Modernizing financial regulation (again)

\\"Modernized\\" financial firms are larger than traditional institutions, and they provide a broader range of services. These features blur the institutional distinctions which have formed the basis of prudential government supervision. Although the individual regulatory issues raised by modernization are not new, the pace and scope of these market changes may constitute a qualitative change in the ability of governments to guarantee financial system stability. Simply adapting current supervisory tools to a modernized environment is too \\"partial equilibrium\\" a solution. Instead, national regulators should encourage the ongoing efforts to implement secure payment and settlement systems, based on extensive collateralization, netting, and/or real-time gross settlements. Replacing our current, credit-based disturbances payments and settlement system with a secure one would sharply reduce the potential for systemic disturbances from a single firm's failure. With lower potential for external costs, governments would intervene less in financial markets and private market discipline could be left to monitor and control the financial services sector - as it does most other sectors of developed economies.