Regulators and supervisors should try to make the playing field as level as possible and certainly be on the look out for regulatory distortions which unduly favour the creation of particular products or limit the creation of other welfare-improving innovative instruments. But the market place should decide which products match issuer and investor desires once all risks are correctly priced. 44 Looking into a crystal ball what are some of our expectations for future financial market developments? We will put forward 7 suggestions: •  First, there will be additional focus on simpler, more standardised products. For example, it would be a surprise and probably undesirable if mezzanine resecuritisations were to reappear. Simpler products should be easier to understand and therefore less prone to radical changes in expectations of their likely performance. Improved stability of expectations should help sustain market liquidity during periods of stress. Standardised products also economise on information requirements and therefore also improve liquidity in secondary markets. •  Second, products will be more transparent in design and content, to improve the ease of monitoring and hence lower information costs. Increased transparency should not be confused with reams of data. The issuance documentation for many securitisations often contained a barrage of statistics. For CDOs of ABS, these documents could run to thousands of pages given that the documentation for each underlying ABS could already comprise of hundreds of pages. Any investor with the appetite to conduct due diligence would have found this volume of information completely indigestible.

And notwithstanding the current squeeze on the availability of credit (and withdrawal of many products), households have also benefited from a significant expansion in the range of saving and borrowing products compared to the position 20 years ago. 14 The practical examples described above clearly demonstrate the benefits of financial innovation. Enhancing the capability to transform and transfer risk, and thus improving the matching of the supply of risk products to the demands of end investors offers the prospect of lower risk premia and greater financial efficiency. And that in turn should lower the cost of capital for firms and improve the ability of households to smooth their lifetime consumption and to insure against unexpected outcomes. 4  BIS Review 93/2008  15 Taking an even further step back, there is a beguiling vision of financial innovation taking us closer towards a world of more complete and efficient markets for state-contingent contracts. The ability to decompose and trade the distribution of many dimensions of fundamental risks creates a potential lattice of efficient risk prices which can then, by arbitrage, be used to price efficiently the combinations of these risks embedded in “natural assets” and in “synthetic assets” structured to meet investor demand. Section 4: Frictions and Market Imperfections 16 The previous section described how financial innovation has widened the range and choice of financial products available to corporates and households to facilitate improved risk management. But it also noted the potential importance of market imperfections and frictions in the provision of such contracts.