sort of foreign currency swap. the most noted bankers of that era were of course the medici family of florence, who went further than their predecessors and contemporaries in the pooling of credit risk, by having a branch network with partners who were remunerated with a profit share. 8 the development of double - entry bookkeeping, in genoa in the 1340s, also helped banking assume more modern features : the receipt of deposits, maintenance of current accounts, provision of loans and management of payments. 9 this form of banking in italy later became a model for holland, sweden and england, to which further innovations were added. in amsterdam, the wisselbank, which was the first exchange bank in northern europe, pioneered a system of cheques and direct debits circumventing problems with different currencies. 10 the swedish riksbank, formed in 1656 and the oldest institution recognised today as a central bank, is credited by some as having pioneered fractional reserve banking. 11 other key innovations were joint - stock ownership and limited liability. these allowed more capital to find its way into banking and further reduced the costs of intermediation. the bank of england, established in 1694, was for many years the only bank in england allowed to operate on a joint - stock ownership basis. walter bagehot devotes a chapter in lombard street to the virtues of joint - stock ownership, noting that while these sorts of companies “ had a chequered history ”, in general the joint - stock banks of britain were “ a most remarkable success ”. 12 the same innovations helped to develop equity markets more generally. meanwhile bond markets had also developed. again the earliest forms were in renaissance italy, where wealthy citizens were able to buy bonds and thereby invest their savings in one of the few activities that was seen as providing a significant return : war. such instruments allowed governments ( and later large corporations ) to raise funds from a broader set of sources. in time, the formation of secondary markets for these securities meant that risk had banking activities were sufficiently important in babylonia that there were written standards of practice that were part of the code of hammurabi, the earliest known formal laws ( davies 1994 ). these were carved on tablets of stone, including details of how loans, interest and guarantees would operate according to a set of standardised procedures. temin ( 2004 ). see de roover ( 1946 ). the medici family may have learned from earlier failures of the peruzzi and bardi families

, i will take up four questions : 1. what are the desirable functions of the financial system, and how did they evolve? 2. what problems are inherent in finance, and what issues do they raise for policymakers? 3. what questions arise from the growth and change of the financial system over the past couple of decades? and finally, 4. what are the challenges as we look ahead? the functions of the financial system and its origins what is it that we need the financial system to do? i think we can outline five key functions. we want it to provide : i. a reliable way of making payments ( that is, exchanging value ) ; ii. a means for pricing and pooling certain types of risks ; iii. a way of transferring resources from savers to borrowers ; iv. a way of transferring the returns back again, which requires that the savers ’ money is not lost and which, in turn, requires monitoring of borrowers and managers ; and v. liquidity. these are very valuable things for a community to have. the modern economy could not have developed without these capabilities arising in the financial system. we tend to think of financial activity and innovation as very recent, but in fact the history is a long one. there is not time to do justice to that history here, and there are some fascinating books on the subject which repay the reader generously for the investment of their time. 5 but it is clear that borrowing and lending is almost as old as civilisation itself. evidence of such transactions, some of them remarkably codified, go back at least to eighteenth century bc one of the most accessible recent treatments is ferguson ( 2008 ). babylonian records. 6 some scholars suggest that the records of the greek and then roman ages show considerable evidence of several activities we would associate with banking, including taking deposits, making loans and facilitating transactions. 7 developments seemed to accelerate during the renaissance, particularly in italy. bills of exchange were by then in common use as a means to facilitate trade and also to circumvent usury laws. traders were able to take a deposit in one city, make a loan to someone transporting goods to another city and then take repayment at the destination ( possibly in a different currency ) – with a suitable addition to the price in lieu of interest. this activity would appear to be a forerunner – by seven centuries – of an instrument that in our terminology would combine elements of a zero coupon or discount security, trade credit and a