basis of this, benchmarks and best practices have been described by various bodies. the financial stability forum has assembled “ 12 key standards for sound financial systems ”, and the g - 20, an informal amalgamation of the g - 7 countries and large emerging market economies, has conducted extensive research on institution building in the financial sector and drawn useful conclusions. at the risk of oversimplification, the advice given boils down to sound institutions and sound policies as the main tools for preserving stability. macroeconomic policy must be geared towards stability - price stability and sustainable public finances - and be consistent with the chosen exchange - rate system. microeconomic policy needs to furnish the economy with a high degree of flexibility. financial regulation and supervision are to safeguard the strength of national financial systems. the degree of sophistication in financial regulation and supervision determines the prudent degree of capital account openness. the sequencing of capital account liberalisation needs to start with the more stable long - term capital flows, such as fdi. volatile short - term capital flows are to be deregulated last. a reliable legal system raises confidence while a high degree of transparency allows rational decision - making by international investors. as to international investors, sophisticated risk management is of the essence. the implementation of the aforementioned institutions, standards and policies falls predominantly into the realm of national governments. they are subject to multilateral surveillance, primarily by the international monetary fund ( imf ) by means of article iv consultations. multilateral surveillance has been devised to identify potential weaknesses early on. the bundesbank appreciates that the imf recently strengthened its surveillance activity in terms of quality by expanding vulnerability assessments and by focusing more distinctly on conclusions and recommendations in reports on the observance of standards and codes and in financial sector stability assessments. in terms of transparency, the publication of staff reports of article iv consultations, which is now almost standard procedure, is to be welcomed. in terms of scope, an improvement has been achieved by covering developments in international capital markets more extensively. history suggests that, despite all these efforts in crisis prevention, the international financial system will experience rough patches from time to time. a pre - agreed framework for the orderly resolution of financial crises is therefore required. providing ex - ante clarity on the procedure of debt restructuring is not the least important part of the crisis prevention exercise. the bundesbank has long been favouring the involvement of the private sector in crisis resolution. arrangements where the private sector reaps

provision of precautionary lending create moral hazard and counteract the original purpose of advancing financial stability. furthermore, they have already left the fund with a very high risk concentration. as liabilities to the international financial institutions now account for a large share of some debtors ’ foreign borrowing, conflicts of interest between the borrowers, imf shareholders and private creditors could put the imf financing mechanism at risk. ultimately, the entire concept of imf lending may end up in danger of being undermined. the bundesbank therefore welcomes a return to a lending policy more in line with the catalytic role of imf financing, a policy which the imf generally endorsed last year. establishing credible ex - ante clarity about financial assistance is crucial in this respect. the single most important element in a revised lending strategy would be a restrictive exceptional access policy stringently conditioned on acute needs and debt sustainability. exceptional access must be reserved for only a few true emergency cases. lending criteria need to be applied without exception. care must also be taken to ensure that prolonged use of fund resources does not intrude upon the world bank ’ s territory of catering to longer - term financing needs for development purposes. over the years the imf has repeatedly expanded its policy of lending to debtors that are in arrears to the private sector ( lia policy ). the bundesbank advocates the establishment and application of transparent and operational lia criteria and recommends that the regular access limits be respected. considerations to install a new precautionary lending facility after the expiration of the contingent credit line should not be pursued any further. uncapped precautionary lending without acute needs would push the imf towards the role of a general risk insurer. this would distort creditors ’ risk assessment, ie invite moral hazard and undermine debtors ’ incentives to build strong institutions and to implement sound policies. the international financial architecture will have to be constantly evolved through formal and informal international cooperation, with a special view to building strong institutions and to creating incentives that propagate stability.