assets. • stronger regulation and oversight for systemically important firms. for countries like india and sri lanka, the growth opportunities are almost limitless, given our current levels of development from where we have to catch up with the welfare and income levels of the advanced economies. large sections of the population contribute much below their potential because of lack of opportunities, and if the policy environment could recognize the gaps and provide the right opportunities with appropriate incentives, the growth prospects could improve significantly. a global crisis of this magnitude does not help in creating and expanding opportunities for around more than 2 billion population in the world who live under abject poverty. that is an important reason why countries like india and sri lanka must demand a better global governance system to manage the challenges of globalisation. moreover, the ambitious fail - proof financial stability architecture that may emerge in the postcrisis period should also emphasize financial inclusion, since financial system is a potential key channel for offering the opportunity that could make a large section of the population realise their potential. india has the opportunity to reap the demographic dividend, because of its demography in favour of a large young population ; estimates suggest that by 2020 average age of the indian population could be as low as 30. the demographic dividend, it has been viewed, could become a demographic curse, unless opportunities are created for everybody, with a sense of participation by all in the development process. finance, therefore, has a key role in addressing this challenge, unlike the role of finance we experienced in the financial systems of the advanced economies where a few could maximize individual returns but easily socialize the costs of their actions. concluding observations we have a collective responsibility in ensuring a sound and stable financial system, so as to be able to contribute better to sustainable growth and economic development. the link between finance and growth must be strengthened, and we must realise that finance is a means to economic growth and development ; it is not an end in itself. the tendency among some to use the financial systems as a casino must be curbed, both through strengthened regulations and better management of distorted incentives among market participants. it is not easy to draw the optimal line between right regulations andfree markets. no regulator would deliberately stifle financial innovations unless the perceived risks outweigh the benefits. in a free market economy, however, financial innovations may be driven by what the market wants, rather than by what may be necessary for the economy. freedom increases the scope for misuse, but freedom is also necessary for

be created out of cashflows linked to sub - prime loans. in the post crisis period, some have questioned the relevance of such innovations in any financial market. innovations need to be encouraged for enhancing market efficiency, but market efficiency cannot be achieved without proper information. financial systems became too complex and the potential vulnerabilities escaped supervisory focus the role of complexity in financial systems in causing the crisis has been deftly explained by landau ( 2009 ). complexity increased from two sides, first, the structured products ( whose valuation could be hard to establish ), and second, the rising interdependence between financial institutions, market players and counterparties. the nature of this interdependence was too complex to be monitored by any regulator, and the dynamics of the interactions also kept changing in constant search of higher returns through new innovations and regulatory arbitrage. three points are particularly important to note in this context : ( a ) information is critical for any advanced efficient market, however “ complexity ” led to loss of information ; some of the innovations in effect destroyed information ; ( b ) complexity gave rise to higher uncertainty, making financial systems highly unpredictable and ( c ) uncertainty led to “ flight to quality and hoarding of liquidity ”, which precipitated the crisis. when everybody runs for cover to minimise the loss, the “ collective action problem ” accentuates the market stress. pressure on capital and the severe credit squeeze as the prices of toxic papers witnessed free fall ( in some cases the value of certain cdos fell to below 30 cents a dollar, and stock prices also fell significantly ), the losses for the banks having exposure to such papers rose significantly, and the capital buffer turned increasingly inadequate, creating concerns of insolvency. banks, given the capital adequacy requirement, have to either raise fresh capital, or contract their balance sheet size, when capital comes under pressure because of application of mark - to - market ( mtm ) related losses in a falling market for financial instruments held in the investment portfolio of banks. in the testimony of william m isaac before the us sub - committee on capital markets, insurance and government sponsored enterprises dated march 12, 2009 it was pointed out that “ … mtm losses destroyed $ 500 billion of capital in the financial system. because banks can lend 10 times of capital, mtm losses destroyed $ 5 trillion of lending capacity ”, leading to a severe credit squeeze. the sub - prime crisis, thus, had all