find that their vulnerability to crises in other markets is greater than economic fundamentals would suggest. consequently, they need to take pre - emptive actions to strengthen their policies. where might such action be needed? several suggestions come to mind : • one, maintaining an appropriate exchange rate and exchange rate regime. clearly, there is no single “ right ” choice, but more flexible exchange rates can help provide early and visible signals of the need for policy adjustments and are less likely to invite reckless behavior on the part of borrowers and lenders. but regardless of the exchange rate arrangement chosen, appropriate macroeconomic policies are essential to ensure its success ; • two, maintaining a proper policy mix - - among other reasons - - so that high domestic interest rates do not damage the domestic economy, attract excessive amounts of short - term capital, or preclude further monetary tightening if market conditions require ; indeed, it is important to keep the option of using the interest rate instrument open, so that the authorities have some room for manoeuvre in times of international instability ; • three, strengthening structural policies - - especially the policies and institutions such as better prudential supervision, needed to underpin a sound financial system ; • and four, carrying out other supporting reforms - - what we call “ second generation ” reforms - - to promote domestic competition, increase transparency and accountability, improve governance, help ensure that the benefits of future growth are widely shared, and otherwise strengthen the foundations for future growth. iii. restoring confidence as developments have shown, confidence, once lost, is hard to regain. restoring confidence takes a strong commitment to economic adjustment and reform demonstrated by the implementation of often painful measures. it also requires a free flow of timely, accurate, and comprehensive information so that markets can assess the extent of underlying problems and the seriousness of efforts to correct them and uncertainty can be reduced. and, of course, restoring confidence takes time. this process is now under way in southeast asia. with the support of the imf, japan, and a number of other countries in the region, thailand has launched a courageous and comprehensive program that addresses the problems of large external deficits and troubled financial institutions. as a result, the budget is moving back into surplus and a comprehensive restructuring of the financial sector is getting under way. the philippines, for its part, has taken necessary measures and extended its program with the imf under which a substantial amount of economic adjustment and reform had already taken place. malaysia is also adapting to changing conditions

. creating this level playing field will most likely lead to a more balanced and diversified financial system, i. e., with more options for savers and borrowers. this competitive environment is key to maintaining financial markets in constant improvement, characterized by innovation that responds to the insufficiencies of the existing instruments. ideally, restrictions to the development of any type of finance should always be clearly justified on efficiency grounds. along the way, the problems faced by the main source of funding in europe ( i. e., banks ) should not be forgotten. banks do not seem to have liquidity problems ; enough steps have already been taken by the eurosystem to provide liquidity, in such a way that a typical balance of payment crisis was avoided in several countries. but investors are suspicious about the reported balance sheet of banks. thus, the steps towards the banking union, the major leap europe has given to deepen financial integration, including the underway comprehensive assessment, must be credible. losses should be recognized so as to definitely resolve the uncertainty and bring back investors. once this is done overly cautious capital requirements ought to be relaxed. in europe, banks ’ assets account for the bulk of financial wealth. and it is expected that banks will continue for a long time to be the most important intermediaries between borrowers and savers. in fact, it is not easy to change from a bank - based bis central bankers ’ speeches economy to a capital market - based economy nor it is clear that this is the best thing to do. for instance, european firms will have to go through several changes before such shift ( if any ) occurs, namely in terms of size, access to information, transparency ; in general a different corporate culture will be necessary. forcing a shift may be counterproductive. at the same time, more prudent transformation ratios ( say, loans to deposits ), coupled with a lower capacity of banks to attract savings would imply, at least in some countries, that the ability of banks to lend would decrease ; but their willingness would not necessarily decrease, since they keep the advantaged standpoint to screen and monitor loans. this means that the implied gap might be filled by actors ( insurance companies, pension funds ) with greater capacity to attract savings although with limited capacity to lend directly. securitisation of bank loans can be the privileged vehicle through which the gap is filled. securitisation is also key when one thinks at impediments to capital relief and