have become more interlinked within the local and global financial systems, but they are still shallow and prone to sudden price movements and greater disruption that may undermine confidence in their integrity. it is therefore important that the ongoing fundamental reforms in emerging financial markets continue and that these longer term priorities are not forgotten as a consequence of predominant focusing on the policy response to the financial crisis and on the accomplishment of the international regulatory reform agenda. in this sense, a decisive action is needed to develop a domestic investor base, address market illiquidity, and improve key aspects of market infrastructure in order to mitigate risks to emerging economies ’ financial stability. ultimately, development of bond markets, money markets and government securities markets is the optimal route for further progress on this front. the assistance of international partners in this area is of a key importance and should not be neglected in conditions of growing challenges of different size and shape on both sides. loss of diversification benefits another important drawback in this regard is the initiated process of deleverage of western banks, their more pronounced concentration on home markets and the general fragmentation of international banking model that could deplete the financial markets of ee ’ s, slow down the process of their regional integration and globalization and will eliminate the potential diversification benefits for their investors. incentive for further development of shadow banking extremely high capital and other requirements may drive banking activity into institutions or financial arrangements that are not regulated as strongly, often referred to as “ shadow banks. ” this is especially pronounced in ee ’ s where required credit growth rates to support continued rapid economic growth and social development are much higher compared to advanced economies ( ae ) 3. there is near universal agreement after the financial crisis that the shadow banking sector is potentially capable of creating massive problems and triggering a future crisis. therefore, there is much discussion on how to control those institutions and according to financial stability board ’ s monitoring report on global shadow banking ( “ global shadow banking monitoring report 2012 ”, page 4, paragraph 5 ) : “ after the crisis ( 2008 – 2011 ), the shadow banking system continued to grow although at a slower pace in seventeen jurisdictions ( half of them being emerging markets and developing economies undergoing financial deepening ) and contracted in the remaining eight jurisdictions ”.. bis central bankers ’ speeches types of transactions. determining appropriate capital adequacy standards for the shadow banking system will indeed be a key challenge in an effective redesign of the regulatory system. a related challenge is to ensure that tighter capital standards for banks and other

most reliable form of liquidity ). the options for investing in foreign securities might be bis central bankers ’ speeches viable, but at the same time it also increases the exposure to foreign exchange risk. some of the countries might opt for the central bank placements as an alternative, but this is also seen as a solution, which increases the cost of liquidity and hence, increases the costs of finance. the problem of limited availability of proper assets also holds for corporate bonds, which should have a proper credit rating and certain liquidity features to qualify for the lcr. this is difficult to be fulfilled in countries with thin financial markets, and with sovereign and hence corporate credit rating usually bellow the basel iii requirement. so measures that restrict banks ability to finance bond holdings may hamper the further development of the local capital markets. one remaining issue is the interaction between the lcr and the provision of central bank facilities ( the basel committee committed to work on this during 2013 ). – the second “ dimension of problems ” arises from the calculation of the nsfr that requires shift from short - term to more stable funding of assets and business activities. banks would have to extend the maturity of funding sources ( long - term securities or extend the maturity of loans ) or convert long - term loans to short - term loans with negative implications for the effects for the growth. extension of the maturity of the funding structure would also imply higher cost of financing. within the emerging markets, the main concerns arise from the mismatch between the funding that is actually being stable in some of the ee ’ s and the funding that is defined as a stable one within the basel iii regulation. some of the examples that we can run through are countries like saudi arabia and south africa, where the deposits of the public sector entities and the wholesale funding are the most stable one, but are not treated as such within the new regulatory framework. the above can be considered as direct impact of transmission of the new liquidity framework to the ee ’ s, but the indirect impact should not be neglected at all. the new liquidity rules will probably change the assets structure in the balance sheets in some of the large banks in the ae ’ s. in a world of rapid financial integration, many of these banks have subsidiaries in the emerging world and if the liquidity is managed on consolidated level, this can imply possible liquidity shortages in the host country. the treatment of intra - bank exposures may pose challenges especially in the emerging markets where banking systems rely