These are: the importance of system-wide supervision; the regulation of innovation in the financial system; and the interconnections between financial institutions. First, the importance of supervision. One of the clearest lessons from financial history is that the financial sector has an uncanny ability of finding ways of connecting savers with borrowers. When obstacles are put in the way, detours are often found.
New forms of financing pop up. New institutions develop. New products come into play. We saw numerous examples of this in Australia in earlier decades, and there are many overseas examples as well, some of which are quite recent. This intrinsic flexibility of finance is one reason why the international regulatory community is spending a lot of time thinking about so-called “shadow banking”.