Either or both of these features can be replicated in the derivatives or securities lending markets, which provide less visibility to market participants and supervisors. Financial markets evolve constantly in response to market conditions, financial engineering, and regulation. It will be important to keep up with trends in these markets that may give rise to this threat.
Third, if left unaddressed, is it likely that conditions will risk meaningful damage to the real economy when the credit cycle turns? A positive answer on either of the first two questions should raise red flags for supervisors. Let’s say, for the sake of argument, that the answers to these questions were negative.