were severe. do these crises demonstrate that the post - bretton woods model of financial arrangements has outlasted its useful life? do financial markets show an inherent and damaging instability which argues for a return to administrative control? is now the time to consider a fundamental change in the way financial activity is organised, in the way it is monitored and managed, and in the way losses and gains are shared? many indeed are calling for a “ new financial architecture ”, though concrete proposals of what this new construction could look like have yet to be formulated. my own view is that the basic components of today ’ s system of financial intermediation continue to be the only reliable and efficient ones, but that the rough edges of the market - led system need better monitoring and in some cases repair. in other words, the architecture or design of the financial system – the basic rule of decentralised, market - led decision - making – remains sound, but its internal wiring and plumbing – the preconditions which ensure that markets can indeed operate efficiently and stably – may require upgrading. * * * which are the areas of vulnerability or failure which cause markets to display excessive instability, and lead to such severe costs? and why are financial markets particularly prone to such failures? at the risk of over simplification, i propose to focus on three sources of market failure which have been particularly prevalent in the recent episode of worldwide financial turbulence. they are : first, the lack of relevant information and its asymmetric distribution across market participants ; second, the presence of externalities that can give rise to undesired and unintended market outcomes ; and third, the difficulty of establishing an adequate infrastructure in financial markets. note that i make hardly any distinction between the domestic and the international financial system. with the globalisation of finance and the lifting of controls, the two have basically merged. as i will argue, however, dealing with market failures at the international level may be much more complex than in a domestic setting. information and financial activity let me start with the first area of financial market vulnerability, that of information deficits. financial activity is particularly information - intensive. more than any other sector perhaps, financial markets have to cope with a high degree of uncertainty. this is a reflection of the fact that by nature finance is an intertemporal activity : services to which counterparties commit themselves in financial contracts are delivered over sometimes very long periods during which circumstances can change in unforeseen ways. moreover

##bilities may be much lower than if the maturity of their exposures had been kept more medium term. in sum, instead of helping to build a stable equilibrium for a diversified set of profit - maximising agents, the market mechanism may at times fall prey to one - dimensional views and become one - sided, producing highly volatile outcomes and price overshooting. it would be too much to say this was the cause of the asian crisis, but it may have contributed to its unexpected virulence. inadequate infrastructure a final major area of fragility in financial markets is that of an insufficiently developed infrastructure. financial market infrastructure covers a very broad range of elements. it includes modern contract law and efficient law enforcement procedures. it deals with accounting rules and valuation standards, with prudential regulations, effective supervision and appropriate disclosure requirements. it also covers the creation of well - functioning payments and settlement systems and the design of safety net provisions. in many respects, this infrastructure is a public good. it is of benefit to all, but market participants will not be able or willing to supply or fund it fully. it will therefore be left to the relevant authorities to ensure that the necessary infrastructure is put in place and ways are found to share its cost among participants. financial history if replete with cases of crisis which were caused by poor supervision, inadequate legal frameworks or deficient payment and settlement arrangements. this shows how complex and expensive a well - performing infrastructure is, in particular in an international context. it also explains why so often these public goods are being undersupplied and markets often remain immature. moreover, the financial infrastructure may propagate biased incentives and excessively risky behaviour as long as its design is faulty and pricing inappropriate. in the case of countries affected by the recent crises, financial supervisory arrangements were almost always deficient in some respects. accounting conventions were applied insufficiently rigorously, and financial institutions were allowed to become excessively exposed. in some countries, bankruptcy arrangements were virtually non - existent, and in those where they existed, they were often subject to delays. hence the process of recovering value from impaired financial claims ( an essential part of a well - functioning financial system ) was burdened by major uncertainties. in russia, the costs of the absence of reliable contract law and law enforcement are at their most evident. * * * it is now time for me to move from problems to solutions. but first, let me briefly recapitulate the argument so far. open markets