original basel accord has seen most g - 20 countries starting to implement the basel 3 capital rules, which has delivered what many consider to be the world ’ s first global liquidity standard for banks. the jury is still out on basel 3. as many of you know ( or at least i hope you know ), the basel committee does not have the right to impose the standards it produces on others, and has never, at least explicitly, sought to constrain national authorities to do so. nevertheless, more than 100 countries are implementing the three versions of the basel accord in different forms at varying speeds. here in the caribbean, most jurisdictions are still seeking to fully comply with basel 1 before moving to basel 2, while others are focusing on first satisfying pillar 2 of the basel 2 framework. the region, as whole, decided to put the adoption of basel 2 on hold following criticisms of the approach in the wake of the eruption of the international financial crisis in mid - 2007. five years later, one might even perhaps question why the region is not focusing on basel 3 at this time. bis central bankers ’ speeches so why has the caribbean region been grappling with implementation of the basel accord? perhaps the answer, in my respectful view, is that the basel framework was never really designed with developing countries in mind, and implementation of any version in developing countries is likely to be fraught with difficulties. there are a number of factors which determine the speed of basel accord implementation plans in different countries of the world. these include the size, structure and degree of financial sector development, the level of economic development, and the capacity of the existing regulatory and supervisory authorities. application of these factors to the caribbean reveals the following : first, the small island states in the caribbean experience greater macroeconomic volatility, greater volatility of external flows and greater vulnerability to external shocks than the industrial countries. secondly, the newer versions of the basel framework rely on strong institutions. in the caribbean, institutions limiting rent - seeking are weak : banker and bureaucrat have more opportunity and incentive to reap private benefits at public cost. basel 3, for example, presumes that sophisticated and integrated risk management systems are in place, and for the caribbean this is generally not the case. thirdly, skills are scarce in the caribbean. supervision and market discipline require skilled supervisors and market participants. i, therefore, believe it is timely for the regional working committee on basel 2 implementation to start thinking about developing a regional prude

the 1990s. with regard to inflation targeting, i am of course somewhat biased and for obvious reasons find it easier to point to advantages than disadvantages. one advantage is that a central bank which conducts inflation targeting is not tied to maintaining a particular exchange rate relationship, but can be more directly aimed at focussing on what is happening in the domestic economy. another, partly related advantage – which i believe has been very important in sweden ’ s case – is that inflation targeting means that one specific authority is given a clear responsibility for maintaining price stability. during the 1970s and 1980s it was not entirely clear where the responsibility for this lay in sweden. one could say that the responsibility in practice had been delegated to the social partners, but that the total economic policy tended at the same time to be so expansionary that it became difficult to maintain wage and price increases at reasonable levels. a further advantage of inflation targeting is that the task of monetary policy, in the same way as with a fixed exchange rate regime, is easy for the general public to understand. if i am to try to find a disadvantage with inflation targeting, it could be that it is more difficult from a purely operational point of view for a central bank to steer inflation towards a particular level than to maintain a particular exchange rate relationship. inflation targeting is thus much more demanding than a fixed exchange rate regime with regard to the central bank ’ s analytical work and its ability to communicate its policy. whether this is something that should be regarded as a disadvantage or not is of course a question of judgement. for the riksbank, the transition to inflation targeting heralded the start of a fairly comprehensive increase in competence in the field of economics. the number of phd economists at the riksbank has risen sharply in recent years and our research in areas related to monetary policy has expanded considerably. financial stability let me now move on to the other central component of an efficient payment system. this concerns the stability in the financial system ; particularly in the financial institutions that supply payment services, i. e. primarily the banks. financial stability is currently regarded, parallel to the price stability target, as the main task of a modern central bank. the financial system has essentially three main tasks : converting savings into financing, managing risk and providing efficient channels of payment. let me give a basic example. a bank receives savings from households which it then lends to other households or to companies that need to invest. banks are specialists at valuing, monitoring and managing credit risks in the