The links between countries today are even stronger and broader than was the case 100 years ago. The number of countries taking part in the global exchange of goods and capital has soared. China, India, Russia and many other emerging markets have during the past twenty years opened their borders and embraced capitalist reforms. The economic world has become larger. What we have seen is, to use the words of Federal Reserve Chairman Ben  BIS Review 14/2008  1  Bernanke, “a wave of worldwide economic integration and increased economic interdependence”. 1 Economic developments the past 15 years have been extremely favourable. Inflation has generally been low and stable. At the same time, compared to the 1970s and 1980s economic growth has been higher and recessions shallower. Better monetary policy and a firm nominal anchor are in my view vital factors behind this “great moderation”. But intensified competition and increasingly deeper and more integrated markets for goods, services, capital and labour have also contributed to containing inflationary pressures and to making economies more resilient to shocks. Even more importantly, globalisation and a better economic framework have lifted hundreds of millions out of poverty, an achievement that far surpasses anything development aid has ever accomplished. In his book “The age of turbulence”, former Federal Reserve Chairman Alan Greenspan states that “…we are living in a new world – the world of a global capitalist economy that is vastly more flexible, resilient, open, self-correcting, and fast-changing than it was even a quarter century earlier.

Interconnectedness This financial crisis has exposed how important the interconnections are among the banking system, capital markets, and payment and settlement systems. For example, the recent disruption in the functioning of the securitization markets caused by the poor performance of highly-rated debt securities, led to significant problems for major financial institutions. Banks had to take assets back on their books; backstop lines of credit were triggered; and banks could no longer securitize loans, increasing the pressure on their balance sheets. This  BIS Review 125/2009  1  reduced credit availability, which increased the downward pressure on economic activity, which caused asset values to decline further, increasing the degree of stress in the financial system. This interconnectedness implies that regulation and risk management practices that focus only on individual parts of the system will inevitably fail to address important vulnerabilities elsewhere. Thus, we have to make widespread changes in how we approach supervision and regulation, particularly in the context of our most systemically important financial institutions. First, although supervision cannot lose its vertical perspective, looking firm by firm or region by region, it also must place more emphasis than before on gaining a horizontal perspective – looking broadly across banks, securities firms and other types of financial institutions, and across markets and geographies. Second, the supervision of our financial institutions and the regulation of markets need to be risk focused, coordinated and multi-disciplinary.