructure so as to contribute to the development of our regional financial  BIS Review 149/2010  5  systems and thereby improving the availability of capital. I am also encouraged by the increasing number of financial service providers in our economies. As competition intensifies, banks and other financial institutions will start to reposition themselves by lowering the cost of lending to the private sector.

These include insurance companies, mutual funds and pension funds which achieve important economies of scale through pooling small savings, diversifying investments and monitoring market information. Institutional investors raise the level of professionalism within markets through requiring better information and increased transparency. Financial infrastructure: Capital market participants nearly unanimously agree that they should not engage in underwriting, trading or asset management activities in the absence of a secure legal and regulatory environment. Foreign investment funds usually cannot go into a market that lacks adequate legislation and oversight. Ladies and Gentlemen, many organized exchanges operate as self-regulatory organizations (SROs) that sometimes do not meet internationally recognized norms for transparency and disclosure. Although exchanges perform a self-regulatory function, most developed financial systems additionally have a securities exchange commission-type institution that provides an additional layer of oversight. Investors look to these organizations to safeguard the markets through establishing minimum standards of capitalization, registration of securities and market participants, timely and material disclosure and effective enforcement. In addition to the legal and regulatory framework, the financial infrastructure should include a non-bank payments system for the organized exchanges. Commonly called clearance and settlement within a central securities depository, these clearing houses depend importantly on legislation enabling their establishment and on the clarification of legal concepts such as netting and the treatment of guarantees in bankruptcy for their effective operation.