Policy-makers and regulators do not want to discourage appropriate risk taking to the point where incentives are created for appropriate risk-taking activities to move outside the regulated financial system. Given the development of a wide range of new financial instruments and the exponential growth in their use, the need to find this regulatory balance is becoming more and more acute.
It is certainly true that through these instruments, banks have become better able to manage risk by shifting some risks to others. But as banks do this, the question arises, Where do these risks ultimately reside?