developments. the above considerations indicate areas where further assistance may be required by particular countries. apart from programs supported by international organisations, continuing recourse to bilateral co - operation arrangements between authorities of eu countries and those of see countries would be particularly useful. in this respect, the experience of the authorities of eu countries that have relatively recently completed the reform of their financial sector in accordance with international standards would be a valuable input to the authorities of see countries that currently face similar challenges. also, peer group reviews by financial sector supervisors from other countries could play a useful role in periodically assessing the effectiveness of financial sector regulation and supervision in each see country and in offering advice on needed improvements. finally, national banking federations of see countries can help to bring the operation of local banks up to eu standards through multilateral co - operation in the areas of staff training and convergence in the implementation of sound operating and risk management systems. to this end, the national banking federations participating in the interbalkan banking forum have recently signed a memorandum of understanding. it is important to recognize that, as the financial systems of see countries are liberalized and their economies become more open, the task of maintaining financial stability becomes more challenging. in meeting this challenge, i believe that arrangements for supervisory co - operation and the provision of technical assistance can continue to play a useful role in supporting national efforts for further regulatory and supervisory reform aimed at strengthening the resilience of the financial sector of see countries and achieving conformity with eu standards. let me conclude by stressing the importance of the financial system for economic growth. why is the financial system so crucial? the answer is that the financial system can be thought of as a coordinating mechanism that allocates capital to building factories, houses and roads. if capital is misallocated, the economy will operate inefficiently and economic growth will be low ( mishkin, 2005 ) 1. effectively, just as a high level of human capital increases the productivity of labour, so an efficient financial system increases the productivity of all factor inputs. for this reason, a financial system can be thought of as the central nervous system of an economy. if it is stable and efficient, it coordinates the economy ’ s activities, helping to improve the living standards of its citizens thank you for your attention. mishkin, s. frederick ( 2005 ), “ is financial globalization beneficial? ” nber working paper no. 11891 ( december ).

in the banking sector compared to other segments of the financial system. this is due to the fact that the capital markets are still underdeveloped in see countries, with the banking sector dominating the financial system in these countries. accordingly, both the national authorities and the foreign providers of technical assistance place more emphasis on regulatory and supervisory reform in the banking sector. [ bulgaria and romania have nevertheless made progress toward harmonization with eu regulations on capital markets. ] meanwhile, in all see countries except turkey, foreign banks, mainly from eu countries, have acquired, through their subsidiaries and branch networks, a dominant position in local banking systems. this development has increased competition, facilitated the transfer of expertise especially in credit assessment and risk management and enhanced the ability of local banking systems to operate under more demanding supervisory standards. in contrast with the banking sector, the insurance sector in see countries is still underdeveloped and tends to be characterized by weak governance and regulation, despite improvements in recent years, mainly in bulgaria and romania in connection with these countries ’ preparation for eu accession. furthermore, reflecting the persisting problems in governance and regulation, the insurance sector in see countries tends to be undercapitalized. in the banking sectors of see counties, it appears that the degree of progress towards achieving international best standards has not been the same in all areas of regulatory and supervisory interest, particularly as regards the implementation and enforcement capabilities of the competent authorities. in a number of countries, assessments on behalf of the european commission and the imf have revealed remaining weaknesses in such fields as anti - money laundering, consolidated supervision of financial conglomerates, implementation of international financial reporting standards ( ifrs ), integrated assessment of risk management systems and the extent of co - operation with foreign supervisors. [ as regards the ifrs, it is worth noting that bulgaria, romania, croatia, and serbia have already implemented these standards for companies and banks, while turkey and albania envisage their implementation by 2008. ] moreover, see countries face important medium - term challenges relating to the effective application of the principles of good corporate governance across the financial sector, the implementation of the basel ii capital adequacy framework and the development of a comprehensive methodology for financial stability assessment, including the design of a macro stresstesting framework, especially for credit risk. although central banks in some see countries have already made progress in financial stability assessment, more work needs to be done and such assessments need to increasingly take into account potential repercussions from regional and wider european