Discussing the causes and consequences of innovation in financial markets, the Governor makes the following points:
- new financial instruments have been introduced which offer their users lower costs and greater flexibility;
- many of these new instruments were not caught by the supervisory rules in existence when they were devised but still give rise to the same kinds of risk as more traditional instruments: both banks and supervisors must be able to recognise these risks;
- many of the new developments are international in scope and cross the traditional divide between banks and other financial firms; for reasonable competitive equality between the different types and nationalities of institution to be assured, there may be a need for banking and securities supervisors to co-operate internationally;
- the quality of information available on individual firms becomes less comprehensive as they enter new areas of activity and it is important that disclosure should be adequate to support well-informed market judgements;
- the complexity of many of the new techniques increases the difficulty of risk measurement, while making it all the more important to ensure that risks are adequately assessed and controlled and priced appropriately;
- the shift to marketable assets has implications for the quality of banks' asset portfolios-and perhaps, too, for the quality of long-term credit decisions-which need to be recognised.
Innovation in international banking - Governors speech