Financial liberalisation, the removal of controls and the breakdown of international barriers, make it possible for new entrants to participate in markets which were previously closed to them. In view of the size of these enterprises and their involvement in many countries in the world, they are usually well-placed to provide specialised services to clients at relatively low costs.
For instance, if financial firms were required to issue subordinated debt, as I have just discussed, supervisors could monitor a bank’s subordinated debt spreads for indications of emerging risk and take appropriate actions in response. This strategy is supported by evidence that subordinated debt spreads do increase with the risk profile of the issuers.