almost certainly vary from country to country. hence, we should not seek to pursue a “ once size fits all ” type of approach. taking into account these general observations, i believe the most productive focus for international and national economic reforms lies in a few key areas : • strengthening financial markets. • reducing vulnerability to short - term capital flows. • promoting greater transparency – at all levels. • involving private creditors in debt resolution arrangements. as you will note, these four areas overlap significantly with some of the issues addressed by m. trichet. let me elaborate a little on these points. strengthening financial markets. the importance of robust financial markets has been clearly demonstrated in many countries over recent years, most recently in asia. given the critical role that financial markets play in the wider economy, and the problems created when financial markets are in a weakened state, particularly in a world of mobile capital, it is essential that steps be taken to strengthen financial markets. a number of positive measures are already being taken to this end. the development of the basel core principles on banking supervision is one of these, as m. trichet has mentioned. effective banking supervision arrangements are clearly an important element in creating robust financial systems and the basel core principles have the potential to play a helpful role in assisting governments to improve their supervisory arrangements. however, i would make two cautionary points. first, it is important that the core principles do not become prescriptive, rigid templates to be applied uniformly in all countries. the optimal design of banking supervision arrangements will necessarily vary from country to country, depending on market structure, institutional arrangements and the effectiveness of market disciplines. it is important that, in advancing the core principles, governments have the leeway to depart tom the specifics of the principles where they consider it appropriate to do so. and, in assessing compliance with the core principles, it is important that emphasis is placed on the quality of policy and policy outcomes, rather than on whether there has been strict compliance with the details of the principles. this is also true for the other international standards being developed. second, it will not surprise you when i say that there are dangers in placing too much reliance on banking supervision, or in pursuing regulation with excessive vigour. banking supervision and some regulation of risk - taking are important ingredients in the policy mix, but they are not sufficient in themselves to promote financial system stability. and there are dangers in taking regulation too far – we need to be sensitive to the compliance costs, regulatory distortion

new credit and hence delay economic recovery. • the risks of inadequate transparency. lack of transparency, both in the public and private sectors, can exacerbate financial distress by reducing the scope for market disciplines to operate and by weakening the ability of creditors and investors to make informed decisions. in some cases, herd behaviour and resultant over - selling of currencies can be attributed in part to inadequate transparency. what, then, can be done to address these problems and restore the global economy to sound health? before setting out some specific thoughts, i think a number of general points are worth mentioning : • first, we should not pretend that risks can be eliminated or that we can create a world where financial distress does not occur. there will always be periods of financial distress. no policy framework at national or international levels, will entirely eliminate these risks. and nor should we seek to do so. for we need to remind ourselves that there is always a trade - off between risk and return. if we seek to eliminate risks, not only will we be bound to fail, but we will also risk undermining the prospects for strong and sustainable economic growth. and, within reason, a degree of financial distress need not necessarily be a bad thing. the most we can hope to achieve is to reduce the risks and severity of economic distress in the future, and to create a resilience within economic structures to facilitate orderly recoveries from periods of distress. • second, we need to accept that modem economies are inherently complex and that there are no magic solutions. we need to be realistic as to what can be achieved. in that regard, i believe the best solutions will not lie in grand designs, but rather will be relatively modest and incremental in nature. • third, while some solutions may lie in changes to international financial architecture, i believe that the most productive remedies are generally those that apply at the national level - a point made strongly in an address given last month by joseph yam. there is a danger that the debate on the grander elements of international financial architecture could distract attention from the need for sound policy reform at the national level. • and finally, we should not fall into the trap of placing excessive reliance on any one policy response. for example, financial regulation alone cannot provide all the solutions. and equally, improved transparency and market disciplines on their own will not be sufficient. the answer lies in striking a sensible balance among a number of mutually supportive policies. that balance will