First: intensifying competition between financial institutions Whereas financial institutions formerly operated in separate segments of closed economies, they must now compete in financial markets with other financial institutions, both domestic and foreign, regulated and unregulated, as in the case of pension or hedge funds. Financial innovation puts incessant competitive pressure on the providers of financial services which were formerly clearly distinguishable. Credit institutions, investment firms and insurance corporations increasingly offer products that have some similarities in terms of yield or hedging and thus find themselves competing for overlapping customer bases. Competition between financial sectors has also increased in step with technological advances, which have enabled the emergence of new players in the financial sector. E-traders and e-brokers are challenging the dominant positions of banks and brokerage firms. The service providers for outsourced activities peripheral to financial business, such as back-office or custodian services, are also becoming increasingly important. In the future, Internet access providers or telephony companies may well become fully-fledged financial players in their own right. 1  BIS Review 85/2000  Second: stiffer competition between markets The development of information technology and telecommunications has allowed economic agents to move their capital at will. As a result, their investment and borrowing decisions are based on the opportunities available on all markets. •  Domestic exchanges have become mere compartments of the global market and find themselves competing with each other. •  Exchanges must also compete with the extraordinary expansion of over-the-counter markets.
We cannot justify having a banking system that depends on the use of public money to douse the fire when the crisis comes. And we also cannot allow conditions to exist where risks are taken on the basis that this backstop exists. “Too big” or “Too important to fail” are shorthand for institutions that exist in their chosen form as a result of underwriting with public money. I don’t believe that there is anything controversial about a statement that no industry can take on a form which is a consequence of such a massive potential, and of course recently actual, call on public money. The big issue is therefore what to do to correct the situation. There are three elements to the debate: regulation, structure and resolution. We can re-design and re-build the fire prevention systems in the existing landscape. This is the regulation element. At the heart of this is action on capital requirements, including a role for contingent capital and larger liquidity buffers. But we may also conclude that we want to prevent fires by having a different landscape of buildings – a town planning solution in which the structure of the industry is re-drawn. And in the past, cities were rebuilt with that objective in mind. This is the structure element. But, whichever combination of these courses we choose to take, we cannot guarantee that there will be no fires in the future, and we would be extremely foolish if we made that promise.