Some banks are now non-bank-like, as exemplified in the current financial jargon used to describe these banks’ business practices, such as “originate to distribute model” and “prop trading”, while some non-banks have become bank-like, as the phrase “shadow banking system” suggests. The financial innovations behind these changes are in essence welcome developments, helping to improve efficiency by shifting risk among economic agents.
However, they have made it increasingly difficult to locate the whereabouts of ultimate risk. Vital information regarding banks’ risk exposures has been literally “lost in transformation” in the originate-todistribute model and various proprietary derivative trades. We have been unable to identify what risks a particular bank has been exposed to, and, as a consequence, those facing the financial system as a whole.