Supervision of savings banks commenced as early as 1900, with the establishment of the position of Inspector of Savings Banks. This was probably one reason why savings banks were not as expansive as commercial banks during World War I. Nor were they as severely affected by the banking crisis. A gradual increase in the regulation and supervision of financial enterprises and the introduction of a financial safety net did not mean that the market-based system was abandoned. However, recessions and demands for more protectionism led to restrictions on international trade and capital movements. The result was that domestic investments increasingly had to be financed through domestic savings. This can be illustrated by looking at the relationship between the saving ratio and the fixed investment rate for selected countries. A strong correlation indicates a limited degree of openness. Measured in 6 this way, integration was greater before 1914 than in the interwar period. Protectionism had a very harmful effect on economic developments. 5  Ecklund, G. J. and S. Knutsen (2000). Vern mot kriser? Norsk finanstilsyn gjennom 100 år. (Protection against crises? 100 years of Norwegian financial supervision) Fagbokforlaget. 6  Jones, M. T. and M. Obstfeld (1997). Saving, Investment, and Gold: A Reassessment of Historical Current Account Data. NBER Working Paper Series. 4  BIS Review 86/2001  After World War II, international organisations were established to promote economic cooperation and their objective was increased integration of international trade and fixed investment. However, crossborder capital movements remained heavily regulated.

Other international organisations are also intensifying their efforts in the area of financial stability. In the Nordic countries, both the supervisory authorities and the central banks have expanded their cooperation as a result of the integration of the Nordic banking industry. One question that will arise is 9  Bordo, M. D., Dueker, M. J. and D. C. Wheelock (2000). Aggregate price shocks and financial instability: An historical analysis. NBER Working Paper 7652  10  See BIS, Financial Stability Forum (2001). International Standards and Codes to Strengthen Financial Systems. BIS Review 86/2001  9  whether guarantee funds and other rules and regulations can differ when markets are so closely integrated. Next year, an important international milestone will be reached when the Basel Committee on Banking Supervision presents the new capital adequacy rules. According to plan, the rules will apply from 2005. Basel II has a three-pillar architecture. First, the rules relating to minimum capital requirements will be further developed. Second, the supervisory authorities will monitor banks more actively. Third, information disclosure requirements will enhance market discipline. Combined, this will constitute a coherent system for protecting the financial strength of banks. The regulations will improve the balance between capital requirements and banks’ financial risk. This will also increase the focus on the development of risk management systems. Finally, I would like to place particular emphasis on the need for market discipline, which is the third pillar in the proposed Basel Capital Accord. Financial stability is dependent on the identification, management and control of risk.