currency accounts and french banks to lend french francs to non – residents. of course, the indian experience differs from the french one as there is no " one - size - fits - all " transition process. and i would be very interested in listening to your views on this. 2. but before, let me remind you that, to be successful, it is not sufficient to improve the financial system : shaping appropriate institutions and economic policies is of the essence the need to set in place strong institutions should never be underestimated. a g20 work entitled " institution building in the financial sector " ( in which both india and france participated ) stressed the importance of solid institutions along with deep and sophisticated financial markets as key elements to maximise the benefits of globalisation and reduce the risks of financial crises. an appropriate institutional framework includes among others a well functioning legal system, a reliable payment system, a proper framework for regulation and supervision, an appropriate deposit insurance scheme, and propitious conditions for implementing new developments in information and communication technology. as a central banker, i will of course argue that the role of the central bank is crucial. it should be the guardian of the health of the " financial ecosystem " through reinforced surveillance and a continuous improvement of the regulatory and legal framework. sound supervision must be promoted by an independent body, which may be more or less related to the central bank. in france as in india, banking supervision is indeed implemented by the central bank staff. sound supervision and a clear legal framework in turn are likely to encourage foreign participation and maximise the associated benefits in terms of best practices. the need for appropriate supervision is indeed not reduced but modified or may even be increased in case of financial liberalisation. for instance, a working group in process at the bis, in which both the rbi and the bdf are currently participating, shows that the development of local bond markets changes the types of risks faced domestically from currency risks to interest rate risks or maturity mismatches. this requires to enhance and control adequate risk management in the banking sector and in those institutions in which the risk may have been transferred. indeed financial innovations such as credit risk transfers may well spread risks but risk does not disappear. the central bank is also responsible for producing and disseminating various sets of monetary and financial statistics whose quality is of utmost importance for policy makers and investors. an efficient statistical apparatus provides the basis for financial transparency, thus contributing to disseminating best practices in terms of governance. besides, institutional quality also

countries to participate voluntarily in the imf financial stability assessment program ( fsap ). in my view, the progressive and transparent character of this process is fundamental to guarantee that a country reaps the full benefits of its integration into the world economy. the lessons that can be drawn from a comparison with the french experience may seem limited since, in the 1980s, france was facing capital outflows, whereas emerging economies are now often facing speculative capital inflows. however, i believe that, while the challenge has become more demanding, successful financial liberalisation for emes still rests on the same two key conditions that applied to france : • building a resilient domestic financial system while or before opening the capital account. • shaping appropriate institutions and policies. i will illustrate these two conditions in the reminder of my speech. 1. a successful liberalisation requires to strengthen the domestic financial system while, or sometimes before, opening the capital account i will briefly remind you why and how this can be done. first, why? this is because an efficient financial sector ensures both a better financing of and a better protection for the economy. on the one hand, it ensures a better financing of the economy by broadening the investor base and enhancing their ability to make use of diversified financial instruments. not only does competition within the financial sector contribute to limiting the cost of capital but it also fosters innovation and thus allows for more efficient risk management. for example, securitisation provides financial institutions with instruments to manage the composition of their balance sheets and thus contributes to buttressing credit distribution while supporting the development of financial markets. moreover the development of bond markets allows for a better financing of public deficits while providing instruments that enable international investors to diversify their portfolios. it provides a reference for the market and may thus pave the way for the issuance of private bonds. on the other hand, an efficient and developed financial sector offers better protection for the economy against the risks of a capital account crisis. most of the emes ’ crises of the 1990s were triggered or accompanied by banking crises. to improve resilience to external shocks, it is essential that financial players be able to manage interest and exchange rate risks in a more flexible environment, both for themselves and their customers. now, how to achieve this in a smooth way? there is a kind of paradox in the interaction between internal and external liberalisation : the former may be a pre - requisite for the latter but external openness may