##ness, thus imposing future adjustment costs on the economy. hence, there is a need to review regulations constantly and to de - regulate or re - regulate. why are we deregulating? there are four major reasons why deregulation is occurring : globalisation financial innovation and disintermediation changing consumer behaviour, e. g. aging population excessive costs the globalisation of financial markets can be demonstrated by the tremendous increase in cross - border transactions. for instance, at the end of 1994 the stock of cross - border bank assets was more than 4. 5 times its level of 15 years earlier, which represents an increase from 20 % of the combined gdp of oecd countries in 1980 to around 35 % in 1994. between 1980 and 1994 cross - border securities transactions in industrial countries expanded from less than 10 % of gdp to well above 100 % of gdp. within the equity sector, cross - exchange and cross - border transactions have increased rapidly as a percentage of world equity turnover to the point where one in four stock market trades conducted world - wide involves either a foreign security or a foreign counterparty. the globalisation of financial markets may increase systemic risk, through contagious financial disorders originating in poorly regulated financial centres. as alan greenspan ( 1997 ) mentioned, ’ the efficiency of global financial markets, engendered by the rapid proliferation of financial products, has the capability of transmitting mistakes at a far faster pace throughout the financial system in ways that were unknown a generation ago, and not even remotely imagined in the 19th century. ’ depositors, investors and counterparties may be exposed to foreign jurisdiction risks which they are not in a position to monitor or control. besides, the co - existence of uneven national regulations and global markets may severely distort competition between financial institutions. the growing integration of markets calls for international cooperation among supervisors. accordingly, the basle committee on banking supervision was established in 1974 and is involved in establishing a common regulatory framework. the basle committee and the international organisation of securities commissions ( iosco ) issued co - ordinated guidelines on risk management on otc derivatives business. iosco also adopted the so - called windsor declaration on co - operation between supervisors of futures and options markets. industry initiatives also aimed at strengthening prudential standards in international financial markets. the group of thirty has proposed minimum standards relating to netting arrangements, settlement procedures and managerial oversight of derivatives risks. the international securities dealers association ( isda ) has established good practice guidelines for the management

swings. credit, in particular, has played an increasing role in asset price fluctuations. initially observed during the “ speculative bubbles ” of the 1980s and early 1990s, this trend has persisted. another example is provided by boom - bust cycles in asset prices and credit activities, which have often been associated with sharp economic contractions. in sum, the recent period has experienced some amplification of financial cycles, compared with business cycles. b. what are the factors underlying this possible amplification of financial cycles? let us first consider credit cycles : • the first factor in play is the behaviour of banks, which is closely linked to their environment. some of them may have tended to artificially increase their return on equity through higher leverage or low provisioning during upswings. as a consequence they tend to become more fragile in the downward phase of the cycle. in parallel, investors have become more reluctant to invest in the banking sector when profit expectations are low, making it difficult for banks to raise new funds. banks ’ soundness therefore tends to be more correlated to economic fluctuations than in the past, contributing to the amplification of the credit cycle. • accounting regulations so far may also contribute to amplifying credit cycles to some extent. in most financial centres, current provisioning behaviour does not allow banks to take a forward - looking view of their risks, as accounting and tax rules only accept loan - loss provisions for impaired loans. such a regulatory environment may amplify the credit cycle, contributing to low provisioning and over - lending during upswings and paving the way to sharp corrections during downswings. using full fair value accounting for loan portfolios might further amplify credit cycles by increasing the volatility of banks ’ earnings. • prudential rules may also have been unable so far to always prevent these developments. current capital adequacy rules are not risk - sensitive ; as a result, credit deterioration does not require additional regulatory capital unless loan losses erode the capital base under minimum requirements. as most banks – particularly large ones – have capital far beyond the prudential minimum requirements, they can bear a reduction of their capital base without being compelled to restrict their credit granting. therefore, capital ratio is not pro - cyclical as such. the point is that, even while capital requirements are fulfilled, losses can reduce banks ’ own funds at a time when capital issuance is difficult or costly ; in such a juncture, some analysts argue that banks may be