Finally, the banking system must be healthy otherwise opening up will only lead to problems. Emerging market economies with open capital accounts are susceptible to violent swings of portfolio flows. Derivatives could accentuate an existing problem but they are usually not the roots of the problem. There are practical difficulties in regulating the trading of derivatives. Most emerging countries can ban these activities in their own countries but cannot do so in other jurisdictions.
Exchange controls can stop the offshore trading of certain derivatives.
However, they are ineffective against the trading of derivative products that are settled in foreign currencies. Banks need to be big in order to have the global reach demanded by their customers and to compete for the mega-deals. It is difficult to determine the optimum size of banks whether they have grown too large. It depends on their business strategies, their management and the environment in which they operate. Size does increase the complexity of administration, although new technology and better management systems can mitigate these difficulties.