on a global basis. moreover, the coordination and exchange of information must be strengthened both in “ peacetime ” and during crises. not surprisingly, i consider it important to implement regional financial stability analyses to detect possible vulnerabilities ; the type of analyses now being made in the imf - led exercise in the nordic - baltic region. furthermore, both the institutions and the public authorities must gain greater knowledge of where the risks end up and what might happen if the ultimate risk - takers suffer problems. the nordic countries and the baltic countries financial integration has come a long way in the nordic and baltic countries. there is a close collaboration between the central banks and financial supervisory authorities in the nordic countries. we have agreements on consultation in the event of crises and we hold joint crisis exercises. as swedish banks play an important role in the baltic countries, discussions are under way on the signing of a consultation agreement between the swedish and baltic authorities. one important weakness that remains is the unclear distribution of the financial costs between countries in the event of a crisis. a closely - linked but also unsolved issue is which country ’ s assessment of the situation will prevail and who may decide on measures such as closing a bank. are the danish taxpayers prepared to help pay to save nordea ’ s operations in a crisis or do you see it as a problem for the swedes alone? the question can be reversed, to ask how we swedes would regard a crisis in danske bank. these issues are not unique to our countries ; they apply to all countries and therefore require widescale international management. this is a difficult but important issue to discuss – before the next crisis occurs. one means of making this issue more concrete could be to hold a new nordic crisis exercise based on the conditions in a real bank. it would be necessary in this type of exercise to take a stand on the specific case, which in turn might make it easy to continue a general discussion. conclusion the crises during the 1980s and 1990s led to many important measures being taken : a number of international standards were adopted to create global minimum standards for regulation and supervision, for instance the basel committee ’ s core principles for effective banking supervision. the tasks of the imf and the world bank were increased to systematically identifying vulnerabilities in countries ’ financial sectors, proposing measures to remedy them and giving technical assistance. the private agents in the financial market have also taken initiatives to reduce risks. they have, for instance, established the cls

or pre - announced target or band. our policy has been to intervene in the market to manage excessive volatility and disruptions to the macroeconomic situation. this “ volatility centric approach ” to exchange rate also stems from the source of volatility which is capital flows. despite not having a fully open capital account, we have experienced large volatility in capital flows as the data for last four years suggests ( see table below ). the exchange rate of the indian rupee vis - a - vis us dollar appreciated when there were large capital inflows ; and it depreciated when the capital inflows thinned out. the two way movement is a clear demarcation of our flexible exchange rate policy. table trends in india ’ s external sector 2006 / 07 2007 / 08 2008 / 09 2009 / 10 cad ( % of gdp ) 1. 0 1. 3 2. 4 2. 5 net capital flows ( % of gdp ) 4. 8 8. 7 0. 6 3. 8 capital flows in excess of cad ( $ billion ) ( – ) 20 rupee appreciation ( + ) depreciation ( – ) vis - a - vis us $ during the year 2. 3 9. 0 ( – ) 21. 5 12. 9 19. india ’ s exchange rate policy is said to have imposed some costs. last fiscal ( 2009 / 10 ), the rupee appreciated by 13 per cent in nominal terms but by as much as 19 per cent in real terms because of the inflation differential between us and our trading partners. this has implications for our external competitiveness at a time when world trade is recovering and concerns about protectionism are resurfacing. also, if we have a flexible exchange rate, and if other countries which are our trading partners or competitors for the same export markets have a fixed exchange rate, we get disadvantaged. 20. although india does not have a deliberate strategy of building up reserves for self insurance, our reserves got built up as a result of our relatively flexible exchange rate policy. the reserves so built up have been used to contain volatility in the event of capital flow reversals. 21. there has been much discussion post - crisis on the cost effectiveness of self - insurance. the main refrain has been that accumulation of reserves by emes as a safety - net entails domestic costs while also leading to global imbalances. be that as it may, in evaluating the level of reserves and the quantum of