Financial intermediaries are provided with sufficient incentives to improve their risk-management techniques. Therefore, the financial system is better able to absorb shocks without increasing the effects of such shocks on the economy. Broadly speaking, this seems correct to me. The financial system has coped with remarkable success and with few signs of instability with the various episodes of financial turmoil and shocks in recent years. Market-functioning difficulties were short-lived. The impact of these episodes on the real economies of industrialised countries was generally limited. However, we want to make sure that financial institutions and markets help to absorb and redistribute the shocks occurring in the real economy. We don't want them, in general, to be an additional source of shocks. In this regard, two specific questions come to the mind of policy makers. The first relates very simply to our ability to understand what is going on in the financial system when innovations permanently introduce additional layers of sophistication and complexity. As is often the case with  BIS Review 64/2006  3  financial innovations, evaluating the risk they entail requires the use of complex techniques that are not always sufficiently tried and tested 6 .The second issue, singled out by Rajan himself, is about incentives, an issue made especially important by the shift from depository intermediation to professional asset management. The system of incentives under which managers operate should be closely and permanently aligned with the interests of investors.

It seems to me that the old age crisis will prompt us to invent institutions to deal with this kind of risk or maybe to create additional investment products. For instance, the increase in life expectancy could generate risks that are not efficiently hedged in the financial markets or that are to difficult to manage by households. Beyond pure demography, some risks could be more efficiently shared between generations. In his stimulating book – “The new financial order”- Robert Shiller suggests to expand the principles of financial management “to include the society as a whole”. For example, he advocates the creation of “macro markets” on which long-term claims on national incomes and occupational incomes as well as for illiquid assets such as real estate would be traded. One of his most thought-provoking ideas is “intergenerational social security”. Current old age “pay-as-you-go” systems do not share risks between generations. In fact, they transfer the income risks of retired people to working people and their dependents who thereby bear the risks of both generations. Intergenerational social security’s defining characteristic would be a plan to pool the risks that different generations hold, including macro economic risks. C  Innovation and risk  Should we be somehow concerned by the speed of this innovation process or, as R. Rajan has put it, "has financial development made the world riskier"? According to a “benign” view, financial innovation has improved the efficiency and increased the resilience of the financial system. Risks are spread among more agents, willing and able to have them.