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 Furthermore, there is a widespread consensus within the US that Glass-Steagall should be repealed.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.

Since US banks are increasingly engaged in securities areas, their functions are also subject to the Securities and Exchange Commission (SEC) and consumer lobbies. Regulation may be based on product types such that each regulatory authority specialises in one financial product. Under this framework, a securities regulator will concentrate in the oversight of securities activities, irrespective of the type of financial institutions that are carrying out this business. Functional regulation is generally conducted by two separate regulatory bodies, an investor protection arm and a systemic stability arm. The investor protection arm deals with retail depositors and small investors to ensure fair conduct, equitable competition and customer protection. The systemic stability agency, on the other hand, looks at the larger players and wholesale activities. It would also be responsible for the safety, structure and functioning of all payment systems and financial markets. Preventive measures include capital adequacy requirements; constraints on connected lending and other rules aimed at preventing insolvency; and an official safety net such as lender of last resort or deposit insurance. This approach follows the Goodhart (1995) model, which suggests that the difference in focus and function of investor protection and systemic stability is large enough to justify two separate regulatory bodies in each country to share the regulatory responsibilities. According to Goodhart, the formulation of rules for the safety of the system should be the responsibility of the systemic stability arm.