in, and interactions among, financial vulnerabilities across financial institutions, markets, and instruments. another approach is to track the resilience of institutions, either broad categories or individual systemically important institutions. good monitoring frameworks combine elements of both. let me start with the vulnerabilities - focused approach, as developed by tobias adrian, daniel covitz, and nellie liang. 2 that approach defines financial vulnerabilities as a collection of factors that may amplify financial shocks and, when elevated, have the potential to generate systemic risk. the focus is on vulnerabilities rather than shocks, because the timing of shocks, such as sudden drops in asset prices, are inherently hard to predict. vulnerabilities, in contrast, tend to build up over time, and policies can be designed to help contain these vulnerabilities, reducing the likelihood of systemic events. some financial vulnerabilities are cyclical in nature, rising and falling over time, while others are structural, stemming from longer - term forces shaping the nature of credit intermediation. informed by academic research, some of it in - house, we at the federal reserve focus on four broad cyclical vulnerabilities : ( 1 ) financial - sector leverage, nonfinancial - sector borrowing, ( 3 ) liquidity and maturity transformation, and ( 4 ) asset see adrian, covitz, and liang ( 2015 ). - 3valuation pressures. 3 briefly, leverage, across a range of institutions, is a key amplifier of solvency shocks, leading to a greater chance of a credit crunch or fire sale. liquidity and maturity mismatches can generate run risk, leading to fire sales and contagion. finally, elevated valuation pressures, especially when combined with high leverage, can lead to excessive credit growth. when asset prices are appreciating rapidly and expected to continue to do so, borrowers and lenders are more willing to accept higher degrees of risk and leverage. using a range of indicators, we assess these cyclical vulnerabilities relative to past experience. that is, we evaluate where the current levels of these indicators stand compared with their historical values, to identify whether they point to a low, average, or high level of vulnerabilities. while we try to rely on quantitative indicators, in the end, this evaluation requires some degree of judgment. we also closely monitor potential structural vulnerabilities, such as funding models and

##ers are among the most prominent cash providers in segment 4, while securities dealers are the primary borrowers of cash. dealers may use this cash to fund their own portfolios ; they may also lend it to other dealers in the general collateral finance ( gcf ) repo market ( segment 5 ). this segment is cleared through the fixed income clearing corporation, and is currently the only segment of the market that is centrally cleared. based on figures from september 2015, the size of the tri - party repo market, segment 4, was approximately $ 1. 5 trillion and the gcf market ( segment 5 ) was approximately $ 300 billion. the general lack of data on bilateral repo activity makes it difficult to know the precise size of each individual segment of that market, but bilateral repo and securities lending taken together accounted for approximately $ 1. 7 trillion in outstanding activity. 7 general collateral or gc repo involve repo transactions secured by a range of treasury or other assets that are accepted as collateral by the majority of intermediaries in the repo market. gc repo assets are high quality and liquid, but not subject to exceptional specific demand. these estimates are based on the methodology described in adam copeland, isaac davis, eric lesueur, and antoine martin ( 2012 ), “ mapping and sizing the u. s. repo market. ” bis central bankers ’ speeches given its vast scale and position at the center of the wholesale finance markets, repo is without doubt a critical activity. repo is a key source of financing for a wide range of firms, and an important “ safe asset ” for investors. the gcf segment, although modest in size compared to the overall market, is a key source of financing for smaller dealers, particularly in times of financial stress. the availability of repo funding for a diverse range of participants supports market liquidity by enabling them to make markets in treasury and agency securities. ccps themselves also rely on these markets, often using repo to earn interest on cash collateral and counting on access to repo markets in their liquidity planning. the fsb has called on authorities to “ consider the pros and cons of broadening participation in repo clearing arrangements. ” 8 what are the potential benefits of greater clearing in this market? in addition to the potential netting benefits i mentioned earlier, a ccp typically performs three other beneficial economic functions : 1 ) a reduction in the potential cost of counterparty default coming