The Future of the Financial System

During the past two decades financial systems world-wide have developed rapidly in terms of size, industry structure, and the range of products and services produced. In Australia the size of the financial system, measured by total assets, has approximately doubled relative to nominal GDP in the past twenty years, while in a number of other countries the growth has been even more dramatic. More importantly, there have been major changes in the range and mix of financial-sector activities and in competitive conditions for the participants. Examples include the spectacular growth in financial-market trading, including the newly developing derivatives markets, considerable product innovation in retail and commercial banking, and the development of new payment and transaction technologies. At the same time, the competitive environment is being reshaped by the increasing scope for new providers of financial services to enter traditional markets, or for existing providers to cross traditional boundaries. These developments have stimulated considerable debate about the future of the financial system. Among the issues raised have been the likely roles of the established financial institutions, the extent to which traditional dividing lines within the financial sector will remain meaningful, and possible implications of further structural change for regulatory and supervisory policies. The papers commissioned for this volume are aimed at exploring those issues. They are divided into three parts: the papers in Part I present the recent trends, place them in historical and international perspective, and analyse some of the main driving forces; those in Part II consider possible future developments and their implications for finance-industry participants; and Part III focuses on issues for financial regulatory policy.