Poszar, Z (2014), ‘Shadow banking: the money view’, Office of Financial Research Working Paper No.14–04. Tirole, J (1988), The theory of industrial organization, MIT Press. BIS central bankers’ speeches  5  Chart 1: Higher capital requirements and market concentration(a) In an oligopolistic market, assume banks that invested first have a higher market share and are more profitable for a given level of costs than the banks that invested second. Higher capital requirements push the profits of the banks with smaller market shares below the fixed cost, causing them to exit, while the profits of banks with larger market shares remain above the fixed cost and they remain in the market. The market becomes more concentrated. Profit (excluding fixed cost) Higher capital requirements increase marginal costs  Banks with large market share Banks with smaller market share Fixed cost Marginal cost (a) The chart is drawn based on the Stackelberg-Spence-Dixit model described in chapter 8.2 in Tirole (1988). 6  BIS central bankers’ speeches  Chart 2: A bank substitutes investment in a lower-risk-weighted asset for investment in a higher-risk-weighted asset when the risk weight for the higher-risk-weighted asset increases A bank chooses a portfolio of assets where its indifference curve is tangent to its risk-based capital constraint. An increase in the risk weight on the higher-risk-weighted assets relative to the risk weight on the lower-risk-weighted assets induces a bank to decrease its investment in the higher-risk-weighted assets and increase its investment in the lower-riskweighted assets.

They facilitate the allocation of resources and their deployment within a financial system by reducing risk and transaction costs. By facilitating market exchange of complex financial services they can be taken as a means to achieve efficiency gains within a financial system. Various mechanisms are provided to clear and settle securities transactions. Common features of these mechanisms are, e.g., that they provide for a technical infrastructure to exchange payment and settlement instructions and that they rely on commonly agreed rules and processes. There is widespread agreement that these mechanisms have been fairly successful in reducing settlement risks and transaction costs. With respect to the business activities of market utilities I can mention, e.g., the dematerialization and immobilisation of securities or the increasingly pervasive application of the delivery-versus-payment principle. In essence the clearing and settlement function provided in a financial system contributes to the reduction of imperfections and thereby makes possible increasingly more integrated and efficient  BIS Review 28/2003  1  economic systems. This improvement, in turn, facilitates capital accumulation and technological innovation that underlie the implementation of investment projects. Thereby a long-term economic growth process is supported and, correspondingly, welfare is improved. Let me state the obvious with Levine (1997): “the development of financial markets and institutions is a critical and inextricable part of the growth process […]”. However, despite the tremendous efficiency gains obtained through the emergence of the financial system, the improvement process is far from being over.