* * under the rubric of risk management are a number of specific issues that we at the fed had to address over the past decade and a half and that will likely resurface to confront future monetary policymakers. most prominent is the appropriate role of asset prices in policy. in addition to the narrower issue of product price stability, asset prices will remain high on the research agenda of central banks for years to come. as the ratios of gross liabilities and gross assets to gdp continue to rise, owing to expanding domestic and international financial intermediation, the visibility of asset prices relative to product prices will itself rise. there is little dispute that the prices of stocks, bonds, homes, real estate, and exchange rates affect gdp. but most central banks have chosen, at least to date, not to view asset prices as targets of policy, but as economic variables to be considered through the prism of the policy ’ s ultimate objective. * * * as the transcripts of fomc meetings attest, making monetary policy is an especially humbling activity. in hindsight, the paths of inflation, real output, stock prices and exchange rates may have seemed preordained, but no such insight existed as we experienced it at the time. in fact, uncertainty characterized virtually every meeting, and, as the transcripts show, our ability to anticipate was limited. from time to time the fomc made decisions, some to move and some not to move, that we came to regret. yet, during the last quarter century, policymakers managed to defuse dangerous inflationary forces and dealt with the consequences of a stock market crash, a large asset price bubble, and a series of liquidity crises. these events did not distract us from the pursuit and eventual achievement of price stability and the greater economic stability that goes with it. as we confront the many unspecifiable dangers that lie ahead, the marked improvement in the degree of flexibility and resilience exhibited by our economy in recent years should afford us considerable comfort. 12 assuming that it will persist, the trend toward increased flexibility implies that an evergreater part of the resolution of economic imbalances will occur through the actions of business firms and households. less will be required from the risk - laden initiatives of monetary policymakers. each generation of policymakers has had to grapple with a changing portfolio of problems. so while we eagerly draw on the experiences of our predecessors, we can be assured that we will confront

j. pesola, and m. viren ( 2015 ) : why is credit - to - gdp a good measure for setting countercyclical capital buffers? journal of financial stability 18, june 2015, pp. 117 – 126. bis central bankers ’ speeches the shooting up of systemic risk in this example happens when the vulnerability of firms and households to external shocks enters a critical zone. as debts grow, more and more firms and households would experience financial distress if the economy turns down. financial distress may feed back negatively to the economy if consumption and investment are reduced. at worst, firm and household defaults cause substantial losses to financiers, especially banks. if banks have also had too little capital and too much debt, especially short - term debt, banks may not be able to absorb the losses without cutting back their lending. this adds a further and potentially dangerous negative feedback to the economy. macroeconomic models are now taking steps to incorporate such effects. but more work needs to be done. another source of complexity in the real world are the networks of banks and banks´ bilateral exposures. the network and contagion effects are difficult to analyze due, inter alia, to imperfect information about counterparty balance sheets. 2 after the crisis, more attention has been paid on the network analysis. i am certain that the presentations of this conference related to networks and contagion will give us many new insights. complex risks – complex rules? [ slide 4 ] if systemic risks are complex, does this imply that we need complex regulatory rules to combat them? not necessarily. while economic models missed some important complexities of the real world prior to the crisis, the regulation of finance, particularly banks ’ risk - based capital requirements, had grown perhaps too complex. complex regulation together with its heterogeneous implementation left financial institutions with plenty of room for regulatory arbitrage and even manipulation of their regulatory and accounting information. this is somewhat ironic, because the increasing complexity of regulation was largely motivated by the need to reduce incentive problems which were created by the “ flat ”, non - risk - based capital requirements of the earlier ( basel i ) framework. after the crisis, simpler and more robust regulatory rules have been developed to back up the more complex rules. the forthcoming leverage ratio requirement and the basel committee´s proposals for the new simple capital floors for banks´ internal risk - based capital requirements are examples of that approach. such safeguards provide protection against collective model risks, such as the