Title: Maintaining Stability in a Changing Financial System: Some Lessons Relearned Again?
Abstract: It is a pleasure to be in Sydney today to participate in this meeting and to offer my perspectives on some of the recent events in financial markets and their implications for financial stability. Over the past three decades, we have experienced an increased number of financial crises in many countries around the world. These crises have taken place in many different parts of the financial system, including: banking and payments systems, housing finance systems, securities markets, and currency markets. Central banks and other authorities charged with maintaining financial stability have drawn important lessons from each of these crises and have instituted regulatory and policy changes that have helped strengthen the financial system in the wake of these crises. Indeed, forums like this meeting are extremely helpful in providing a venue for discussion of these crises and possible policy responses.Despite our best efforts, much like a virus responds to the body's immune system defenses, financial crises have continued to return in modified form, requiring ongoing vigilance by policymakers. Moreover, the task of maintaining financial stability has become more difficult over time because of the changing structure of the financial system. As you may know, many countries are in the process of shifting from a bank-based system of financial intermediation to a capital marketsbased system. The pace of change has risen as well, with many new financial products and many new players in the financial landscape. In addition, the intermediation process has become increasingly complex, posing difficulties both for market participants and policymakers. And, with the increased global linkages among financial markets, disruptions in one market may spread quickly around the world.Unfortunately, we have not adapted our regulatory and policy framework at the same speed as financial market developments. Our main regulatory and supervisory policies and our central bank liquidity facilities are best positioned to deal with traditional banking crises and appear less adequate to deal with crises that increasingly originate in financial markets and outside the banking system.In my remarks today, I would like to use the recent subprime mortgage crisis to motivate a broader discussion of how we can maintain financial stability in a changing financial system. While the recent crisis has revealed some new and unexpected vulnerabilities in the financial system, it has also highlighted the need to remember some of the lessons we have learned from past crises-as indicated by the tide of my speech.I. RECENT EVOLUTION OF THE FINANCIAL SYSTEMLet me begin my discussion with some general comments on the sweeping changes we are seeing in financial systems around the world. The key development in this changing framework is the evolution from a bank-based system of financial intermediation to a market-based system. Banks retain an important but increasingly different role in financial intermediation. For the larger banking organizations, activities and earnings are now focused more on loan originations and credit risk management services, and less on holding loans on the balance sheet to generate interest income.While some of these developments may be further along in the United States, similar trends are evident throughout the world. In this new system, investors can be very far removed from borrowers, relying on a number of agents to ensure the smooth functioning of the system. With the increased linkages among financial systems around the world, financial instruments and claims pass through many hands and often wind up far from their origins.Several factors are behind these dramatic changes in the financial framework. One key factor is the enormous growth in the amount of funds managed by large institutional investors such as pension and mutual funds. Equally important are technological innovations in information processing and telecommunications. …
Publication Year: 2008
Publication Date: 2008-01-01
Language: en
Type: article
Access and Citation
Cited By Count: 6
AI Researcher Chatbot
Get quick answers to your questions about the article from our AI researcher chatbot