Change and development in international financial markets

Quarterly Bulletin 1985 Q3
Published on 01 September 1985

The Deputy Governor reviews the major changes in the role of the banks that have taken place over the past ten years, against a background first of the rapid expansion of cross-border lending and then, in the early 1980s, of more restrictive conditions and growing debt problems. One factor behind the expansion of the banks' role in the 1970s was the dismantling of barriers to competition. This has brought major advantages but has also made it more difficult to ensure the stability and integrity of the financial system, underlining the need for adequate capital and liquidity: and the Deputy Governor argues that, in an increasingly integrated world, market supervisors need to strive towards convergence of prudential standards across countries.

The Deputy Governor goes on to examine the current trend toward securitisation of lending and the pressures of competition and innovation which have stimulated it. He warns that, while many of the new techniques offer potential advantages-to lenders and borrowers alike-in terms of greater flexibility, they also carry additional risks, which need to be fully understood and carefully weighed. In particular, liquidity is not necessarily improved, nor the need for capital backing diminished, by increased marketability of an asset: and the allocation of responsibility for credit risks under the new techniques has to be clearly established and properly provided for.

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