will do this in two steps. first, i will discuss the considerable contributions of the paper. second, i will talk about where the paper might be extended and other areas of future research that might seem appropriate. in general, i liked the paper. i think it makes some important contributions in how to construct a more complete and robust financial conditions index. in particular, i thought the paper makes two important points : financial conditions should measure financial innovations, not changes in financial variables that are due to past changes in economic activity. the endogenous components of financial conditions should be removed in the construction of a financial conditions index. both neoclassical ( yield curve and stock prices ) and non - neoclassical ( credit availability ) variables should be included. the gsfci that i helped to develop only included neoclassical indictors and i think that was ( and is ) a shortcoming. the authors deserve considerable credit for constructing a financial conditions index ( fci ) that is more rigorous and complete than any that have been developed in the past – 44 financial variables divided across five categories. moreover, this is not just innovation for its own sake. the new fci does a better job than single - factor models in forecasting real gross domestic product ( gdp ). so what are the shortcomings of this approach? first, including 44 variables may generate good results more because the additional variables add greater flexibility to soak up variability in real gdp, rather than providing a more solid theoretical underpinning. as the authors note, the variables were selected, in part, on the basis of what we know today about which variables are likely to be important. but this type of selection process – even if conducted on a pseudo real - time basis – introduces selection bias, which the authors do admit could be important. second, despite the inclusion of a large number of variables, some important ones may still be missing. in particular, leverage variables – such as the leverage ratio of the major securities dealers – may be an important component of financial conditions. the work of tobias adrian and hyun shin suggests that the increase in leverage of the major securities was a major factor that fueled the asset bubble preceding the recent crisis. if this was indeed the case as seems likely, this type of variable should also be included in a financial conditions framework. 4 third, as the authors note, the resulting fci is complex ; it is difficult to estimate, update and to communicate what the results mean. i think fcis have value as heuristic

##mediating between those with surplus resources ( depositors ) and those in need of resources ( investors ). in view of the foregoing, effective and efficient supervision is crucial to limit the risk of loss to depositors, henceforth maintaining public confidence in the financial system. in response to the liberalised environment, there has been a proliferation of linkages between institutions operating in various segments of the financial sector and a growing number of financial mergers and acquisitions, thus creating, in the process, huge financial conglomerates. for instance, banks and insurance companies are searching for growth through the diversification of their activities in such a way that they can no longer be considered as homogeneous institutions falling within the scope of one economic sector and one supervisory system! these conglomerates aim to exploit the synergies that exist among banking, insurance and investment. this market evolution towards huge financial conglomerates, with integrated product development is slowly blurring the traditional boundaries between banks and non - bank financial institutions, on the one hand, and the supervision of these institutions, on the other. in spite of these trends in the international financial markets, regrettably, supervisory systems, in our sub - region, are mainly structured along the traditional boundaries demarcating banks, insurance companies, investment and micro - finance institutions. these integration changes represent major challenges to the supervisors of the different sectors, especially as the financial institutions become more complex in their structures and operations. notwithstanding the foregoing, the sluggish growth of our economies in the sub - region has also created a difficult operating environment for financial institutions, especially banks. as a result, this has contributed to the mushrooming of non - bank financial institutions, such as, micro - finance. it is a fact that the financial sector in our sub - region is dominated by commercial banks, which have continued to service only a small section of the population. the majority of the people are denied access, largely, due to numerous reasons, including perceived risks, high costs involved in dealing in small transactions and the inability to provide marketable collateral for loans. it is against this background that financial sector supervision should also be directed at financial institutions that pose the greatest risks, such as, non - bank financial institutions. in this regard, the adoption of the risk - based approach allows the supervisor to devote more supervisory effort to those areas that have a high - risk profile. this therefore, entails that supervisory authorities should shift their focus from the traditional capital, assets, management, earnings, liquidity