In my address today I shall be pointing out discernible trends in the development of the financial system and how this process is being reinforced by the coming European Monetary Union. In conclusion I shall consider what this requires of economic policy, its decision-makers and various authorities. A financial revolution It is hardly an exaggeration to say that a revolutionary process of financial transformation and development has got under way in the past decade, with consequences that we probably cannot yet fully foresee. Deregulation, globalisation, advanced information technology and new methods for valuation and risk management have initiated a dynamic process in which financial markets, institutions and instruments are interacting. There are clear similarities with the expansion of real economies in the past hundred years; a stream of new, more efficient and specialised production processes and new communication facilities are leading to a growing volume of trade. Basically, the financial trend and its internationalisation are a natural development of the market economy, a logical consequence of persistently rapid economic transformations that call for new financial solutions for households and firms. Challenges for banks The foreseeable developments will alter or at least affect the future role of banks. New trends in traditional banking are already discernible. Competition for bank deposits is growing in that people are increasingly choosing to place assets in securities, either directly or via mutual funds. Specialised agents of various types, such as niche banks, have also entered this field.

Moreover, in a particular country, even if its economic fundamentals look good, such a situation can give rise to downward pressure on both the BIS Review 81/1998  -5exchange rate and share prices at the same time as interest rates rise. That suggests that certain investors are reducing all types of holding in the country in question, which is a signal to the country’s decisionmakers that more must be done to enhance general economic policy’s credibility. High standard of discipline throughout economic policy While it is obviously important to discuss how a financial crisis, if it occurs, should be managed, it is at least as important to minimise the risks of a crisis ever materialising. This applies in particular when the financial system is undergoing rapid developments. The transformation in Europe in the coming years must therefore be followed closely. One key factor is economic policy in general. An economy characterised by low, stable inflation, sound government finances and good economic policy credibility also provides a generally stable economic environment. This in turn promotes a sound development of the financial domain. By itself, however, this is not enough. Another highly important matter is the appropriate government supervision of the financial sector. Even central banks that are not directly engaged in this supervision must monitor tendencies in the financial field in order to fulfil their primary tasks of ensuring price stability and financial system stability. There are several reasons for this. Monetary policy is implemented through the financial system’s agents.