Supervision of savings banks commenced as early as 1900, with the establishment of the position of Inspector of Savings Banks. This was probably one reason why savings banks were not as expansive as commercial banks during World War I. Nor were they as severely affected by the banking crisis. A gradual increase in the regulation and supervision of financial enterprises and the introduction of a financial safety net did not mean that the market-based system was abandoned. However, recessions and demands for more protectionism led to restrictions on international trade and capital movements. The result was that domestic investments increasingly had to be financed through domestic savings. This can be illustrated by looking at the relationship between the saving ratio and the fixed investment rate for selected countries. A strong correlation indicates a limited degree of openness. Measured in 6 this way, integration was greater before 1914 than in the interwar period. Protectionism had a very harmful effect on economic developments. 5  Ecklund, G. J. and S. Knutsen (2000). Vern mot kriser? Norsk finanstilsyn gjennom 100 år. (Protection against crises? 100 years of Norwegian financial supervision) Fagbokforlaget. 6  Jones, M. T. and M. Obstfeld (1997). Saving, Investment, and Gold: A Reassessment of Historical Current Account Data. NBER Working Paper Series. 4  BIS Review 86/2001  After World War II, international organisations were established to promote economic cooperation and their objective was increased integration of international trade and fixed investment. However, crossborder capital movements remained heavily regulated.

The first situation is when the highly leveraged institutions taking very large positions are overwhelmed by market forces. As the case of LTCM has illustrated, highly leveraged positions can pose serious risks to systemic stability even in the large and established markets of the developed economies. As the highly leveraged institutions are, for circumstances they have not factored into their mathematical models, forced to unwind their very large positions, particularly against the background of highly volatile and illiquid market conditions, the credit losses of institutions providing the highly leveraged institutions with funding can be huge. The rapid de-leveraging of large positions by highly leveraged institutions is also highly contagious in that it in turn exacerbates volatility and reduces liquidity not only in the markets concerned, but also in other markets. The rapid de-leveraging of the short yen positions by the hedge funds in October last year is a good example of the volatility that can result. The yen strengthened by 11% to 111 over a couple of days. Such volatility affects the positions of yet other highly leveraged institutions and their counter-parties providing them with credit. The potential for market dislocation and the systemic risks this posed were so serious that, as you all know, last September the Federal Reserve Bank found it necessary to broker an unusual package by a consortium of banks to rescue LTCM. The second situation is when the smaller markets are overwhelmed by the forces of the highly leveraged institutions.