agreement curtails governments ’ ability to pursue sound macroeconomic and regulatory policies. third, these particular negotiations were mostly about allowing foreign institutions to establish in the market - entailing foreign direct investment - to provide services and bring technology, capital and expertise with them. this was seen not as an additional threat, but as part of the answer to the crisis. commitments in the wto provide a guarantee that the terms and conditions on which investment decisions are made, and trade is carried on, are not going to change overnight. since nothing chills investment more than uncertainty about the direction of government policy, such guarantees are valuable to traders and investors, as well as to governments wanting to attract foreign investment. the financial industry in the us, europe and japan has been active in formulating positions for the negotiations that began this year. the liberalization of the rights of establishment and operation for suppliers remains essential for the provision of most financial services, and there will be calls for further liberalization on this front. at the same time, technological advances in telecommunications and informatics are radically changing the manner in which financial services are traded, making cross - border trade increasingly important. the negotiations will certainly seek improved access and greater security for this type of trade. this issue is also relevant to the ongoing work on electronic commerce. now, what can we do to ensure successful conclusion of these negotiations? there is much that can be done, especially in creating conditions favourable to further liberalization. many countries, particularly developing countries, lack the necessary institutions, regulatory structures and legal frameworks needed to support a fast - changing, modern economy. in a sense we find ourselves between two worlds - between an economic system which is increasingly global and a patchwork of institutions and structures which remains largely national in scope. more generally, there is a continuing need for vigorous international dialogue and cooperation. the efforts being made by the bis and other international fora are critical for confidence and stability in the financial systems of the world, which in turn is a key requirement for keeping the trading system open. we need to make the markets work. adequate prudential regulation and supervision, enhanced transparency and corporate governance, strengthened competition policy, provision of safety nets and proper legal and accounting systems are all preconditions for countries to be able to take advantage of the sizeable benefits of liberalization. your contribution on these fronts is crucial to our efforts. thank you.

s call for more comprehensive qualitative supervision, rather than the mechanical checking of quantitative ratios, is likely to induce banks to focus on their risk management and monitoring capabilities, and thus on their ability to incorporate all information that is relevant to risk control. there is little doubt in my mind that the encouragement of a credit culture which requires lending officers to realistically appraise the credit and market risks of their portfolio or investment decisions will generate many incentives to use and disclose market - relevant information. externalities i come now to the second area of market vulnerability, that of undesired externalities and aggregation problems. this may be even more complex. in theory it is course possible to consider the radical solution of forcing financial institutions to reduce their leverage and increase the degree of their liquidity so much that a run on them becomes highly unlikely. similarly, one could consider pushing countries into holding a sufficiently large stock of international reserves which would reduce the likelihood of currency runs to a minimum. however, the costs of such measures in terms of efficiency and economic growth would be large. the financial sector makes its contribution to the wider economy by adding to the liquidity of intersectoral claims. this depends on leverage. to reduce its capacity to this would involve economic costs. we therefore need to strike a balance between efficiency and stability objectives. much more constructive, i feel, would be to improve our understanding of how financial regulation can give rise to aggregation issues and generate externalities. greater awareness of the link between individual behaviour and market outcomes can contribute to better rules and more appropriate market guidance. as a result, the incidence of capital flow volatility would be less. more discriminating and critical behaviour on the part of market participants may be promoted, and a bunching of particular types of lending and investment might be more easily avoided. no doubt, many controversial issues will have to be dealt with in this area, and solutions which seem adequate from one point of view may be questionable when looked at from a different angle. for instance, the pressure to maintain prescribed capital ratios is sometimes argued to have undesirable macroeconomic consequences. the need to satisfy capital requirements can aggravate economic recessions, if banks feel forced to curtail their lending beyond what the underlying economic situation would warrant. similarly, a comfortable capital cushion in economic booms may induce banks to engage in lending sprees. to the extent they have pro - cyclical effects, capital requirements may generate externalities and aggregation effects. some have