system : the process of risk allocation and risk reallocation. a vast array of formerly non - tradable risks have become tradable. financial institutions can now shed risks that used to be stuck in their balance sheets. institutional as well as retail investors can much more easily diversify their portfolios. risks can be transferred without difficulty to those who are best placed to bear them. overall financial stability - and also economic efficiency - should benefit from such improved risk allocation. credit risk, for example, is no longer the domain of commercial banking. insurance corporations and pension funds acquire credit risk both for portfolio diversification purposes and as a stable source of income. beyond conventional asset - backed securities, financial intermediaries now have additional derivative instruments for credit risk transfer at their disposal : plain vanilla credit derivatives such as single name credit default swaps or, at the other end of the spectrum, complex structured products such as cdos of cdos. in some countries, even retail investors now have direct access to credit risk. the prospect of new and increasingly risk - based capital requirements for banks and insurance corporations - basel ii and solvency ii - coming into effect over the next few years is reinforcing the financial industry trend of shifting risks. mark to market accounting sharpens the awareness of risks, thereby also setting incentives to adjust risk portfolios. the flip side of the constant risk reallocation is a certain reduction in transparency. more and more often, risks end up in portfolios where you wouldn ’ t expect them in the first place. tracking the flow and the location of risks has become trickier for market participants as well as for supervisory authorities. the question is whether today ’ s statistics are keeping up with this dynamic development and whether they accurately reflect reality, ie the overall risk allocation and risk concentration in financial systems. at the end of the day, all financial risk is borne by private households. all the risks that financial institutions carry in their balance sheets are effectively held by their shareholders. these shareholders are ultimately private households, even if a chain of ownership relations may conceal this fact. the same holds true for risks assumed by the government or its institutions. the taxpayer, ie again private households, is the true holder of governments ’ financial risk. thus, talking of a “ risk transfer to the household sector ” is slightly incorrect. but the phenomenon of changing risk profiles within in the household sector is real. this subject is still under - researched, though. changes in an individual household ’ s risk

profile may be the result of active choice. however, even in the case of intended portfolio restructuring, we cannot be entirely sure that households fully understand all the risk which they take on, for example, when buying structured products. given the low level of financial literacy revealed in some recent studies, unintentional risk acquisition is a possibility not to be underrated. inadvertent changes in risk profiles may also occur via institutionalised investing, when financial intermediaries modify their investment habits. during the last decade, german life insurance companies had increasingly taken to riskier assets in order to bolster returns. most probably, life insurance policy holders were not fully aware of these alterations in their individual risk profiles [ that more recently have been partially reversed ]. over the past couple of years, pension reforms have been a key driver of risk transfer. in recent reforms of pay - as - you - go public pension systems, benefits have been cut. such reforms effectively shift a higher portion of the longevity risk that was previously borne by ( payroll ) taxpayers back to households. to the extent that households try to cushion their prospective loss of retirement income with private provisioning, they have to assume additional investment and market risk. corporate pension plans migrating from defined benefits to defined contributions also burden households directly with market risk. as ultimate bearers of all financial risk, private households also feature as the ultimate absorbers of shocks to the financial system. solvency, liquidity, ability and willingness to ride out losses determine the shock absorbing capacity of the household sector. therefore, striving to assess the scope and direction of risk reallocation among different groups of households is of the essence. income, wealth and age have significant influence on the readiness to bear risk and tolerate possible losses. knowledge of the nature of risks, how to measure and how to mitigate them becomes crucial for those households that have to assume more risk. what is the upshot of all this risk redistribution? up to now little is known [ for sure ] about the macroeconomic consequences of altered risk profiles in the household sector. macroeconomic dynamics might change. for example, in the wake of risk transfer from relatively wealthy households to those less well - off, consumption and saving levels might become more volatile. this appears to be a reasonable guess, if financial institutions, ie their rather wealthy owners, shed risk, while the man in the street is being switched from a defined benefit to a defined contribution pension plan. in the course of such risk transfer and