Financial Markets and Systemic Risk in an Era of Innovation

This essay reviews some of the more significant ongoing changes in the global financial system over the past decade and identifies implications these changes have had for systemic stability and for the role of public authorities. Trends such as disintermediation and financial sector con‐solidation have modified the ways in which systemic shocks are propagated and distributed among market participants. This has complicated the role of banks, which continue to stand at the centre of the financial system in many countries. While the overall results will no doubt continue to be positive for households and businesses, this complexity increases the potential for uncertainty, particularly during the period when new markets and institutions are developing. These developments have also complicated the roles of financial regulators, including central banks. The response has been a move towards a greater reliance on transparency and market discipline as ways to improve the spread of information and thus prevent systemic disruption. There has been an increased recognition of the systemic significance of a diverse range of markets and channels of intermediation to the health of the financial system.