changing roles of financial intermediaries

traditional roles functions: create, distribute, and retain risks benefits: information asymetry, and save screening and searching costs investment banking: agents, create and distributing risks commerical banking: principals, deploy capital, monitor borrower, and retain some loans. Now with liquidity-fueled innovations lead to a conflation of the roles played by financial intermediaries. commerical banking: securitize loans through CLOS, no more holding but increasing distributing to hedge funds and investment banking entities. investmenting: increasingly ownning assets in portfolios because their advantage in gauging customers risk appettie and pricing expertise. challenge: commerical banks' increasing role as an originator and disbutors - and less as holder - of loans lessened their incentive to screen borrowers and monitor debtors. Notably, this incentive problem become more pronouced when they sell entire loan, as in mortgage securitization programs. Moreover, investment banks that pool and structure loans might have insufficient incentives to effecitively screen. After all, an borrower walks into a commerical bank for a loan, not into the invesment bank that package and distributes the loand through a structured vehicle. Greater liquidity or confidence does little to mitigate these problems; indeed, it could exacerbate them if confidence begets complacency. What if liquidity falter? well, consider the consequence if stock prices sold off globally, implied volatitility jumped, and record trading volumes overwhelmed the trading capacity on the stock exchange....Well it does not take a long memory to recall this scenario played out for a few days in the late Feburary. As you know, share prices recovered quickly, and implied volatitilifty reverted to near record low level. What lessons can be drawn from such an episode? Perhape because of more complete markets, shocks to liquidity are less likely to impose lasting damage. That hypothesis seems credible when the shock is based neither on rapidly changing economic fundamentals nor a genuine breakdown in market infrastruture. Or perhaps we have not witness a scenario that can subject financial innovations to a stringent stress test. Some high-leveraged private pools of capital may be unable to ride out bouts of high turnbulence if they are compellted to sell assets to meet margin calls, and by doing so, amplify the initial shock. Consequence is the losses will be sharper. Howevery, reductions in liquidity are unlikely to turn back the clock on financial innovations.