And ultimately supervisors need to be prepared to take action to limit certain types of activities, or to slow their growth, if the risks are not well understood or not well managed. The third issue is the interconnections between financial institutions.
These institutions, by their very nature, are often highly interconnected: they hold one another’s liabilities and they trade with one another extensively in financial markets. These interconnections are an important part of a well-functioning financial system and they have tended to increase over time as finance has become more important to economies and more globalised.