Financial institutions are linked not only through direct business relationships, but also indirectly through payment and securities settlement systems. It is also difficult to decide how and where to draw the line between “good” and “not so good”. The boundaries between customer business, hedging transactions, market making and proprietary trading are very much fluid.
And problems in drawing clear boundaries generally result in loopholes and incentives for regulatory arbitrage. We should not neglect the danger of transactions and risks being shifted from the banking sector to areas which are less closely monitored and regulated, such as, for example, the transfer of proprietary trading to hedge funds.