If reintermediation is significant, banks will be taking back on to their balance sheets conduit and investment vehicle paper or just holding onto loans for longer than usual before they can be sold onto the capital markets. 19  Perhaps nothing illustrates this as cleanly as the advent of credit derivatives. Derivatives of any kind unbundle funding (and so liquidity risk) from the underlying risk to which an agent is seeking exposure via a particular contract. So a credit derivative unbundles credit risk from funding. This further complicates interpretation of the bank lending data (M4L). Imagine that, due to their customer networks and screening capability, banks originate all credit, but that they use credit-default swaps to shed a great portion of the credit risk via CDS to non-bank financial institutions. In the limit, this would be a world in which M4L correctly measured (bank) lending and M4 was one useful measure of “liquidity”. But it would also be a world in which shocks to credit conditions from capital and risk appetite worked largely through non-bank lenders, and in which shocks to liquidity worked largely through depositor confidence in the banking system. In the real world, this story underlines the need to look at total credit, and to analyse the monetary data with finesse. 20  See Bank of England Inflation Report, November 2007, Section 1 on “Money and Asset Prices”, pages 16-17.
This is not normal, but today there is no other alternative but to continuously expand controlling powers. Since there is little hope for self-regulation, we believe it right to move towards more systemic efforts in order to limit risks for customers. We would like to, so to say, coordinate the fundamental principles with the market community. The first principle is product governance, that is, product life cycle management. We discussed this topic yesterday at the International Financial Congress. We are now drafting a relevant 5/7  BIS central bankers' speeches  consultation paper and will publish it soon to discuss it with the financial community. The idea of such product governance is that, before offering new products or services in the market, a company should identify the target audience and its needs, inherent risks for customers, and test new products before their launch. The second fundamental principle is the assessment of the customer value of a financial product. In our opinion, a high-quality financial product should conform to consumers’ reasonable expectations. I firmly believe that if market participants focus on the customer value of a product, this will promote effective competition in the market. Unfortunately, not all financial products offered in the market today conform to the customer value principle. As an example, let’s look at recent statistics on housing equity holders’ insurance and insurance in general.