In the fifth part I shall address the cost-benefit issues that sooner or later inevitably turn up whenever measures to improve resilience are discussed. I shall conclude with a summing-up of my main points. Value: significance and driving forces The main function of banks is intermediation. In its basic form intermediation takes place between borrowers and lenders. Additional intermediation functions are - among many others - making payments and buying and selling securities on behalf of clients. Over the past decades we have seen a huge decrease in the costs of intermediation. This has drastically changed the structure of the banking sector and, at a more general level, the structure of the whole financial sector. Two factors have triggered this change. First, competition in the markets has increased as a consequence of reduced trade barriers and of deregulation. Trade barriers not only in goods but also in services including financial services and in financial assets have been progressively lifted. This has led to rapidly growing interaction among economies, not least in the area of banking and financial services. Countries participating in this process have seen their domestic financial markets become deeply integrated with markets abroad. Distance and location, increasingly becoming less of an obstacle, no longer give protection from competition. This is globalization. Second, technological progress, especially in information technology (IT) and telecommunications, has exerted an all-pervasive pressure to innovate at the level of processes and products and has greatly affected the way the financial sector organizes itself.

A third source of vulnerability is the large degree of connectivity and interdependency of the financial sector. Y2K and the terrorist attacks of September 11, 2001, highlighted this type of vulnerability. One key lesson learnt was that vulnerability extends beyond these systems since they crucially rely on utilities such as electricity and telecommunications or on service providers like S.W.I.F.T. Let me sum up again. There are three major sources of a financial system’s vulnerability: economic concentration, geographic clustering, and connectivity and interdependency. The latter are an obvious characteristic of financial networks. Networks contribute to increased efficiency and facilitate risk management. At the same time they also can act as channels as well as origins of systemic crisis. From vulnerability to resilience Hand in hand with a new awareness of the vulnerability of the financial system, those responsible for its safety and stability in private firms, in financial market infrastructures as well as in the regulatory agencies have recently been taking a new hard look at the financial system’s capacity for resilience. In retrospect the Y2K problem was a first mild but nevertheless rather valuable test. The Y2K test was mild in the sense that everybody had enough time to prepare for it. What helped in Y2K was the clear deadline. All the contingency and communication networks could be set up before the event. Many of us gathered here today knew exactly where we had to be on December 31, 1999, what we had to do and whom we had to call if there were problems.