Lowering the barriers to entering the financial sector, the free circulation of information and fiercer competition have also brought financial markets closer to a situation of perfect competition, which is of benefit to all consumers. Lastly, the growth of market financing has allowed savings to be channelled directly into investment. Reducing the share of bank financing, and therefore to a certain extent that of money creation, has enabled the financing of the economy to be less inflationary. Second consequence: a new framework for conducting monetary policy Financial deregulation has contributed to change the conduct of monetary policies. More open economies and greater interdependence between financial systems has completely overhauled the context in which monetary policy is implemented. •  Financial markets can now penalise inflationary monetary policies by withdrawing capital, with a subsequent rise in long-term interest rates and/or depreciation of the exchange rate. •  At the same time, the monetary policy transmission mechanisms have become more diversified and complex. This situation is one of the reasons why there has been a substantial clarification at a European and global level of the division of labour amongst economic policies. In this context, monetary policy has been clearly assigned the objective of maintaining price stability. Today, monetary policies are conducted within a framework characterised by two main features: •  Firstly, the reducing of inflation expectations depends on compliance with a number of rules that have been clearly defined in advance.

First: intensifying competition between financial institutions Whereas financial institutions formerly operated in separate segments of closed economies, they must now compete in financial markets with other financial institutions, both domestic and foreign, regulated and unregulated, as in the case of pension or hedge funds. Financial innovation puts incessant competitive pressure on the providers of financial services which were formerly clearly distinguishable. Credit institutions, investment firms and insurance corporations increasingly offer products that have some similarities in terms of yield or hedging and thus find themselves competing for overlapping customer bases. Competition between financial sectors has also increased in step with technological advances, which have enabled the emergence of new players in the financial sector. E-traders and e-brokers are challenging the dominant positions of banks and brokerage firms. The service providers for outsourced activities peripheral to financial business, such as back-office or custodian services, are also becoming increasingly important. In the future, Internet access providers or telephony companies may well become fully-fledged financial players in their own right. 1  BIS Review 85/2000  Second: stiffer competition between markets The development of information technology and telecommunications has allowed economic agents to move their capital at will. As a result, their investment and borrowing decisions are based on the opportunities available on all markets. •  Domestic exchanges have become mere compartments of the global market and find themselves competing with each other. •  Exchanges must also compete with the extraordinary expansion of over-the-counter markets.