"Financial modernisation refers to the process of financial innovation and organizational improvements that make the financial system more efficient by overcoming a number of frictions such as asymmetric information, incompleteness of markets, limited opportunities for agents to engage in financial transactions through contracts, high transaction costs and limited competition.”

Gertrude Tumpel-Gugerell, European Central Bank Executive Board Member, September 2006 speech.

The perspective adopted by the European Central Bank offers a useful taxonomy to identify opportunities for greater financial intermediation efficiencies in many countries where substantial reform efforts are required to remove interface barriers between banks and their clients, to create new markets and to improve transactional contractual certainty - as well as to tackle more traditional inefficiencies caused by high transaction costs and imperfect competition.

Accordingly, the Convergence Program focus is to facilitate the delivery of banking products and services that meet the growingly sophisticated needs of companies and households of South-East European economies as they try to reap the advantages of international economic integration.

In the current post-emergency financial crisis response phase, the importance of measures to improve financial intermediation efficiency to counteract the restrictive effect on economic growth of tighter financial stability regulations is already emerging as a key policy agenda, as evidenced by statements of political leaders, representatives of borrowers and bankers.

This Convergence Program Note sets the rationale and shows a road map to pursue a specific financial modernization focus, particularly in emerging and developing countries.

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