Domestic financial systems were to a large extent isolated from each other, because of capital restrictions and the virtual absence of cross-border mergers between financial institutions. Over the past two decades, this segmented structure of financial markets has largely disappeared.
Financial institutions have expanded and increased their range of activities; mergers have taken place both across sectors and across borders; and financial markets have become much more integrated at a global level. As a result, cross-linkages have become stronger and there is a greater risk that shocks are propagated through the financial system. Institutional developments are the second major change for central banks.