Address by Dr Chris Stals, Governor of the South African Reserve Bank, at the Annual Dinner of The Institute of Bankers, Cape Town.                1. Increasing volatility in financial marketsDevelopments in the global financial markets over the past year focused the attention on the ability of countries to adapt to rapidly changing conditions in an extremely volatile global environment. With a strong trend towards globalisation and the worldwide integration of financial markets that swept through the world economy over the past decade, most countries of the world, big and small, have now become more exposed to volatile capital inflows and outflows. The cross-border (and therefore cross-currency) transfers of huge amounts of investment funds disrupt domestic and foreign currency markets in many countries almost on a regular basis.From the experience of the past year, it is clear that many of the smaller countries with rapidly expanding domestic economies and emerging financial markets find it increasingly more difficult to maintain domestic financial stability, and remain within the unstable environment of an integrated global financial market. The amounts involved in volatile capital transfers are too large for the smaller economies to absorb. Countries find it difficult to adapt internal situations to sudden and unpredictable turnarounds in the flow of funds that may take place from time to time.A second major problem that surfaced during this year of financial turmoil centred around the diverse economic needs of many countries that find themselves at different stages of economic development, different phases of the business cycle, and pursuing different objectives with their overall economic strategies. The integrated global financial markets set high standards, based on the needs and norms of the more developed economies, being the main source of the supply of funds. Ambitious fund managers, seeking to maximise the yield on investments managed on behalf of demanding clients, have little loyalty to the needs or the circumstances of the countries where they make their investments. There is, indeed, little diversification in their thinking or in their computer programmes when they invest in the global markets -- all emerging markets are, for example, treated as just one group of countries.Given the environment of volatile capital movements, a third deficiency of the present system has been identified, and that is the lack of a global "lender of last resort" or "discount window facility" that can serve to provide temporary assistance in times of sudden outflows of capital from a country. The resources of the International Monetary Fund turned out to be completely inadequate in the present volatile environment. Even after the completion of the current round of increases in the quotas of the Fund, the IMF will not be in a position to supply in the needs of its member countries in times of serious global financial crises. Many recipients over the past year of IMF assistance are also of opinion that the conditionalities attached to IMF loans are no longer appropriate for the present world environment. Disruptions in international financial markets are no longer created by structural or temporary imbalances in international trade, but rather by volatile international capital inflows and outflows. The IMF's conditionalities are still directed, however, to the restoration of equilibrium in the current account of the balance of payments.A fourth conclusion from the developments of the past year is that the present international financial system of floating exchange rates and free capital movements provides increasing incentives for speculators and short-term profit explorers to exploit weaknesses of individual countries, often at the cost of the impoverished and the poor people of the world. 2. A Hobson's choice for the emerging marketsSmaller countries such as South Africa can do little to change the world financial system, but may still be able to isolate themselves from the volatility of the world environment. This will, howe