Starting from this premise, I would like to specify what kind of challenges oversight authorities face and share with you some ideas on what the role of an institution like the Swiss National Bank should be. But first of all, I would like to clarify a fundamental point. Some people claim that the oversight authorities’ objective of promoting the stability of the financial system hides an undue interventionist activism. Well, these claims are beside the mark. Let me quote Andrew Crockett, BIS General 7 Manager and Chairman of the Financial Stability Forum : “[…] systemic stability is critically determined by the collective behaviour of individual market players. […]. And supervisors need to analyse the interaction between individual incentives and systemic outcomes.” In other words, systemic stability depends on how negative externalities, which are not priced or internalised by the market, are dealt with. Thus, we should not waste our time discussing whether regulatory intervention is necessary or not, but rather how oversight authorities, focusing on systemic risk, should shape the process. Keeping this in mind, the challenges oversight authorities face are numerous and well-known. The Giovannini Group lists no less than 15 barriers to efficient cross-border and settlement procedures within the European Union. These barriers are categorised according to their technical nature, their fiscal implications and their legal aspects. A remarkable feature of this report is the distinction between what market forces can achieve and what regulatory authorities should do. In particular, there are several issues that cannot be tackled by the private sector, e.g.

In the field of financial market infrastructure, there is no alternative to close cooperation between private market players and oversight authorities. On the one hand, it makes sense in this field as well to rely on market forces to stimulate, as energetically as possible, an eagerness for progress and innovation. On the other hand, we have to take into consideration that there are economic forces working in this area that limit the free play of market forces and require oversight authorities to take on a more active role. First, clearing, settlement and payment systems entail network characteristics with potentially negative externalities not internalised by individually optimising market players. It is thus the aim of oversight authorities to take into account the financial infrastructure as a whole, thereby focussing on the links between all components. In other terms, some of these systems are “too interlinked to fail” and must therefore be overseen with special care. Second, since clearing, settlement and payment services are based on production processes with very high fixed costs, there is a risk that consolidation may lead to a monopolistic market result. Oversight authorities must therefore also make it their goal to prevent potential abuses of market power. Against this background, a trust-based cooperation between financial service providers and oversight authorities remains the key to a continued successful development of an efficient and secure financial market infrastructure that meets the fast-changing needs of the future. BIS Review 37/2002  7