is that a paradigm shift in supervision towards harnessing market forces will make a more significant contribution to promoting sound and efficient financial systems than simply changing regulatory structures within the same external regulation paradigm. although it is far too early to make conclusive assessments of the success or otherwise of our new supervisory approach ( which has now been in operation for nearly two years ), i am satisfied that it is encouraging prudent behaviour by banks in new zealand, and thereby is reducing the likelihood of financial system instability in the future. moreover, i am confident that it is doing this at lower efficiency, compliance and taxpayer costs than other supervisory options might be expected to achieve. payments system reform so far, i have discussed the regulatory response to the globalisation of finance in terms of the health of the individual institutions that make up the financial system. of equal significance to financial stability in this new environment is how resilient payment and settlement systems are, both domestically and internationally. in common with most central banks around the world, we have been devoting considerable attention to payments system reform. our main focus to date has been developing a real time gross settlement system for large - value transactions between banks. until quite recently, the standard form of settlement was end - of - day net settlement : all payments and receipts between banks were allowed to accumulate during the day, to be settled by transfer of the very much smaller net amount at the end of the day. the risk of this form of settlement is that it usually requires participants to grant unsecured and unlimited credit to other participants during the period until final settlement occurs. credit extended to a single counterparty can in some cases exceed a bank ’ s entire capital. one important solution which has been implemented in some countries, and which we have as a high priority to implement within the next few months in new zealand, is the replacement of this traditional end - of - day settlement arrangement with an rtgs system. individual transactions under rtgs are settled one - by - one during the day rather than being allowed to accumulate, thereby removing the very large exposures that can 3 speech by the general manager of the bank for international settlements, mr andrew crockett, at the money, macro and finance conference held in durham on 11 september 1997. build up between banks. once implemented, rtgs will be a significant milestone in the reduction of domestic payment system risks. another important initiative that we are promoting to reduce systemic risk is to make bilateral and multilateral netting arrangements for certain transactions legally binding

evident with the increasing application of derivatives to credit risk. the rapid globalisation of finance is well illustrated by the phenomenal growth in cross - border financial activity. an april 1995 survey by the bank for international settlements estimated that an average of us $ 1. 2 trillion flowed through the world ’ s foreign exchange markets each day, up 45 % on three years earlier. estimated turnover of over - the - counter derivatives on an average day was us $ 880 billion, 70 % of which involved transactions with counterparties in different countries. an article in institutional investor in august 1997 provides another illustration of the magnitude of cross - border finance - - “ nearly us $ 150 billion of net new private capital poured into the main latin american and asian economies in 1996, almost double the 1995 level ”. these numbers are enormous however you want to look at them. new sources of systemic risk the globalisation of finance, the liberalisation of financial markets and rapid technological change have opened up new opportunities in commerce for achieving economies of scale, and facilitating the international rationalisation of production and distribution. the resulting benefits include productivity growth and improving living standards. innovations like derivatives improve the efficiency of financial markets. new technology allows sophisticated management information and control systems, and the application of complex analytical models to help institutions manage risks more effectively. but while considerable benefits flow from such developments, they also inevitably bring with them new risks. one of the most important from a central banker ’ s perspective is the introduction of new sources of risk to the stability of the financial system : • liberalisation and globalisation bring competition, which squeezes out the rents created by previously protected markets. this produces efficiency gains but it also means that financial institutions in the new environment have less of a buffer of protected profits and are therefore more vulnerable to distress caused by either mismanagement or misfortune. • derivatives bring new risks in that they can expose financial institutions to greater leverage, thereby allowing for shocks to be amplified. in addition, they increase the linkages between national financial markets, which means that adverse events are quickly transmitted from one market to another. • furthermore, market participants can now react very rapidly to a problem in a particular country, or even a perceived problem. capital can move rapidly and in large volumes. again, a disturbance in one country can now flow rapidly to other countries with the result that other countries ’ financial systems, and the international financial system more generally, are arguably more exposed to disturbance than before globalisation. in the light of these increased