The paper outlines the evolution of the financial industry across industrialised countries since liberalisation gathered momentum in the 1980s and assesses its implications for prudential regulation and supervision, paying particular attention to changes in the degree of compartmentalisation between (commercial and investment) banking, insurance and non-financial business activities. Two key conclusions are highlighted. First, as segmentation has weakened, the compartmentalisation of prudential regulation and supervision has come under pressure. At the same time, how far harmonisation in prudential arrangements can, or indeed, should, be extended remains a moot question. Second, the changes have also put a premium on the need to find an appropriate balance between official and market discipline. The scope for improvement in this area should not be underestimated. It is argued that information disclosure should be strengthened and capital standards upgraded.
