up front – are clearly worth experimenting with. private sector intermediaries, pension funds, and sovereign wealth funds should be actively encouraged to develop and propose such innovations. once again, there is a lot of money at stake. it should be clear by now that i am a big fan of market forces. the returns from successful financial innovation in market - based finance and p2p finance are likely to be very large, from the perspectives of both the innovator and the macroeconomist. allowing those competitive forces to flourish, within principles - based regulation aimed at protecting the financial system, is essential for future economic growth. tweaking public financial intermediation should take care of the rest of our market imperfections. but all of these market structures exist already, so speculating on their future is not that much of a stretch. that makes me wonder if we are missing something big. how blue - sky do we want to get? does anybody besides me wonder what the banking system looks like in the background of star trek? or, what about the corporatist model of finance, which lies in the background of margaret atwood ’ s novel, the year of the flood? now that ’ s blue - sky thinking : people work for a massive corporation, live in the corporate compound, go to corporate restaurants and events, and bank with a financial intermediary wholly - owned by their own employer, which in turn invests the funds in growth for the corporation. i suppose that model is far - fetched, but i present it as an illustration that the sky really is the limit in this space. i have offered you a range of possibilities today, but there are many other possible futures for finance. financial stability is a shared responsibility a bright future is one where the financial system is safe and efficient – and innovative. financial regulation needs to be designed to allow competitive forces to work, and allow innovation to happen. bis central bankers ’ speeches i said earlier that it is very difficult to strike the perfect balance between regulation and innovation. indeed, public authorities can ’ t strike a perfect balance alone. that balance is the product of regulation and the underlying forces of competition i have talked about. the simple fact is that financial intermediation is, for the most part, a scale business. operating at scale creates the risk of market failure, or market imperfections, as we well know. accordingly, operating at scale demands that the financial intermediary do so under a social license which

of high - quality, low - risk securitization products could differentiate itself from the mistakes of the past. such innovations are to be welcomed, provided that they are created in a manner that does not pose new or growing risks to the financial system, such as liquidity shortfalls in times of stress. importantly, market - based finance can even be a source of economic stability, if such intermediaries react differently to market turbulence than banks. in effect, countries with diversified financing sources may be better placed to weather shocks to the economy. however, market - based finance is unlikely to erase all of the imperfections in our future financial system. in particular, market - based finance is not very effective in reducing information asymmetries, so it probably will not fill the funding gap for young, small - or medium - sized businesses. no doubt, mother nature has a plan to fill those gaps in time, and one probable source is private lending and equity, a second channel where competitive forces are likely to emerge. there have been significant advances in technology that are sure to influence the future provisioning of private capital. one notable example is peer - to - peer ( p2p ) finance, which directly connects private lenders with borrowers via the internet. an important element of this model is that there is no middleman, nor is there any liquidity or maturity transformation as in traditional banking or market - based finance. while p2p finance is still in its infancy, it is already transforming private capital provision and growing fast in pockets in the u. k., the u. s. and china. although it originally focused on pooled funds from smaller investors, p2p finance is increasingly being dominated by big institutions and hedge funds with about two - thirds of the funds loaned coming from institutional investors. this is already changing the face of p2p finance in very important ways. p2p finance has an impressive cost advantage over traditional banking and since there is a lot of money at stake, as usual, competitive forces are certain to manifest themselves. with automated credit checks and “ no skin in the game, ” the operating expenses in p2p lending, for example, run about one - third that of traditional banks. with that advantage, p2p lending provides the opportunity for both savers and borrowers to get a “ better ” deal. however, there is no such thing as a free lunch. the cost of that better deal is the significant risk that the