Such a reallocation of risks should be beneficial to both banks and investors. To this end, banks are expected to enhance their ability to assess borrowers’ creditworthiness appropriately and to reflect these assessments in their pricing of credit. Thanks to recent progress in financial engineering, various new methods to measure and control risks have been made available.
These include quantitative evaluation of credit risks based on such data as credit ratings and bankruptcy ratios, as well as the portfolio approach that makes use of the law of large numbers. New financial products utilizing these methods have also been developed.