Technology does not only manifest itself in web and wires, but also in the rarefied area of financial engineering, with advanced mathematical models and complex equations developed to price new derivative products. These have become useful instruments for hedging purposes and for offloading and allocating risks to those who have the appetite and capacity to take them on. 22. But these developments have brought dangers and anxieties as well as benefits and convenience. The Y2K episode – though it was well managed and ultimately uneventful – underlined how dependent we have become on the technology created over the last decade or so, and how irreversible that technology is. More recently, and now that the Y2K anxiety has been overcome, the rapid development of e-banking has underlined other concerns about privacy, security, risk management, customer protection – even about the very nature of banking – in a borderless world. The dangers posed by innovative financial products hardly need to be laboured in a place that has been very much at the brunt of their more destructive forces in recent years. 23. What can a monetary authority do in the face of such difficulties? I have referred already to the drastic measures taken in 1998, and more than enough has been said on that matter elsewhere. In the field of regulation and supervision, we need to ensure that we keep pace with the rapid 5  BIS Review 114/2000  developments going on, so that anxieties about e-money and e-banking – real or imagined – are properly addressed.
Second, a set of resolutionrelated reforms are intended to limit the consequences to the financial sector if a failure by such an institution still were to occur. Given the limited time on this panel, I will not review in detail the post-crisis comprehensive capital and liquidity framework that the Federal Reserve has put in place. However, from the perspective of addressing too big to fail, it is important to highlight the Federal Reserve rule finalized this year that imposes risk-based capital surcharges on the handful of U.S. global systemically important banking organizations (GSIBs). Under this framework, a GSIB’s riskbased capital surcharge will reflect the degree to which its failure would impact the financial system. In effect, the risk-based capital surcharge confronts each U.S. GSIB with the choice to either reduce its systemic footprint or instead to hold more capital. The policy approach to too big to fail recognizes, of course, that we can reduce but cannot completely eliminate the possibility of a large financial institution’s failure. Therefore, a second aim of our post-crisis reforms has been to limit the adverse consequences that would result if a large financial institution were to fail. That is, large financial firms need to be capable of being successfully resolved without creating unacceptable collateral damage to the rest of the financial system and to the economy.