its surveillance function over exchange rate policies? iii international financial stability – what contributions from national policies and international institutions? in the second panel the discussion will be focussed on international financial stability and the respective contributions from national policies and international institutions. at the current junction, the benign prospects for global growth and inflation and strengthened balance sheet positions of financial institutions provide a positive backdrop for financial stability. overall, risk premia and long - term interest rates are very low currently, which on its own is a positive indicator, but the question is : are risks appropriately priced? downside risks that have the potential to cause strains in financial systems do exist. in its recent global financial stability report the imf warns that “ the single most important risk factor for financial markets in good times is complacency ”. other risks include the untested risk management systems dealing with complex financial instruments, the risk transfer to the household sector and high and sometimes rising public and external debt levels in emerging market economies. against the backdrop of various risks that have emerged in recent years, what are the respective contributions from national policies and international institutions? in promoting financial stability, national policies should focus on sound macroeconomic policies. in addition, sound institutions are key to economic growth, as was highlighted by the g - 20 last year. presently another key question is whether we need more regulations or better ones to strengthen the supervision of the market for credit risk transfer. should transparency be increased? currency mismatches are an important factor in triggering or aggravating financial crises in emerging market economies. currency mismatches arise when borrowers incur foreigncurrency liabilities to finance domestic activities. some people, the so - called “ original sin ” school, traces currency mismatches to a fundamental inability of emerging markets to borrow abroad in their own currency. they recommend that ifis should assume an intermediate role as issuers. other people have countered that this reasoning is based on a misperception as to how capital markets work. even large industrial countries do not issue in their own currency under foreign jurisdiction but issue domestically. at the g20 workshop in ottawa last year, participants concluded that strong domestic financial markets are a key factor to reduce a country ’ s external vulnerability. the question emerges whether national authorities should do more to develop domestic local currency financial markets. alternatively, should the imf assume an intermediate role as issuer? capital account liberalisation is one of the most controversial and least understood policies of the day. some people portray the

cases may still occur, but fund lending might be restricted to true emergency cases and not be used as an instrument without an emergency need. under the strategic review, an important question is how the newly agreed framework for exceptionally large access to fund credit could be strengthened in practice. in this vein, does the proposed introduction of ” exceptional precautionary arrangements ” contribute to a strengthening of market rules or rather a weakening? would such a step towards imposing an insurer role on the imf be compatible with the fund ’ s “ risk - free ” liquidity financing mechanism that designates official reserves as the source of short - term fund credit? in february 2003 the imf concluded that exceptional access should be reserved for truly exceptional cases, access limits must be strictly adhered to, and the four criteria for exceptional access must be fulfilled. will the agreed principles pass future tests? alternatively, should the fund have a free hand in resolving crises? the role of the fund in helping low - income countries is also being hotly debated. admittedly, the fund has a role to play in contributing to macroeconomic stability as an essential requirement for sustained growth and, thus, for effective poverty reduction in low - income countries through surveillance, technical assistance and financial support. however, does this justify a long - term financial involvement of the fund in these countries or should other development - oriented institutions accept chief responsibility? as a monetary institution, should the fund not continue to focus on shortterm adjustment needs? another key issue in the strategic review debate is surveillance. many useful surveillance initiatives have already been launched in recent years, including standards and codes, roscs, fsaps, and the increase in transparency. by strengthening bilateral, regional and multilateral surveillance, the fund can make useful key contributions aimed at achieving and maintaining stability worldwide and thus bolstering growth. fund surveillance increases transparency in financial markets and improves the functioning of the market mechanism. based on profound experience gained from the different regions of the world, the fund is an unbiased arbiter to give policy advice. i am convinced that the imf has done an excellent job so far in helping member countries adapt to a changing economic environment. in a process of trial and error, the fund has become a more open and accountable institution and a major source of information for the general public and capital market participants. the future role and priorities of the fund and its instruments should be carefully reviewed. a greater selectivity with regard to functions and a sharper