Second, risks are endogenous: Public policy and private decisions influence aggregate risk in the system. For example, the widespread private use of collateral to mitigate counterparty risk reduced credit risk but sharply increased liquidity risk. Similarly, the public sector's recent assumption of some risks creates moral hazard. If left unchecked, this will eventually promote private behaviours that will add overall risk to the system.
The first is banks’ accounting treatment of their “available for sale” securities, according to which ongoing mark-to-market gains and losses don’t appear in net income.13 This treatment implicitly presumes that these gains and losses are temporary and that banks can ride them out by not having to sell the security in question before it matures.