But in many respects they highlight the inadequacies of existing regulations. The ease and cheapness of gathering, processing and disseminating information has encouraged financial innovation in a number of areas, including the development of screen-based trading systems, securitisation and the proliferation of derivative products. One of the regulatory responses to financial conglomerates is the adoption of consolidated supervision. Regulators should consider whether various businesses within a conglomerate (banking, securities, insurance, etc.) should be consolidated in an accounting sense for the purpose of calculating capital adequacy and other prudential ratios, and for assessment in general. The more general view expressed, for instance, in European financial market directives and Basle regulatory guidelines is that like activities should be treated identically for supervisory purposes, regardless of the category of institution. It is also important that bank and securities regulators co-operate at the international level. Financial innovation, e.g. derivatives trading, creates transparency problems for regulators, because of the speed and complexity of risk transformation. The appropriate response of market transparency is more extensive disclosure of financial information. But in the context of fast-moving derivatives business the difficulty is to formulate effective disclosure rules that do more than provide an outdated snapshot of risk exposures. For management of financial institutions, the main emphasis must be on internal controls. External regulators, such as the Basle Committee and IOSCO, have responded and issued detailed guidelines on risk management.

Normal banks are allowed to hold any asset, but depositors get no protection at all. But super-safe assets offer a lower yield than normal assets, so the safer the bank the lower the interest rate offered to the depositors. The cost of regulation lies not only in the cost of preventing bank failure, but also the opportunity costs of foregone innovation. Excessive or outmoded regulation results in loss of international competitiveness, thus imposing future adjustment costs on the economy. Hence, there is a need to review regulations constantly and to de-regulate or re-regulate. Why are we deregulating? There are four major reasons why deregulation is occurring: Globalisation Financial innovation and disintermediation Changing consumer behaviour, e.g. aging population Excessive costs  BIS Review 55/1997  -6-  The globalisation of financial markets can be demonstrated by the tremendous increase in cross-border transactions. For instance, at the end of 1994 the stock of cross-border bank assets was more than 4.5 times its level of 15 years earlier, which represents an increase from 20% of the combined GDP of OECD countries in 1980 to around 35% in 1994. Between 1980 and 1994 cross-border securities transactions in industrial countries expanded from less than 10% of GDP to well above 100% of GDP. Within the equity sector, cross-exchange and cross-border transactions have increased rapidly as a percentage of world equity turnover to the point where one in four stock market trades conducted world-wide involves either a foreign security or a foreign counterparty.