Indeed, originators and distributors are finding it difficult to sell products where they do not face first loss or otherwise retain exposure through reputational risk. I have little doubt that, over time, originators and distributors will adjust. Incentive alignment is a necessary but not sufficient condition to revive many structured-product markets.
It will need to be accompanied by greater standardization, improved transparency, and the development of an appropriate investor base. Another example of misaligned incentives can be seen in the risk-management practices and remuneration structures of financial institutions globally. 8 Many financial institutions have pay structures that reward short-term results and encourage potentially excessive risk taking.