In addition, these objectives have established the importance of rating agencies for financial institutions, both in determining the conditions of their funding and in defining the structure of their portfolios. Fourth: restructuring to cope with this increased competitive pressure If they are to survive, traditional financial intermediaries must expand and/or innovate. •  The current consolidation of the financial industry is driven by the search for market power and/or economies of scale. Mega-institutions emerge, more and more internationalised and diversified. These developments give rise to financial conglomerates aiming at economies of scale. •  Product or process innovation is an alternative - or complement - to the search for a size effect. It can translate into a variety of strategies: developing new products to exploit market niches, entering into partnerships with other service providers - financial or not - in order to consolidate market share, or developing remote service offers to attract new customer segments and cut costs. In Europe, the pace of this restructuring is accelerated by the euro. BIS Review 85/2000  2  2. These various trends have three consequences for efficiency and stability  The first consequence: improved macroeconomic efficiency in financial systems Free capital movements, interconnected markets, the integration of market segments and the hedging opportunities provided by the new financial instruments allow a better fit between the financing capacities and borrowing requirements of general governments, households and companies. Market interest rates, which represent the markets’ consensus on the risk incurred, are fully beneficial to the efficient allocation of capital.

The authorities had always been clear that they competed with commercial banks in credit markets (including before the repeal of Glass Steagal), but they were not regarded as monetary institutions and so they did not have access to central banks’ liquidity-insurance facilities and were not regulated alongside commercial banks. It turned out that this was a misthink; or, rather, that over time it was overtaken by developments in parts of their business. During the crisis, the big US securities dealers suffered a liquidity run on two fronts. Repo markets closed to some of them; I shall come back to that later. Also, hedge fund prime-brokerage clients withdrew surplus balances (and transferred trading positions, with the associated collateral, to banks). Some dealers had been using them to finance their business, effectively on-lending “deposits” into the credit and securities markets. And some of them could not easily raise the funds to repay. As a sense of this spread, the demand for repayment inevitably intensified, into a panic. Whatever the details of the law in the US, the UK and elsewhere, the dealers’ prime brokerage services seem to have taken them into the core monetary territory of banks. Lehmans was running a bank, perhaps without knowing it. The dealers, or at least their prime brokerage outfits, should have been banks, with access to the central bank’s Window and subject, at entity and group level, to US led bank regulation. Alternatively, they should not have been providing de facto demand deposit services and using those deposits to finance themselves.