I am sure you will all agree with me when I say, in today’s integrated markets when any country catches a cold there will be many others sneezing. In such an environment we are now increasingly aware of contagion risk. Financial security and financial stability… Within this framework, I would like to emphasize the close linkage between financial security and financial stability. In my opinion, financial security can be enhanced by the existence of a smoothly operating infrastructure. This actually is a comprehensive concept and includes the payment system, the technological infrastructure, as well as the regulatory and supervisory framework. Overseeing the payments system is an essential duty of the central banks. In this respect, a basic continuing responsibility of any central bank is to assure stable and smoothly functioning payment  2  BIS Review 76/2007  systems. Linked to this is the lender of last resort function of the central banks. Emergency liquidity assistance, perhaps the most traditional function for dealing with financial instability, is a way out provided by central banks. Central banks can have a calming influence on markets in case of a market disruption simply by standing ready to provide liquidity assistance if necessary. It includes both the provision of liquidity to the financial system as a whole through market operations, as well as emergency lending to individual banks. Altogether these two important functions facilitate the security in the system. Technological infrastructure is another component to secure financial operations.
Financial systems continuously need to adapt themselves to the rapidly increasing technological innovations. This also includes new products, necessitating increased awareness by the users and supervisors of the risks and benefits inherent in them. At this stage integrity and accuracy of data comes forward to facilitate risk management by the institutions and effective supervision by the regulators. The supervisory authorities increasingly need to be proactive and concentrate on consolidated supervision. In my opinion, it is crucial for policy makers to be aware of the dynamics in the highly correlated markets. Creating widespread transparency with regard to their objectives; identifying risks; sharing views with financial market participants to increase their awareness of risks and to act accordingly; starting or promoting initiatives to reduce the financial system’s vulnerability to crises and to reinforce financial infrastructure, especially in the field of payment services and securities settlement should be given priority. International initiatives ease this process by specifying best practices and defining principles. In these international platforms, we find the opportunity to cooperate and exchange information. As we would all agree, although it is highly comprehensive and demands our devotion, Basel II is a significant step towards that end. There is no doubt that the main pillar of Basel II regarding capital adequacy is a core requirement for the financial soundness of institutions. However, I want to point out the importance of its two other pillars. Supervisory Review is very essential to evaluate an institution’s risk management. Complementary to this is the effective corporate governance in an institution.