The first line of protection against bank failure must be internal management’s own risk controls. The growing complexity and variety of banking business suggests that neither the authorities nor informed customers can prevent internal management from making mistakes if internal controls do not work. The best defense against mistakes and fraud are proper internal governance, or checks and balances. Internal dual controls, together with both internal and external auditors, plus a proper disclosure policy would give the best incentives for internal management to perform according to proper rules of behaviour. Public disclosure rather than private channels of information would be cheaper and reduce unwarranted expectations of what a regulator or supervisor can actually achieve. However, it is difficult, if not impossible, to guarantee full disclosure. It is doubtful whether free markets work well enough in conditions where information is partial and asymmetrically distributed and externalities exist. Thus, it is not really possible for the authorities to shift entirely to reliance on disclosure and to abandon their specialised supervisory function. Increasingly, therefore, the public oversight function is one of monitoring and surveillance, to ensure that systemic risks are not incurred at excessive public costs. When best practices and market standards are applied, any behaviour by regulatees that deviate from the norm would be subject to public scrutiny. There is therefore greater pressure for establishing international norms of performance, such as capital adequacy standards and risk management tools. The Basle Committee has recently established “Core Principles” to guide the regulation of banks.

Another key development in international financial markets is the emergence of financial conglomerates which provides a wide range of services including insurance, securities, mortgage lending and banking services etc.. The fusion of different types of business is made possible by deregulation initiatives in major financial centres. In London, the rules of the Stock Exchange were amended in 1986 to allow acquisition of member firms by outsiders, including banks, thereby ending the separation of banking and securities businesses which had been a feature of the UK financial services industry for some 300 years. In the US, the Glass-Steagall Act of 1933 still formally separates banking from securities businesses, but through liberal interpretation of this statute the US regulatory authorities have in recent years permitted the US banks to develop significant securities operations through special-purpose affiliates. Furthermore, there is a widespread consensus within the US that Glass-Steagall should be repealed. In Japan, the Financial System Reform Law that came into effect in 1993 allowed commercial banks and securities firms to expand into each others’ business territory by establishing separate subsidiaries. In the European Union, the capital adequacy directive’s trading-book approach permits banks to engage freely in securities activities. BIS Review 55/1997  -7-  The revolution in information and data processing technology has transformed our financial markets and the way our financial institutions conduct their operations. In most respects, these technological advances have enhanced the potential for reducing transaction costs, to the benefit of consumers of financial services, and for managing risks.