. the forward exchange and options market have expanded in recent years. a deeper market reduces transaction costs, and it is easier to find counterparties. this has provided companies with greater scope for hedging against foreign exchange risk. the use of instruments that reduce the risk associated with a floating krone is also increasing in norway. a considerably larger portion of credit in other countries is now channelled via the bond market. less risk is being accumulated in banking systems. the development of new markets and instruments, for example credit derivatives, has also led to a broader risk spread than earlier. the improved diversification of risk is probably one of the reasons that world financial markets have coped with the stock market decline and the accounting scandals with limited damage to the wider economy. this is probably one reason why the downturn following the stock market decline in 2000 was considerably less pronounced than earlier downturns. the new instruments spread risk, but do not eliminate it. financial markets have become highly complex. this alone entails an operational risk, which is a challenge to participants and the supervisory authorities. a shift in the international division of labour increased trade promotes growth and lays a basis for prosperity. a number of asian countries have experienced strong, export - led growth - japan from the 1950s and several countries in southeast asia from the 1960s. chart 3. share of global exports per cent us germany japan china sources : imf, ecowin and norges bank in recent years, china has become an important player in international trade, and the country is now the world ’ s fourth largest trade nation. the asian economies and the rest of the world have become more integrated. technological advances and a sharp fall in prices in the it and telecommunications sectors have exposed a number of services that were previously sheltered to competition from low - cost countries. indian companies service three million customer telephones for companies in the us and the uk daily. european airlines are transferring ticket settlement to india. us companies are outsourcing accounting services to india. analytical activity in investment banks and development divisions in itc companies are also being moved to india. norwegian engineering companies are buying cheap engineering services in india and china. eu enlargement this spring, with ten new members, is also influencing the division of labour in europe. chart 4. wage level percentage of wages in the us south korea taiwan singapore hong kong sources : us department of labor and norges bank the advances in asian economies have generally relied on an abundant supply of cheap labour, but wages have gradually

- a - vis us dollar has been attracting large foreign institutional inflows during the last two years. while we have an all time high foreign exchange reserves of more than $ 130 billion, high capital inflows pose a big challenge to monetary and exchange rate management. in this context, operationalisation of market stabilisation scheme ( mss ) has given an additional instrument for liquidity and monetary management. to sum up the challenge, i would like to quote a statement of dr. y. v. reddy, governor, reserve bank of india, which he made at the annual meeting of bank for international settlement ( bis ) on june 28, 2004. and i quote, “ ….. special defences need to be put in place for ensuring financial stability in the case of countries like india that are faced with the prospect of volatile capital flows. the issues relating to cross - border supervision of financial intermediaries in the context of greater capital flows are just emerging and need to be addressed. ” technology is the key as i mentioned in the beginning of my speech, technology has thrown new challenges in the banking sector and new issues have started cropping up which is going to pose certain problems in the near future. the new entrants in the banking are with computer background. however, over a period of time they would acquire banking experience. whereas the middle and senior level people have rich banking experience but their computer literacy is at a low level. therefore, they feel the handicap in this regard since technology has become an indispensable tool in banking. foreign banks and the new private sector banks have embraced technology right from the inception of their operations and therefore, they have adapted themselves to the changes in the technology easily. whereas the public sector banks ( psbs ) and the old private sector banks ( barring a very few of them ) have not been able to keep pace with these developments. in this regard, one can cite historical, political and other factors like work culture and working relations ( which are mainly governed by bipartite settlements between the managements and the staff members ) as the main constraints. added to these woes, the psbs were also saddled with some non - viable and loss making branches, thanks to the social banking concept thrust upon them by the regulatory authorities in 1960s. globalisation of financial services growing integration of economies and the markets around the world is making global banking a reality. the surge in globalization of finance has also gained momentum with the technological advancements which