the rt hon sir edward george : the convergence of financial systems speech by the rt hon sir edward george, governor of the bank of england, at the oesterreichische nationalbank economics conference held in vienna, 31 may 2001. * * * the theme of this session is convergence of financial systems, within the context of the overall conference theme of " the single financial market – two years into emu ". what i propose to do this morning is to ask, first, what are we – or should we be – looking for from our financial systems ; then to ask, secondly, what are the major driving forces that have been, and are, affecting our financial systems – including but not confined to emu ; and, finally, to offer some thoughts on how those systems might continue to evolve. so let me begin by asking what should we look for in our financial systems. in answering that question i suppose i could give you a long list of particular payments and savings services as well as credit, investment and insurance services, provided to individuals, to private organisations and businesses of all kinds, and to various levels of government. but that would be simply a description of our financial systems which do still differ in many respects as a result of history and tradition, of particular local needs, and of the state of evolution in individual countries. we are more interested in the essential purpose of our financial systems. and at the very heart of that is their capacity to bring together financial resources not currently needed by their owners for expenditure on consumption or physical investment, and to channel those resources to wherever they can be most productively used – always allowing for risk. the free movement of capital, like free trade in goods and services, is an immensely powerful means of promoting efficient resource allocation nationally, regionally and globally, and as such it can make a major contribution to improving economic welfare – reducing poverty and raising living standards – which is, of course, what we all want to see. certainly the free movement of capital, like free trade, needs to be governed by rules designed to minimise distortions and unfairness, and to reduce the risks of intermediaries being unable to honour their commitments or of broader, systemic, instability. i don't pretend for a moment that it works perfectly in practice : we could all well do without the wellpublicised institutional failures of recent years, for example, or the volatility which characterised the asian financial crisis or the more recent " tech stock " bubble

collateral efficiently. so the general message, which commands wide support, is that some serious consolidation would be in order. the question however is how to bring this about. i will not go into the technical debate about horizontal versus vertical integration, nor into the distinctions – which are nevertheless important – between trading, clearing and settlement. and there are other, less technical, influences too, including perceptions of national interest. but whatever the reasons it is proving difficult for the markets to make real progress in these areas. in the face of this, there are those who argue for some outside party to intervene and enforce consolidation. the outside party some seem to have in mind is the authorities in one guise or another. i have to say that i have doubts about the wisdom of such an approach. there is little reason to suppose that the authorities are likely to be any better than the private sector at finding the way forward. nor is it obvious that national authorities have the locus or leverage to insist on a particular model. much the same reservations would apply to any european level intervention. that said, what the public sector can contribute, in this area as in financial markets more generally, is a removal of barriers to competition, requirements on the provision of information and the easing of constraints on the effective functioning of the market. if consolidation does indeed take place, the public authorities may also have a role in ensuring that heavily concentrated market infrastructure providers do not exploit their position. but at a european level we are at present still some way from this situation. and internationally we need to work together, within the wto and the imf, as well as within the various international regulatory and professional bodies, to promote the global free movement of capital, because in this context – as in the case of free trade – the potential benefits are not confined to national or even regional boundaries but increase within wider international participation. mr chairman, we have come a long way in improving the effectiveness of our financial systems, and there are powerful forces at work pushing us in the right direction – including, within europe, the introduction of the euro. but we still have a very long way to go. i have no doubt that the effort will prove to be worthwhile.