. the strengthening of the supervisory review process ( pillar 2 ) envisaged in the new accord could provide a sounder basis for promoting these practices. monetary authorities, too, are beginning to recognise the complex two - way relationship between monetary and financial stability. the seeds of future financial instability are usually sown by excessive credit expansion. this facilitates the build up of leverage in the financial system and exposes institutions to losses when the credit cycle turns. monetary policy will have to be more conscious in future of the risk of accommodating excessive credit expansion and the unsustainable rise in asset prices that often accompanies it. iii. the organisation of supervisory functions as i noted at the outset, there are also procedural issues to be considered in adjusting to a more complex environment. the blurring of distinction between institutions makes it increasingly important to have consistency in the supervisory rules and enforcement methods that apply across different sectors. in its absence, there would be the twin dangers of regulatory arbitrage or competition in laxity. this is an issue for an individual economy as much as for an increasingly integrated global financial system. hence, there is a national and an international dimension to the question of how the supervisory function should best be organised. at the national level, two quite different approaches are being pursued : to bring all regulatory, supervisory, and oversight functions together in a single entity, as the scandinavians first did in the late 1980s and others ( e. g. japan, the uk ) have copied since ; or, to keep the entities separate, but create mechanisms that ensure appropriate co - ordination among the relevant authorities. each has advantages and disadvantages. at one level, the single entity solution seems attractive. it would certainly seem preferable if the preponderance of domestic institutions were themselves integrated financial conglomerates. ( but even then – as in netherlands – the authorities can come to different conclusions ). and integration might be an attractive option where a history of supervisory or regulatory failure calls for adjustments that are unlikely to obtain within an existing diversified structure. but even if these conditions are met, it is not immediately clear which are the regulatory activities that it makes sense to bring together and which to keep on a stand - alone basis. should for example the prudential supervision of banks and other financial institutions be integrated, but market regulation, including customer and investor protection, be kept separate? experience with how well integrated regulators handle potentially conflicting objectives during episodes of significant turmoil might tell. a single all embracing

, and the vulnerability to takeover, are just some of the areas where corporate governance structures can play a key role in hindering or encouraging necessary adjustments. finally, and i would stress this point, the european labour market has been relatively inflexible to date, even if important structural reforms are now underway in many countries. obstacles to the adjustment of labour are just as important as obstacles to the adjustment of financial capital. they can result in dangerous inertia in cost structures. and they may prevent the productivity gains otherwise attainable through the reorganisation of business processes and products, particularly through the adoption of new technologies. the pattern of the restructuring process under way in europe tends in many respects to confirm these propositions. available evidence indicates that the tendency for the number of institutions to decline and concentration to rise is a generalised one. at the same time, it also indicates that in terms of cutting branches and, above all, employment, continental europe is lagging well behind english - speaking and nordic countries. this broadly underscores the picture that emerges from the behaviour of indicators of profitability, costs and creditworthiness reviewed above. tellingly, the evidence also indicates that the restructuring has proceeded fastest, and in some respects has gone furthest, in those nordic countries that experienced a banking crisis in the late 1980s and early 1990s. and it suggests that, while in terms of numbers of institutions consolidation has been most substantial among savings, cooperatives and mutual banks, employment appears to have been comparatively less responsive, except where financial difficulties have emerged. against this background of limited progress at the level of the firm, what can be said about the current wave of mergers and acquisitions ( m & a )? m & as are an important means through which restructuring can take place. indeed, the available statistics indicate that the share of financial sector deals in the total has tended to increase in recent years. also, the average size of transactions has gone up substantially. mega - deals of unprecedented proportions have been making headlines. at the same time, the experience with previous merger waves has, on balance, been somewhat disappointing. in addition, it stands to reason that the performance of merged entities is likely to be as sensitive as that of individual firms to a number of environmental elements, ranging from sub - optimal corporate governance structures to inflexibility in factor markets. a look at the current wave shows some brighter spots but is not free of clouds. on the positive side, cost - cutting and down - sizing in