7/9  Steps towards a more integrated financial system at European level have already been taken since the crisis, with the Banking Union and the Capital Markets Union projects. These projects need to be further developed and implemented. The Banking Union, which was set up to put an end to the link between sovereign risk and banking risk, is now operational. What remains to be done in order to finalise it includes completing the resolution pillar by implementing a backstop and adopting a common framework to enhance the provision of liquidity and putting in place a European deposit insurance scheme. Finalising the Banking Union is of prime importance for the development of pan-European banks, and will make it possible to achieve a better balance of risks, economies of scale, a better allocation of savings towards productive investments and increased competitiveness of European banks at the international level. The other major initiative at the European level to strengthen financial integration is the Capital Markets Union project which aims to boost investment in the EU. Speeding up this Union will not only foster growth but will also enhance risk-sharing across European countries and mitigate the procyclicality of bank financing. We, at the Banque of France, support in particular three initiatives which should have a decisive impact on cross-border investment: First, the harmonisation of the insolvency procedures framework and its implementation by companies to promote investment in equity across Europe.
We have to find a middle way in regulation. Market participants should also be given adequate information to protect themselves from any problems related to new products, markets, or institutions and how to mitigate risks. This is a task for policy makers and regulators. More importantly, in finding a middle path, regulators also have to trust markets and institutions, but ensure that the innovations do not result in undue stress to the financial system. A more practical way to regulate financial conglomerates is the closer coordination among regulatory authorities. Another area that is difficult to be brought under regulation is the derivative trading by financial institutions. Fortunately, this trade has not expanded yet in Sri Lanka, but we may have to be mindful of their emergence, sometime in the future. The essence of financial regulations, therefore, is to encourage financial intermediaries to identify and manage risks without causing instability in their own institutions which can have riffle effects on the entire financial system which is heavily dependant on public confidence. A systemically important financial intermediary can cause serious threats to the wider financial system. Financial regulator helps to build that public confidence through regulation and supervision. That’s why regulators try to promote financial intermediaries to hedge against possible risks and prevent over exposure. In keeping with the world trends, the Central Bank as well as the other regulatory authorities will try to be proactive and avoid over-regulation, but at the same time take necessary steps to ensure system-wide stability. Let me sum up.