region. • government securities market : a draft law that will give a legal basis for this market is ready and hopefully will be introduced to parliament very soon. a lot of work has already been done on the infrastructure for this market. most of the elements already exist - registries, clearing and settlement systems - and the cbbh is getting financial and technical assistance from the us to establish a new issue facility. at a technical level i think we could be ready to issue the first short - term security as early as the first quarter of 2004 - provided the law is passed. this meeting should support the speedy introduction and passage of this law. • a leasing law has been drafted and will also hopefully be introduced to parliament soon. • one company has issued a company debenture ( i am not sure if this is the name you use in bih ) on the rs stock exchange. it is very small but it is the first example of a new capital raising instrument for enterprises in bih. reserve requirements : the final issue i want to comment on is the reserve requirements imposed by the cbbh. i am sure the banks here today will say this is one element in the high cost of capital in bih. before they do so, they should think about the following two facts : • the reserve requirement we impose, which is currently 7. 5 % and will rise to 10 % from 1 december, is much lower than in neighboring countries. i understand that the ratio is 19 % in croatia and 22 % in serbia for example. • the remuneration we pay banks on the reserve deposits at the cbbh, which is around 2 % on required reserves and 1 % on excess reserves, is quite generous compared with most other central banks in eastern europe. we are one of the few central banks to remunerate total reserve deposits. • the banks can say that these reserve requirements do impose a cost on them. my point is that the cost the cbbh imposes on you is less than the central banks in the neighboring countries impose on their banks so it is not an explanation for the cost of capital being higher in bih. conclusion : the banking system has improved significantly in bih and this has brought down the cost of capital. but there are further improvements that can be made. in particular, it is very important to accelerate the development of the capital markets in bih. the cbbh promises to continue to be actively involved in this process. but, the things that will do most to

of the board of directors of imi – was a weakness, which was later rectified. if the results achieved in the battle against inflation were only partial during baffi ’ s governorship, the successes that came in the course of the 1980s and 1990s can be traced to the seeds he had sown with his commitment to a new monetary constitution. during his governorship the question of separating the responsibilities of government and central bank was posed. the process subsequently set in motion produced first the abandonment and then the prohibition of monetary financing of the treasury, the assignment to the bank of italy of the power to set the discount rate, formal recognition of its independence and, finally, its formal mandate, within the framework of the european system of central banks, to work for the objective of price stability. the full achievement of independence nevertheless took another fifteen years, major legislative reform and, lastly, an international treaty. in the 1980s and early 1990s, in a course of reform that was initiated and spurred in part by the bank of italy, broader and more efficient money and government securities markets were created. the effectiveness of indirect instruments of monetary control increased. paolo baffi as governor is perhaps best symbolically portrayed as a ferryman of ideas, with all the exertion that such an image implies. his intellectual heritage was liberal, embracing more leavenings of modernity than were to be found in the political and economic culture of the day. but action was fettered by the harshness of the times. these were years, let us not forget, of bitter social conflict, years of terrorism. paolo baffi ’ s awareness of the drama of social problems was painfully acute, as is well known by those who were close to him in those years and could see the signs that a man of his temperament allowed to emerge. subsequent developments in italy and in europe and the consequent advances in economic theory have confirmed that the effectiveness of monetary policy depends above all on appropriate institutional arrangements and on the ability to affect the expectations and the behaviour of the public ; and that appropriate institutional arrangements, in turn, are not unrelated to political and social consensus. institutions comprise the set of written and unwritten rules that guide the conduct of the central bank, formal recognition of its objectives and independence, and suitably designed instruments, ensuring effectiveness of action without interfering in the operation of a market economy. to us paolo baffi, who was the very antithesis of the politician, has bequeathed the conviction that the strength of economic policy