their administrative and regulatory capabilities. financial institutions were reformed with insufficient regulation and unclear focus and expansion was associated with improprieties, scandals and fraudulent schemes during the early stages of transition. therefore, the financial sector was unable to attract deposits and develop extensive client networks. finally, state banks were compelled to carry a high number of non - performing loans, which had been accumulated by the government subsidization programs to state run enterprises. the development of the financial sector was hampered at the beginning by inadequate macroeconomic management. fiscal deficits were mostly excessive, and often monetized, and the inevitable outcome was high inflation. it is encouraging that in the last few years we can see clear evidence of maturity in economic management. the path to macroeconomic stabilization was different for every country. in the region we can now observe all types of monetary and exchange rate regimes, from formal euro - ization and currency boards linked to the euro, all the way to monetary targeting. this is proof, if proof was needed, that there is no single solution, to economic problems but that the policies of each country should be tailored to its specific needs. going beyond the diversity of the region, at this point i would like to underline two characteristics of the financial system of practically all countries in the region, which are the result of their past, but will also shape their future developments. the first is extensive currency substitution. as a result of past inflation, but also because of the large numbers of people working abroad, foreign currencies, and especially the euro, play a large role and they have often become the main currency in use. one can gauge the degree of currency substitution by noting that in all countries in the region deposits in a foreign currency account for at least half of all bank deposits. one must add to this, money " kept under the mattress " and capital flight. undoubtedly all these were a vote of no confidence in domestic policymakers. people showed their dissatisfaction with local financial institutions and monetary authorities by moving their savings abroad, or by using other, more stable currencies. this high degree of currency substitution can only be found in some latin american countries and undermined the effectiveness of monetary policy. the ability of monetary authorities to extract seignorage was severely limited, and this is a partial justification of the high inflation rates. at the same time, monetary management became more difficult, as small shocks had a disproportionately big impact on inflation and the exchange rate. in

this is not enough. the euro area is an economic and monetary union, an “ e - m - u ”. european governments have strengthened the governance framework through the six - pack and the fiscal compact. their actions to address fiscal and economic imbalances are bearing fruit. they should further enhance their efforts to boost the single market. so the “ e ” stands for “ economic ”. the ecb has used conventional and non - conventional measures to support price stability. it is striving to restore the transmission channels of monetary policy and make sure that the impulse stemming from it is transmitted uniformly across the 17 economies of the euro area. so the “ m ” stands for “ monetary ”. but the letter “ f ” – for financial – is missing : to operate smoothly and to be more resilient to crises, the economic and monetary union has to become a true financial union. i thank you for your attention. bis central bankers ’ speeches