roger w ferguson, jr : thoughts on financial stability and central banking remarks by mr roger w ferguson, jr, vice chairman of the board of governors of the us federal reserve system, at the conference on modern financial institutions, financial markets, and systemic risk, federal reserve bank of atlanta, georgia, 17 april 2006. * * * i am very pleased to open this conference on modern financial institutions, financial markets and systemic risk. let me begin by thanking the federal reserve bank of atlanta for hosting this conference and for organizing, along with the international association of financial engineers, an impressive program that is filled with high - quality papers on topics of keen interest to central bankers. before proceeding, i must indicate that the views i am about to express are my own and do not necessarily reflect the views of other members of the board of governors or the federal reserve more generally. few subjects are more important for central bankers than the efficiency and stability of our financial system. the term " financial instability " is often poorly defined. some argue that financial instability occurs when imperfections or externalities in the financial system are substantial enough to create significant risks for real aggregate economic performance. others argue that financial stability is potentially absent, or that financial instability is on the horizon, when they perceive that some important set of financial asset prices seem to have diverged sharply from fundamentals. finally, many observers have used the term " financial instability " to describe their perception that market functioning seems to have been significantly distorted or impaired. regardless of the definitions used for financial instability, they lead us to a strong interest in ensuring that our financial infrastructure is robust and that our supervisory operations are sound and up - to - date. ironically, our interest in financial stability seem to have increased in recent years even as real ( that is, inflation - adjusted ) variability in economic aggregates seems to have decreased. since 1985, the volatility of real growth in gross domestic product ( gdp ) has been only about half of what it was during the preceding twenty - five years. in addition, as shown in a number of papers, the volatility of many components of gdp and of other measures of aggregate economic activity also declined sharply between these periods. the source of the moderation in the real economy is unclear. changes in data construction do not seem to be responsible. fiscal policy has not become appreciably more countercyclical, and the shift of the economy toward producing more services appears to have played only a small role. the leading explanations

curve and excel. while we are in the midst of a global financial turmoil and there are many challenges lying ahead of us, i ’ m delighted to find this impressive gathering of regulators, shariah scholars, business leaders and practitioners who commit themselves to the future development of the financial market. your presence here is ample evidence that there remains plenty of opportunities even in circumstances like these and that a forward - looking view is more important than ever. today, i ’ m particularly honoured to join you in the discussion of a topic that has been recognised as a source of sustainability and growth – islamic finance. there are two main issues that i would like to talk about today. first, despite the current financial turmoil, we continue to see the long term potential in islamic finance. there are two good reasons for this. one is that the islamic finance industry is in many ways fortunate to be at an early stage of development during this turmoil. despite the effects of a temporary shortage of liquidity, which has been a worldwide phenomenon, source : bloomberg. the degree of damage has been far lower than that to the much wider network of international finance, primarily because of the more restricted spread of islamic financial instruments across regions and the generally lower level of leverage allowed in islamic financial transactions. although islamic finance has grown by leaps and bounds in recent years, assets held by islamic financial institutions and insurance operators known as takaful providers are estimated to be us $ 1 trillion, accounting for only about 1 % of the financial assets in the overall banking and insurance sectors. 2 the industry ’ s remarkable annual growth rate of 15 % to 20 % has to be viewed in perspective : after all it began from a small base. this suggests that there is still ample room for growth on the supply side in the provision of islamic financial products. on the demand side, the potential of islamic finance is often linked to the 1. 4 billion - strong muslim population worldwide, and some people appear to believe that this obviates the need for further development of islamic finance. but population is not the only factor : economic development in islamic regions also has to be taken into account. the imf has estimated that there are some us $ 800 billion worth of investment projects under way or in the pipeline in countries of the gulf cooperation council ( gcc ) over the next five years, with major projects in the oil and gas sectors, infrastructure and real estate. according to a uk research report, the annual investment rate in the range of us $ 200 billion