The aim here is to preserve the prudential strength of the core part of the system in the interests of economic financial stability, while allowing the part beyond the prudential net to play its role in taking on risk. But such an approach, relying a good deal on market discipline, is not getting easier to implement.
As Tim notes, the increasing complexity of the activities of various investors makes it hard for any one counterparty to know whether they really have a good understanding of their customers’ business (including with their competitors) and therefore their own exposures. Their direct exposures might be considerably smaller than the indirect ones, which will perhaps only come to light under conditions of duress.