This also entails increased international cooperation. Many financial crises in the 1980s and up to today have occurred in countries where rules and supervision are relatively ineffective. As a result, the financial sector has become fragile. The capital strength of financial institutions has been inadequate. Deregulation has occurred before the country’s financial infrastructure is in place. This has fuelled the build-up of financial bubbles. Large fluctuations in capital movements have often intensified the problems. Elements of this were also present during the banking crisis in the Nordic countries. The financial safety net should help prevent financial instability and curb the effects if instability should arise. This may also prevent the development of imbalances. Deposit guarantees, crisis liquidity schemes and the assumption that large banks will be rescued by the government may weaken market discipline. The result may be increased risk-taking. International organisations have developed international codes and standards for the financial infrastructure and for the regulation and supervision of the financial sector, which are in line with good 10 practices. These codes and standards should contribute to improving policy and creating more robust financial systems. They should make it easier for investors and others to keep abreast of developments, which in turn will increase their ability to assess risks in a country. This will reduce the risk of herd behaviour and the build-up of substantial imbalances. The International Monetary Fund plays an important role in international surveillance and crisis management. They have substantially strengthened their oversight of the financial systems in member countries.

The same applied to direct regulation of financial enterprises. Other considerations, than returns and risk, took precedence in connection with the provision of credit and capital movements. At the end of the 1970s, direct controls were gradually removed. As a result of the emergence of new financial instruments, the controls no longer had the same effect. There was a growing realisation that the existing controls had a negative effect on the allocation of credit and capital, and hence on longterm economic growth. Cross-border capital movements were gradually liberalised. It was not until the 1990s that capital was able to move between countries as freely as before 1914. Because of the serious effects of financial crises, the financial industry is subject to many regulations and to extensive supervision. The industry is by no means deregulated, but the regulations are now designed to make markets function more securely and more efficiently. Clear requirements have been established for both capital adequacy and liquidity. Nevertheless, the regulations do not eliminate the possibility of financial crises. Are financial crises an inherent feature of today’s system? 7  The transition to a market-based system has increased the scope for financial cycles. The cycles may be amplified by unrestricted cross-border capital flows. Because of the central role of the financial industry as a credit and capital intermediary, this can also influence macroeconomic developments. At worst, an upswing in the economy can be amplified through the build-up of financial imbalances, which may trigger and reinforce a downturn and financial crisis.