New services offered by banks on the FX market, such as the prime brokerage, also create difficulties. Under a prime brokerage agreement, the bank makes its credit limits available to other institutions that speculate on the FX market, most frequently to hedge funds. As the product becomes widely used, supervisors are faced with a growing difficulty in monitoring the credit risk and liquidity risk of operations concluded on the FX market, 42 where the average daily net turnover amounts to USD 1,900 trillion. This creates quite a challenge for supervisors, who must have human and financial capital available to properly assess the risk in the increasingly global and complex world of finance. The understanding of the mechanics of financial markets is a never-ending challenge for supervisors. 40  Kapstein E. “Architects of stability? International cooperation among financial supervisors”, BIS Working Papers No 1999, February 2006. 41  Schinasi G. J. “Safeguarding financial stability: theory and practice”, Washington, D.C., IMF, 2005. 42  Kos D. “Developments In the FX Market: New Opportunities, Risks and Responsibilities”, a speech at the “Future of FX” conference in New York, October 24, 2003. BIS Review 60/2006  15  The response of bank supervisors gathered in the Basel Committee on Banking Supervision to the increasing complexity of financial instruments in banks’ portfolios is the New Capital Accord (“Basel II”), which is to replace the regulations currently applicable in over 100 countries.
21  Feldstein M., Horioka C. “Domestic Savings and International Capital Flows”, Economic Journal, June 1980. 10  BIS Review 60/2006  work of 1980 estimated the correlation between the national savings rate and the investment rate in the years 1960-1974 at 0.89. This correlation for the years 1990-1997 was estimated at 0.60, and having included South Korea – at 0.76. Despite a pronounced fall, the correlation between the national savings and investment remained high. 22 his constituted a peculiar puzzle, as in the global world of finance there were no good reasons for which investments were to be financed with residents’ savings rather than with loans drawn on the global financial market. As in the case of the “Lucas puzzle”, numerous works have been written to explain this phenomenon. In the most recent work by Martin Feldstein regarding this subject, 23 the newly estimated correlation rate gradually decreased over subsequent decades to reach a mere 0.19 in the decade ending in 2002. The decreases regard mostly smaller countries, but the estimates for large countries also show that the correlation rate fell from 0.92 down to 0.59. Therefore, it seems that over 10 recent years the process of globalization of financial markets exhibited a pronounced deepening. One may wonder why the recent years have witnessed acceleration and deepening of the globalization process, given that some phenomena that are universally deemed the reasons behind globalization, started a few decades ago.