As we have discussed in the Introduction, innovation and complexity are not, in principle, bad, yet they have a darker side, so to speak. They have the potential to create a dangerous knowledge gap between the front office (whether it is lending, trading, asset management or some other business) and the rest of the firm. This is most notable in the parts of the firm that are responsible, at various levels, for managing the bank’s risks: risk management, compliance, internal audit and so on. This gap does not need to be there, but it would be foolish to think that bridging it effectively would have no cost. This becomes clearer if we consider the fact that it is not just a matter of approving new types of transaction. The issue is how to create a level playing field for all the key players in the bank and ensure that everyone who needs to be is up to speed with the implications (risks, regulatory requirements, administrative tasks, system issues) of each product. A divide between some parts of the firm and the proper handling of a product may arise for many reasons, where the novelty of the product itself is only one. In the first half of this chapter, we will describe the key
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