Other studies, however, have found that human capital differences increase the pay differential (Lang and Manove (2011)). Wage differentials between black and white women have historically been considerably lower than between men (Lang (2007)) and at times have even reversed. However, Neal (2004) demonstrates that this finding partially reflects the differential selection of black and white women into the labour force. For example, black women face a lower household income than white women, which provides a stronger incentive for them to enter the workforce in the first place. For the UK, although evidence is more partial, it suggests that both gender and ethnicity pay gaps have fallen over time (ONS (2018), ONS (2019)). For gender, the factors determining these gaps include age, educational background, sector, occupation and part time work (Olsen and Walby (2004), Manning and Swaffield (2005), Brynin (2017), ONS (2018)). For ethnicity, it includes occupation, being born in the UK and education (ONS (2019), Brynin and Guveli (2012)). As in the US, the UK ethnicity gap appears to be larger for males than females (Longhi and Brynin (2017)). When it comes to explaining the sources of pay gaps, three main approaches have typically been used. Regression techniques estimate pay gaps controlling for various characteristics of the individual or job (Goldin (2014), Brynin and Guveli (2012)). Oaxaca-Blinder decompositions account for differences in pay between two groups using an independent set of factors. This is useful for capturing the effects of compositional differences in the characteristics of groups (O’Donnell et al (2008)).

There are several reasons: HLIs are perceived as a highly risky industry which is not subject to supervision. HLIs are perceived as non-transparent and opaque. HLIs use complex financial instruments and employ non-traditional investment strategies, partially based on complex mathematical models. HLIs are active shareholders, as the recent example of ABN Amro showed. HLIs are part of the glamorous world of high-net-worth investors and high-salary investment managers. And, probably most important, in recent years, the importance of HLIs has grown tremendously. Why is the risk they pose to financial stability perceived as being so high? HLIs account not only for a significant share of trading volume in some market segments, especially complex ones, they are also important counterparties and clients which provide a significant source of revenue for large international banks. This raises the question of whether HLIs are indeed a threat to financial stability and, if so, whether there is a need for regulation. These are the two questions we will try to answer in this paper. To begin with, let me point out what central banks understand by financial stability and why we consider financial stability to be important. In our view, a financial system should be able to absorb shocks affecting financial institutions (e.g., banks) and/or links between institutions (e.g., payment systems) without jeopardising the system’s vital functions such as financial intermediation, i.e. the transfer of funds from savers to investors, monitoring debtors and transporting payments between economic agents.