unusual configurations of asset price movements is higher than normal. implications for risk management financial institutions and public policymakers have demonstrated an ability to respond flexibly to changing circumstances over the past several years. but what does this imply about their ability to adapt to the conditions that they may confront in the future? financial institutions one of the defining characteristics of financial institutions and markets of late has been a significant expansion in the tools available for managing risk. these tools are tested and refined over time. importantly, however, they rest on past experience and our understanding of events. thus, as firms look ahead, they must be cognizant of the challenges that activities or events outside our experience pose for their risk management. new products and new business lines, for example, are an ongoing challenge. historical data may be limited or not relevant for assessing risk in newly created products. such data limitations affect even standard risk - management tools such as value - at - risk analysis. recognizing the need to supplement standard risk - management tools, managers also routinely estimate their exposures under so - called tail events. tail events, that is, asset price movements that are much more extreme than our usual experience, often appear driven by unique and idiosyncratic circumstances, so their implications are open to question and a challenge to risk managers. should they be viewed as temporary deviations from a still - valid view of the usual distributions of possible outcomes, or are they a harbinger of a more permanent shift that suggests a need for re - assessment of risk - management models and practices? tail events, by their nature, also are likely to be accompanied by heightened uncertainties. during such periods, the reaction of other market participants may become more relevant in the assessment of one ’ s own risk. consider the management of market liquidity risk when asset prices are moving in unusual ways. a firm can no longer assume that it will be able to reduce its risk quickly by adjusting positions. trades may be possible mostly at smaller volumes, and large trades almost surely will have greater price effects than normally observed. other firms also may be trying to liquidate the same positions, creating further demands on diminished market liquidity. risk management must take into account the potential for the longer holding periods and more - severe asset price movements likely to be observed in such conditions and the possibility of concentrations of positions in some markets. the challenges posed by tail events are not limited to market liquidity risk. they have broader effects on the measurement and management of market and counterpart

wider range of instruments from which to choose the risk profile of their financial positions and to adjust that profile in response to changes in their own situations or in the overall financial and economic environment. innovation and competition have substantially increased the role of markets relative to banks and other traditional providers of financial intermediation services. this has helped reduce the cost of transferring savings from anywhere around the globe into investment anywhere around the globe. it has also reduced the reliance of particular classes of borrowers and lenders on particular types of financial intermediaries. but it has also challenged you as bankers to identify the value you add to the intermediation process, and some of the new instruments and techniques we see have resulted from your attempting to exploit your comparative advantage. these changes have created the potential for more - robust financial markets, but in practice these shifts have not been without difficulties. some significant disturbances in the past decade have challenged market participants ’ and regulators ’ understanding of risk and revealed weaknesses in risk - management tools and practices. for example, in 1997 and 1998, capital flows to a number of asian countries were disrupted, with severe effects on their economies. in 1998, the global financial system was rocked by the russian debt default and the troubles of long - term capital management the views i express here are my own and not necessarily those of other members of the board. pat white, of the board ’ s staff, contributed to these remarks. and its imitators. those events were followed by the worst excesses of the stock market bubble, including not only the overvaluation of many stocks, but also the lapses in corporate governance that marked that era. still, for most industrialized economies the macroeconomic fallout from the sharp decline in equity prices, from the spike in risk premiums and business distress, and from the revelations of corporate wrongdoing of a few years ago has been limited ; in the united states, we experienced a mild recession. the effects have been limited in part because the financial system has proven reasonably resilient to these developments. since the fall of 1998, we have not seen the kind of widespread uncertainty about the health of major players in financial markets that has in the past tended to intensify and spread the economic effect of adverse events. in my view, two basic reasons account for this relatively favorable outcome. first, risks probably are in fact better diversified and better allocated to those who are prepared to absorb them or to those whose financial distress is less likely to have feed - through