Measures to broaden and deepen domestic capital markets, when combined with sound macroeconomic and prudential policies, can play an important role in increasing the benefits from financial integration and resilience against the transmission of capital flow shocks, as well as helping provide finance for development. Financial deepening – expanding the range of instruments, actors, liquidity, and risk sharing capacity – has the potential to enhance the stability of the international monetary system by (i) raising economies’ capacity to absorb volatile capital flows and intermediate them efficiently and safely ; (ii) reducing reliance on foreign savings; (iii) attenuating external imbalances; (iv) mitigating the need for large precautionary reserve holdings; and (v) improving the capacity of macroeconomic policies to respond to shocks by allowing balance sheets to adjust more smoothly. 2. The international financial crisis has underlined the importance of developed, deep, efficient and properly regulated public and private local currency bond markets (ICBMs) for enhancing national and global financial stability and economic growth. Many countries have made successful efforts to deepen their LCBMs and develop their domestic investor base, facilitating a lengthening of the maturity of the debt stock, and reducing their dependency on short-term or foreign debt. Accordingly, currency and maturity mismatches, which were an amplifier of the financial crisis in the late 1990s, have been reduced significantly which has helped contain adverse balance sheet effects in many countries. Moreover, the financial crisis has demonstrated that LCBMs, if accompanied by the development of the local investor base, can provide a “spare tire” in times of tension in domestic and international credit markets to the extent that they can provide a domestic source of finance for local entities. They can thus help reduce contagion effects across financial markets and spillovers into the real economy. Moreover, they can help expand the range of domestic assets available to investors and thereby help reduce the potential for asset price inflation, broaden the scope for fiscal policy to manage and counteract the financial crisis and provide the authorities with greater freedom to use the exchange rate as a tool to achieve macroeconomic stabilization. A more diverse financial system is also better able to absorb shocks.