and fail as a result. what is different about leveraged financial intermediaries is first, that the claims on banks are such important assets to a wide spectrum of economic agents, and second, the possibility, however remote, of a chain reaction, a cascading sequence of defaults that could culminate in financial implosion. such events could have a substantial adverse impact on the real economy. historically, both bank owners and bank depositors have understood this problem. and, acting in their own self - interest, each group has tried to limit its risks – loss of their equity or their deposits. that is, banks were supervised by the market, with government oversight initially limited to chartering and trying to ensure at least minimum specie reserves to meet demand for repayment of banks'circulating note liabilities. brokers and other arbitrageurs soon emerged, and their evaluation of the quality of individual banks was instrumental in establishing market prices – discounts – on the notes of individual banks. by collecting notes that were issued in excessive amounts and presenting them for payment, regional clearing systems also served as a limit on the banks with perhaps excessive risk appetites. in short, market discipline in one form or another was the major governor of bank risk - taking from the early years of the republic. advancing technology – telegraph, railroad, and transatlantic cable – disseminated information, the raw material for market discipline, ever more rapidly. in this environment, banks competed for reputation, and hence deposits, by advertising their high capital ratios. indeed, high levels of equity capital had generally been necessary to induce the public to deposit its funds or to accept bank notes. equity also played an important role in protecting bank owners from the short - term vicissitudes of lending. equity capital ratios declined throughout the nineteenth century as increased real - time information capabilities lowered risk premiums embodied in equity contracts, but also because of bank risk - sharing through correspondent relationships, wider supervision, and state and, later, federal note collateral requirements. equity capital ratios, which were as high as 50 percent in the 1830s, were still a third in the 1860s and more than 15 percent at the time the federal reserve began operations in 1914. but if market discipline was such an attractive governor for managing risk, why were the nineteenth and early twentieth centuries punctuated by those periodic banking collapses known to historians as panics? " panic " was, in fact, a good description, since participants felt it necessary, during those periodic

place in 2008, many emerging countries have experienced sudden stops of capital inflows on a recurrent basis. the international financial architecture as it was before the crisis lacked appropriate tools to deal with volatility in global capital flows and to prevent crisis contagion. this was an incentive for emerging countries to self - insure against global liquidity shocks by accumulating international reserves or protect themselves through capital flows control, both distortive types of protection. reserve accumulation is costly to emerging economies as they have to restrain consumption and forego profitable investment opportunities in order to buy the low - yield assets that usually constitute reserves. it also has global consequences. for those emerging market economies that ran a current account surplus to accumulate reserves, the process has contributed to current account imbalances. this is why finance has an important role to play to help these economies effectively deal with capital volatility. a lot has already been done by g20 countries and international institutions since the beginning of the crisis. central banks of large advanced countries have set up swap arrangements with some emerging countries. the international monetary fund has created a precautionary lending facility : the flexible credit line. a general sdr allocation of usd 250 bn has been agreed in the london summit of april 2009 and out in place. however, there is still scope for improvement and further work is currently being done to improve global financial safety nets. in their meeting in busan earlier this month, finance ministers and central bank governors of the g20 have “ acknowledged a need for national, regional and multilateral efforts to deal with capital volatility ”. a financial safety net experts group has been set up to work on the issue. the reform of financial regulation the financial crisis as taught us some very hard lessons. while there are many causes to the crisis, it is clear that it forces us to reconsider the way we regulate and supervise the financial system. that is what we have been doing since the november 2008 g20 meeting. we entered this crisis with many unregulated entities playing a major role in the financial system. there were, therefore, huge “ black holes ”, including what has been called a “ shadow banking system ” where most of the excesses of securitisation took place. the g20 has fostered coordinated efforts by industrialized and emerging countries alike to bring most important financial actors under the umbrella of supervision, with rating agencies and hedge funds receiving a larger degree of attention. beyond these actors, the