THIS IS QUITE SIMPLY A CRUCIAL CONTRIBUTION TO THE CURRENT DEBATE ABOUT WHAT WILL QUANTITATIVE FINANCE LOOK LIKE POST CREDIT CRUNCH

A missing link in the transmission mechanism?

by Claudio Borio and Haibin Zhu, Bank for International Settlements

Over the last three decades the financial landscape has gone through radical structural change. As a result of financial liberalisation and innovation, heavily controlled, segmented and “sleepy” domestic financial systems have given way to a lightly regulated, open and vibrant global financial system. The main regulatory constraints that remain are of a prudential nature.

The world that has emerged from this transformation is one where finance naturally plays a bigger role in macroeconomic dynamics. Financing constraints have structurally been eased but have by no means disappeared. The measurement, management and pricing of risk have moved from the periphery to the core of financial activity.

http://www.bis.org/publ/work268.pdf