Global debt securities outstanding are nearly a third higher at just over $ trillion, having quadrupled over the same period. Turnover in foreign exchange markets has also quadrupled over a similar period to some $ trillion a day. Completely new markets have developed to manage and match risk and to expand funding options. Derivative markets now dwarf the markets in the underlying instruments on which they are based. Total derivatives outstanding have increased nearly six fold over the past 20 years to around $ trillion. In 1914, such markets existed on a small scale for agricultural products. Repo and securitisation markets which hardly existed when financial globalisation restarted are now each worth around $ trillion. 4  As financial globalisation has grown, so has the tendency for activity to concentrate in financial centres. Concentration, as Paul Krugman observes, is the most striking feature of many industries’ economic geography. Labour market externalities mean that larger concentrations allow for a more efficient matching between employers and employees, and encourage the formation of a pool of specialised workers. Concentration increases the scale of the demand for intermediate inputs encouraging the development of more specialisation in the suppliers of those inputs. And concentrations facilitate the exchange of knowledge and skills. Given the importance of access to specialised labour, to intermediate inputs and to knowledge, it is not surprising that financial services are subject to very strong pressures to concentrate activity in key centres. 3 4  See World Federation of Exchanges H1 2016 Market Highlights.

I will briefly deal with the general approach, then discuss the instruments available to mitigate procyclicality. General approach As in many matters of public policy, there is a choice between rules and discretion in dealing with procyclicality. The rule based approach can be built on "automatic stabilizers" which would constrain institutions in their behaviour, regardless of their own individual situations. Examples would include contra cyclical capital requirement, for instance, as well as dynamic provisioning. Alternatively, discretionary action could consist in "top down" interventions from macro prudential authorities. They would step in and impose (or relax) constraints whenever they come to the conclusion that dangerous imbalances are building up (or unwinding). We probably cannot dispense of this second approach. The difficulty to date cycles makes it dangerous to rely purely on automatic mechanisms, which cannot be precisely calibrated. Financial cycles, in particular, are driven by changes in risk appetite which are impossible to predict. Actually, one essential objective of macro prudential supervision may be to "regulate" (not in the legal sense, but economically) the aggregate level of risk appetite inside the financial system. This unavoidably involves some degree of discretionary judgement. How that judgement is made will determine the relevance and effectiveness of macro prudential supervision. The prudential apparatus has worked in the past on the presumption that all movements in asset prices were based on fundamentals. This approach may prevent supervisors from dealing with excessive procyclicality until it is too late. The existence of bubbles, for instance, is impossible to prove until they burst.