Modernizing financial regulation: The relation between interbank transactions and supervisory reform

"Modernized" financial firms are larger than traditional institutions, and they provide a broader range of services. Although the individual regulator y issues raised by modernization are not new, the pace and scope of these m arket changes may imply a qualitative change in the ability of governments to guarantee financial system stability. Private market discipline is more flexible, and the value of flexibility seems to have risen. In order to eli cit private monitoring, however, governments must credibly eschew "too-big- to-fail" policies. Toward this end, national regulators should encourage on going efforts to implement secure interbank settlement systems.