In this latter context banks have traditionally played a key role in financing the corporate and household sectors, earning their return by gathering information about, and assessing and monitoring, the creditworthiness of private sector borrowers, especially those who do not or cannot cost-effectively provide the comprehensive, public, information that would allow them to access the capital markets. Much of the banks’ lending, while nominally at short-term, for example in the form of callable overdrafts, is in practice illiquid and non-marketable. So a further  BIS Review 13/1997  -2-  distinctive characteristic of banks is that they typically function with a mismatch between their highly liquid liabilities and their less liquid, non-marketable, assets. There is no need, I think, to labour the importance to the economy as a whole of these distinctive banking functions, or the damage that would be caused if the banks’ role - as the repository of liquidity, as the core payments mechanism, and as the principal source of finance to at least a large part of the economy - were seriously interrupted. That in itself helps to explain the public interest in the effective functioning of the banking system, or why banks collectively have been regarded as special. But beyond that, the distinctive banking characteristics that I have described, of liquid liabilities and less liquid assets, give rise to special needs. Given the banks’ role in the payments system they may need late access to liquidity to square their positions vis-à-vis each other after executing payments instructions on behalf of their customers.

Their loan ratio to total assets is down to around 12% from around 50% in 1985 and 30% only 5 years ago. That is still much higher than the illiquid asset ratio for the large US securities firms which has fairly consistently been around 2%. The conclusion that I draw from all of this is that while there certainly have been important changes affecting the banks, and the environment in which they operate, they have not, yet at least, been such as to affect fundamentally their relevant key functions or the importance of those functions to the economy; nor have they altered fundamentally the distinctive characteristics of either the banks’ liabilities or their assets. To what extent have other financial institutions become more like banks? So, then, to what extent have other financial institutions developed similar characteristics to the distinctive characteristics of the banks as I have described them? The question, let me be quite clear, is not whether other financial institutions perform economically or socially important functions - clearly they do - and those functions may equally be special in their own distinctive ways. It is also obviously true that, with the upsurge in financial innovation and globalisation that we have seen in the past 10-20 years, there has been substantial blurring of the boundaries between different types of financial institution and the increasing emergence of multifunctional, multinational, financial groups, so that non-bank institutions have taken over banks or offered banking services just as banks have entered substantially into non-banking financial activities.