. similarly, banks have noted the importance of stress tests in identifying significant concentrations of risk. they also have noted, however, that events unfolded over much longer periods of time than the typical oneday horizon of a stress test and that contagion across markets was faster than anticipated. this argues for assumptions of multi - day events in some stress scenarios, particularly when dealing with less liquid instruments. making appropriate judgements about the liquidity of instruments, or lack thereof, in determining the size of acceptable exposures is a theme that emerges in a variety of contexts when assessing market movements of the fourth quarter. another area in which valuable lessons were learned is the importance of having hedging instruments available for the full range of risks that are being assumed through product offerings. banks have reported that liquidity dried up in some instruments they were depending upon for hedging. this forced them into proxy hedging strategies using instruments that inevitably exposed them to basis risk. as i noted earlier, the availability of hedging instruments has been key to the growth and the broad product line that is found in otc markets. events of the last year may, however, have highlighted the fact that some dealers are not thinking carefully and critically enough about the ways they are going to hedge the risks assumed in various lines of business. in this area also, the theme of the availability of liquidity emerges. the final area related to the lessons of asia that i would like to touch on is that old - fashioned topic of concentrations of credit risk. the turmoil in asian markets has clearly provided a test of the risk management processes associated with derivatives dealing. but at the end of the day, the lessons to be learned may be related less to derivatives themselves than to why dealers analyze credit risk and view diversification. prices moved dramatically and market risk became credit exposures. these events raised the sensitivity of bank management to the potentially high correlation between credit exposures and the probability of counterparty default during stressful times. at a minimum, they illustrate the importance of diversification in all lines of business and the need to view diversification in the broadest context. despite the fact that i think there are numerous improvements dealers could make to their risk management systems, i do not want to end with the impression that derivatives dealers and their systems somehow failed this test of market volatility. systems generally performed well. the very conduct of a post mortem, after all, demonstrates the basic quality of existing procedures and systems. that said,

however, we should not forego the opportunity to learn from the events and possibly strengthen systems even further. future directions looking to the future, the lessons of asia provide sign posts for the areas of risk management in which work by both market participants and supervisors is likely to be concentrated. volatility, after all, usually leads to innovations to help deal with it. credit risk management emerged as one theme in assessments of the asian volatility. a reassessment of liquidity risk was another. an emphasis on the infrastructure of the market no doubt will continue as well. firms already were working upon ways to apply techniques developed for the management of market risk in the context of credit risk. supervisors also were evaluating the potential for applying such an internal models approach to the determination of regulatory capital requirements for credit risk. events in asia highlight not only the promise of such approaches but also the hurdles that must be overcome if their potential is to be realized. once one recognizes the correlation between market risk and credit risk, the next step is a consideration of a global approach to risk management and the possibility of extending an internal models approach beyond market risk. the application of that approach implies, however, that prices can be obtained from thin markets and used effectively in risk measurement. as we continue to pursue new approaches to credit risk management, the basic questions arise again and again : are data and techniques for revaluing positions available? can acceptable risk measurement models be developed? are hedging vehicles available? these questions represent hurdles that must be jumped. they will not necessarily be easy, but neither were other hurdles that this industry has overcome. another theme that emerges is liquidity risk. a fundamental assumption of many risk management procedures is the ability to get out of a position or to hedge it. events in asia demonstrated once again that assumptions about liquidity in normal markets rarely hold in more volatile ones. this argues both for a reassessment of the assumptions themselves and for more careful and fundamental thinking about liquidity risk in risk management procedures. at the outset of my remarks, i noted my appreciation for infrastructure developments as a foundation for the growth of the market. certainly, their importance is unlikely to diminish in the near term. market participants generally have an appreciation for potential legal risk but continuing reassessment is valuable. episodes of volatility give some counterparties strong incentives to try to walk away from losing contracts. such events indicate areas where further legal work may be necessary to ensure that the market