<p><br/></p><p><font size="4">In this Paper we study the impact of credit risk transfer (CRT) on the stability<br/>and the efficiency of a financial system in a model with endogenous<br/>intermediation and production. Our analysis suggests that with respect to<br/>CRT, the individual incentives of the agents in the economy are generally<br/>aligned with social incentives. Hence, CRT does not pose a systematic<br/>challenge to the functioning of the financial system and is generally welfare<br/>enhancing. We identify issues that should be addressed by the regulatory<br/>authorities in order to minimize the potential costs of CRT. These include:<br/>ensuring the development of new methods of CRT that allow risk to be more<br/>perfectly transferred, setting regulatory standards that reflect differences in the<br/>social cost of instability in the banking and insurance sector; promoting CRT<br/>instruments that are not detrimental to the monitoring incentives of banks</font></p>