more efficiently and financial services have become cheaper to end - users. but it also means that the cushion against bad luck or bad judgement is thinner. franchise values are much smaller, so that an erosion of capital more quickly leads to the threat of failure ( and the temptation to take unwarranted risks to stay in business ). fourth, the source of financial disturbances has become more become more unpredictable. one cause is capital market integration, which affects a country ’ s financial markets and institutions whether or not the economy is entirely integrated. we have seen that capital flows can be volatile and unpredictable. contagion means that the problems of neighbouring or more distant economies can rapidly become one ’ s own. another aspect is the much greater diversity of actors in the financial markets. in the 1970s and 80s, most financial intermediation was conducted through banks, with insurance companies and investment vehicles having well defined roles. but many different types of institution, including non - financial firms are now involved in both wholesale and retail markets. and financial institutions based outside the major centres have come to play a more important role in international markets. a fifth characteristic is that financial systems appear to have become more pro - cyclical than before, capable of amplifying credit growth and leveraging market positions more intensely than before. in essence, the “ marginal ” risk that financial actors willingly engage is greater than before. to a degree, this is a result of innovations in financial technology, including the process of securitisation, which allow risks to be better distributed and managed. the more widespread use and trading of collateral is also a factor. but it also reflects the intensification of competition, and perhaps a view among firms that they will be able to get out of risky engagements before they sour. of course, procyclicality works in both directions : once the downturn sets in, the financial system seems more prone to liquidity erosions and reduced credit supply than in previous episodes of stress. the final characteristic to which i would like to draw attention is the greatly increased speed of developments in the financial sector. the speed of transmission of news in the financial sector has always been high relative to other sectors. nowadays, market communication and execution can be almost instantaneous. but what is also speeding up is financial sector actors ’ judgement of strategic opportunities in their environment and their moves to take advantage of them. new and cheaper technology, as well as deregulation, has greatly helped this. business models get adopted and discarded

financial authority naturally prompts the question of where that authority should reside. this is now the subject of intense debate in quite a number of countries. and where such entities have been created, they mostly exist outside the central bank. this can be seen to have a number of advantages : given the blurring of distinctions between different types of financial institutions, the retention of supervisory responsibilities within the central bank may give rise to perceptions that the lender of last resort function is being extended, with consequent risks of moral hazard. there could also be a conflict of interest with monetary policy, if central banks were induced to be excessively expansionary in order to head off weaknesses at individual financial institutions. there is also the issue of reputational risk. finally, the central bank may be perceived as too powerful if it is both independent and endowed with a broad range of functions. there are, however, arguments for retaining at least some supervisory functions within the central bank. the central bank will have easier access to market information in the case of a crisis, and it will be easier to co - ordinate monetary and prudential policy actions. it will be easier to assess and respond to the build - up of systemic risk if the supervisory authority also has responsibilities, and hence specific know - how, in other areas of the financial system ( e. g. market functioning and the operation of clearing and settlement systems ), as do central banks. and, access to supervisory information can help the central bank better calibrate monetary policy ( e. g. the case of the “ headwinds ” that confronted the us economy during the recovery of the early 1990s ). in these terms, there is no obviously “ right ” answer to this debate. individual observers may have their own preferences, but at the end of the day, the answer probably depends on country - specific circumstances. for example, how independent from political and industry pressure can a separate supervisor be? how scarce are the relevant skills? and how blurred have the distinctions between * different types of financial intermediary become? some, such as charles goodhart, have argued that these considerations lead to the conclusion that the case for combining supervisory and monetary policy responsibilities in the central bank will generally be stronger in emerging markets. but whatever is the answer to the question “ who should supervise? ”, it is necessary to define tasks clearly and in such a way that the tools are available to discharge them. one risk in the present trend to remove supervision from the