the likelihood of the credit busts and banking crises that have historically been a major source of macroeconomic and financial instability in many countries. it should be noted though that, even before the outbreak of financial market turmoil, some commentators have voiced doubts about some of the welfare - enhancing effects of the “ originate to distribute ” model. for instance it has been argued that, while securitisation certainly spreads existing risks, it may in fact encourage the creation of further risks, particularly by relaxing the incentives for banks to screen and monitor borrowers in order to alleviate the informational asymmetries associated with credit contracts. incidentally, it should be recalled that, when assets - backed securities were in their infancy, concerns about the risks for investors stemming from the possible relaxation of lending and monitoring standards by banks were among the main reasons for scepticism about the prospects of the market for securitised loans. in addition, it has been questioned whether the securitisation of loans has succeeded in ensuring risk diversification. indeed, for many banks all over the world, risks do not seem to have travelled farther away than the balance sheets of their own conduits, and have been internalised again once the market turmoil erupted. besides, some banks turned out to have direct exposures through their own investment activity on structured products and secondary exposures via some of their customers. while this certainly does not mean that securitisation is not potentially welfare - enhancing, it suggests that – in the environment of historically low returns on traditional securities and an implied imprudent hunt for yield that preceded the turmoil – the markets for asset - backed securities and credit derivatives may have failed to spread risks as effectively as expected and have, by contrast, exacerbated information asymmetries, probably as a result of their opacity and the complexity of the underlying contracts. overall, the “ originate to distribute ” banking business model has taken a hit and its survival has been questioned. there is clearly a need to reflect carefully on the model and its increased reliance on secured and off - balance sheet funding. for example, several types of banks involved to varying degrees in the “ originate to distribute ” business model turned out to be vulnerable to the rapid re - pricing on the abs products, in particular banks with small deposit bases and strong reliance on wholesale funding. also, as mentioned earlier, the model may have negatively affected origination standards, by weakening lenders ’ incentives to monitor the quality of the

priced too cheaply ( i. e., the risks were under - priced ). borio ( 2005 ) 4 emphasises credit supply by highlighting the role of ` financial imbalances'in causing crises. that is, where lenders over - extend themselves by financing highly leveraged assets that turn out to be incapable of generating the cash flows required to service the debt. however, credit growth measures and asset market valuations alone are not necessarily good financial stability indicators. rather, it is assessing " why " the indicators have moved that matters most, and hence the need for a framework to assess these developments. kindleberger ( 1996 ) " manias, panics and crashes : a history of financial crises " john wiley and sons, inc. third edition. borio ( 2005 ) " monetary and financial stability : so close and yet so far? " national institute economic review no 192 ( april ). financial system assessment and regulatory balance making assessments of financial stability risks, such as the sustainability of credit expansions and large asset price movements, is difficult. the extent to which central banks should attempt such assessments is also an area of considerable debate. much of the debate concerns rather polar positions, that is, whether or not central banks should ‘ target ’ asset prices. the financial stability assessment framework outlined in this speech does not approach this question as an " either - or " issue, but instead aims to assist an assessment - based approach by providing a framework of questions. furthermore, crafting the regulatory infrastructure to support the process of economic exchange is far from straightforward. for example, regulation that excessively constrains sellers, whether directly or through imposition of compliance costs, can cause them to withdraw from the market and lead to economic inefficiencies. significant ‘ moral hazard ’ problems can also arise, where over - regulation can remove the actual financial risk from the owner of the asset, institution, market, or payment system. the public provision of certain financial services may also crowd out competition and innovation. it is also very important to recognise that markets can and do generate their own solutions to what otherwise would be information asymmetry market failures. financial intermediaries themselves are a market response to this underlying economic problem. the role of a bank is to monitor and manage the risks embedded in risky loans that depositors would be unable to monitor themselves. banks in effect facilitate the economic exchange between depositors and borrowers by playing a role that balances up the information asymmetry.