I outlined earlier the reasons why monetary policy has only limited capacity to deal preemptively with financial bubbles. Similarly, I see little prospect that supervision will have the capacity to identify and address potential concentrations in exposure to individual risk factors, whether through changes to capital charges or other means. Focusing on the quality and strength of cushions against tail risk is the best way for supervision to be countercyclical rather than procyclical. The subtitle of your conference is, I believe, “Where’s the Risk?” And as this implies, there is still substantial interest in markets and official circles in finding ways to use greater transparency to improve the capacity of markets, and supervisors, to try to address emerging risks early, to let the air out of crowded trades and concentrations of leverage or risk before they reach potentially troubling proportions. We will continue to explore ways to improve the quality of public disclosure by financial institutions, and other sources of information on financial activity. But we do not have the capacity to put in place a transparency regime over markets that would give people a real-time picture of the incidence and magnitude of potential risks. The pace of change is too rapid, the number of positions, funds, and institutions too great, and the analytical challenge too complex to offer the promise of that type of early warning system. The conditions we see prevailing in global financial markets today reflect a range of different factors, some fundamental and others that are less likely to be enduring.

The resilience of the market in the face of the latest shocks has increased confidence in future financial resilience. In these conditions, market participants face more acutely the classic dilemma of deciding whether to follow the market, or to buy more insurance against the risk of a reversal at the expense of near term returns. This mix of forces operating on financial conditions presents challenges for policymakers and financial markets participants, for it makes it harder to figure out what is fundamental and enduring and what is temporary or transitional, or the result of policy distortions. Confidence exists alongside concerns about sustainability. Although there is much that is positive in the world today, there is little reason to believe we have entered a new era of permanent stability. Financial innovation and global financial integration do not offer the prospect of eliminating the risk of asset price and credit cycles, of manias and panics, or of shocks that could have systemic consequences. Over the past 25 years or so, we have seen a significant number of episodes of financial shocks, in U.S. markets and globally. Although more different than similar in their nature and impact, they had some common features. They were unanticipated. The causes varied, with some associated with a substantial deterioration in the real economy, and others not. And they typically involved the dynamic in which a sharp change in risk perception results in a fall in asset prices and a sharp reduction in market liquidity, and an increase in correlations across asset classes.