The revisions to the Basel Capital Accord, which aim to align supervisory assessments of capital adequacy more closely with the frontier of risk management techniques, are a good example of these efforts. The changes in the structure of finance and the nature of the financial intermediation process reinforce the importance of cooperation between supervisory authorities. The sources of potential risk to financial stability are not confined to banks. Financial institutions increasingly operate across the legal parameters that define the responsibilities of the individual supervisory authorities. The economic characteristics of many of the financial credit instruments provided by banks and other financial institutions have converged. Our supervisory system is a complex framework in terms of the number of  BIS Review 18/2004  3  responsible supervisory institutions, differences in approaches, overlaps, and gaps. This complexity makes it even more important that we collectively work to ensure a comprehensive look at sources of systemic risk and that we raise the bar on the quality of supervision and market oversight where it is necessary. Bank supervisors have made significant progress in improving how we share and divide responsibilities for supervision of banks and bank holding companies, reduce overlap, and raise the overall contribution of the examination process. With the passage of the Gramm-Leach-Bliley Act in 1999, and the increased scope of activities it has allowed financial institutions to engage in across the financial services industry, we have worked to strengthen cooperation with other regulatory bodies.
Changes in the nature of financial intermediation have also played a role in improving the overall resilience and performance of the U.S. financial system that was evident in this latest period of economic recession and financial stress. Four different types of changes are particularly important. •  Innovation in financial technology continues to expand the opportunities for financial institutions to separate and distribute, and to manage and hedge, different types of risk. •  The increasingly greater role played by the capital markets in the financial intermediation process relative to banks - both relative to the past and compared with most other major economies - has improved the capacity of our system to handle stress. Loans and securities held by commercial banks today account for less than 20 percent of overall U.S. credit market debt, roughly two--thirds of their 1975 levels. •  The increases in the sophistication of risk management techniques and enhancements to risk management processes have delivered substantial improvements in how banks and other financial institutions actually manage risk in practice. Banks, for example, have aligned their pricing of credit products much more closely with credit risk. •  The increased scale of cross-border financial intermediation, the growing role of securitized financial instruments in those overall flows, and the growth in the size and breadth of financial institutions with global operations may also mean that, as shocks are transmitted more rapidly, they are diffused more broadly. These are positive developments, and they are likely to be enduring.