This paper identifies and discusses the conditions needed for achieving strong and stable capital markets in emerging market economies, which at present remain illiquid and underdeveloped. These conditions can be grouped into four pillars: macroeconomic stability, sound banking systems, high institutional quality, and an adequate regulatory and supervisory framework. A central message is that these pillars are interdependent: failure to strengthen any of these pillars will weaken the others; all pillars are complementary and equally important. The paper also emphasizes that the inability of emerging markets to issue safe assets imposes a major constraint on the resilience of their local capital markets to external shocks.

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