The emphasis on equality and social security also underlies the “cradle to grave” public welfare systems in the Nordic countries. These systems require large public transfers. Both the large public sectors and the high level of transfers necessitate a high level of taxes. In addition, the tax systems have been focused on redistributing income. Another Nordic feature is the high share of labour union membership. Wage negotiations have traditionally been rather centralised and income is fairly equally distributed. BIS Review 78/2000  2  There is a risk that these features of the Nordic societies weaken both incentives and competition. In that sense, the Nordic countries clash with the “Anglo-Saxon model”. However, both the standard of living and other general indicators of well-being are at the top internationally. Hence these countries must also possess growth-enhancing characteristics. The most important is probably their openness both to trade and the exchange of know-how. We also like to think that the traditional working ethic of the Nordic people is still in place and plays an important role. Nordic enterprises have shown flexibility in adapting to a changing market and technological conditions. The restructuring of the financial industry is a relevant example. There are also differences between the Nordic economies. One such area is industry structure. Sweden and Finland both have relatively large manufacturing sectors. They have some major industrial and technological “locomotives”, in addition to a pool of small companies. Several of these are suppliers to the larger companies. Denmark has many small and medium-sized enterprises.

If systemically important domestic institutions expand abroad, central banks - with responsibility for financial stability - will have to assess the risks involved. In addition, structural changes also influence central banks’ role as “lender of last resort”. Although structural changes alter the risk profile of the financial system, they shouldn’t be viewed as negative. On the contrary, these changes may be necessary to reap the benefits of more efficient intermediation of savings and better risk management. Changes are thus something the authorities should facilitate and adapt to - through high quality supervision and surveillance and through regulatory changes if necessary. Currently a variety of regulatory initiatives are being discussed. Important examples are the EU Financial Services Action Plan, the revision of the Basel Capital Accord, and the different initiatives gathered under the heading of “New Financial Architecture”. However, as the current wave of consolidation progresses, the authorities must take the necessary steps to ensure an adequate level of competition. While executing this task, the authorities should recognise that the competitive environment of the financial sector has changed and will continue to do so. Furthermore, it is important that the market surveillance function is improved. Increased transparency and harmonisation of regulation and industry practices are particularly important in this respect. However, enhanced supervision, international cooperation and regulatory changes are not enough. Improving institutions’ own risk management systems is a key challenge. It is vital that these systems develop as the structure and activities of institutions change. 7.