are not captured through traditional measures. in particular, i would highlight the following : • first, a rapid growth of trading book assets relative to traditional banking book assets and a fundamental shift in the types of risks retained in the trading book, in particular those arising from structured credit products. this is a natural consequence of the improvement in financial technology we are seeing, which enables more and more assets to be priced and traded. • second, the growth of the trading book is, in turn, producing a rapid growth in counterparty credit exposures relative to traditional credit exposures. as with market risk exposures, these counterparty exposures are becoming increasingly complex and difficult to measure. • third, the valuation of increasingly complex products presents yet another challenge. many of these products have not been tested under periods of stressed liquidity, which could have a significant impact on valuations. • fourth, the use of traditional approaches by many firms to assess their vulnerability to funding liquidity risk. these approaches may not take into account the growing reliance on active markets to manage the firm ’ s liquidity in an environment that is increasingly capital - markets driven. both the basel committee and the industry are currently exploring issues relating to the management and supervision of funding liquidity. • finally, the degree of risk transfer that is actually achieved through credit risk mitigation and securitisation techniques requires greater scrutiny. in particular, how well do these risk transfers hold up under stress? to what extent will risk be put back to firms if counterparties were to default, if investors were to demand compensation for losses, or if investor risk appetites were to shift abruptly? practical areas of focus for risk managers and supervisors trying to predict how all these risks will play out in practice can be demanding since we have little historical experience to guide us. growth in credit markets, synthetic securitisations, new market players and new risk management techniques have largely taken place over the past five years, that is, after the last credit downturn. i expect we will only experience a true period of stress when we have the combined impact of a credit downturn, a major shift in risk appetites and a withdrawal of market liquidity. firms have been challenged to develop more comprehensive stress tests that cut across risk types and business lines in a true downturn environment. stress tests that are produced on a regular basis are most evolved in the market risk area. regular credit risk stress tests tend to be conducted primarily at the level of business lines. more

more complex and potentially less liquid risks, for which they are ultimately rewarded. we are therefore witnessing a fundamental change in the business of banking from buy - and - hold strategies to so - called ‘ originate - to - distribute ’ models. while this change presents opportunities and challenges for risk managers and supervisors, it also serves as a useful framework for thinking about the changing risks at banks and other financial institutions. this shift in business models has been propelled by the rapid innovation in financial instruments, in particular the interaction of the credit derivatives markets with the rapid growth of securitisation technology. it has also been influenced by the rapid growth of the institutional investor base. there are many new players to whom risk can be distributed, such as hedge funds, loan funds, funds - of - funds, in - house hedge funds and mutual funds. in particular, we are witnessing a rapid growth in investor appetite to take on new forms of credit risk. these developments have created many opportunities to improve the way financial institutions manage their risk exposures and reduce their vulnerabilities to traditional types of credit stresses. risks are now more widely distributed outside the banking system. there are more tools to manage risk concentrations. risks, and how they are priced, have become more transparent. as a result, deteriorating credit exposures can be managed more actively at an earlier stage. new risks and risk management challenges the transformation of banks ’ business models has yielded substantial benefits. however, the move to originate - to - distribute models also provides a useful framework for examining new types of risks that banks face and for highlighting some of the shortcomings of more traditional measures to manage them. by traditional measures, i mean simple balance sheet ratios of capital adequacy, historical measures of potential losses on loan portfolios, or value - at - risk - based risk measures in the trading book. the originate - to - distribute business models depend on several key characteristics : • first, a growing reliance on liquid markets ; • second, a healthy risk appetite among various types of investors, in particular those taking on the more risky portions of structured credit assets ; • and third, a diverse investor base to whom risk is being distributed. ultimately, what we are concerned about is the ability to transfer or actively manage the various risks that core intermediaries face, not just under favourable market conditions, but also during periods when financial market, credit and liquidity conditions are less benign. when seen through this prism, there are a number of new risks that