Foreword

Summary

Overview

The most recent financial crisis is of paramount concern. But in the long run, what it reveals may be of greater concern. It is said that this crisis is a once-in-a-century event. If viewed narrowly in terms of the proximate causes, this may be true. But closer examination of the crisis reveals a fertile ground for additional crises, albeit with each one perhaps displaying unique features. So in devising reforms, regulators must not only address the most immediate causes of this crisis, they must also tackle the fertile ground from which they spring.

In essence, this crisis is the result of an evolution in markets and financial services. Over the past fifteen years, the structure and principal characteristics of the world's financial system have dramatically changed. The current turmoil is likely the result of the system having failed to adapt to these fundamental changes.

The modern market:

• is global in nature, featuring highly mobile capital;

• is characterized by fierce competition among financial service providers;

• no longer features barriers between historically separate financial products, sectors and actors;

• features increasing cost to investors, financial entities and regulators of monitoring conduct and risk due to increasing use of complex products; and

• features large and relatively liquid unregulated institutional financial markets paralleling the regulated markets.