, along with improvements in computer and telecommunications technologies, have significantly lowered the costs of, and expanded the opportunities for, hedging risks that were not readily deflected in earlier decades. moreover, the counterparty credit risk associated with the use of derivative instruments has been mitigated by legally enforceable netting and through the growing use of collateral agreements. these increasingly complex financial instruments have especially contributed, particularly over the past couple of stressful years, to the development of a far more flexible, efficient, and resilient financial system than existed just a quarter - century ago. greater resilience has been evident in many segments of the financial markets. one prominent example is the response of financial markets to a burgeoning and then deflating telecommunications sector. worldwide borrowing by telecommunications firms in all currencies amounted to more than the equivalent of one trillion u. s. dollars during the years 1998 to 2001. the financing of the massive expansion of fiber - optic networks and heavy investments in third - generation mobile - phone licenses by european firms strained debt markets. at the time, the financing of these investments was widely seen as prudent because the telecommunication borrowers had very high valuations in equity markets, which could facilitate a stock issuance, if needed, to take down bank loans and other debt. in the event, of course, prices of telecommunication stocks collapsed, and many firms went bankrupt. in decades past, such a sequence would have been a recipe for creating severe distress in the wider financial system. however, compared with decades past, banks now have significantly more capital with which to absorb shocks, and they employ improved systems for managing credit risk. in conjunction with this improvement, both as cause and effect, banks have more tools at their disposal with which to transfer credit risk and, in so doing, to disperse credit risk more broadly through the financial system. some of these tools, such as loan syndications, loan sales, and pooled asset securitizations, are relatively straightforward and transparent. more recently, instruments that are more complex and less transparent - - such as credit default swaps, collateralized debt obligations, and credit - linked notes - have been developed and their use has grown very rapidly in recent years. the result? improved credit - risk management together with more and better risk - management tools appear to have significantly reduced loan concentrations in telecommunications and, indeed, other areas and the associated stress on banks and other financial institutions. more generally, such instruments appear to have

be lower on average in the south and the southwest than elsewhere - but they may nonetheless warrant further analysis. of course, public attention has focused on a notable variation in the incidence of higher - priced lending across racial and ethnic lines : blacks and hispanics are much more likely than non - hispanic whites to receive higher - priced loans. in 2004, 32 percent of black borrowers and 20 percent of hispanic borrowers received higher - priced home purchase loans, but only 9 percent of non - hispanic white borrowers did. in other words, black homebuyers received higher - priced loans more than three times as often as non - hispanic white homebuyers, and hispanic homebuyers received higher - priced loans more than twice as often as non - hispanic whites. certainly, differences of this magnitude are disturbing and raise important public policy questions. they also have led some to conclude that racial discrimination must play a role in the pricing of home loans. however, for the reasons i have explained above, we cannot use hmda data alone to judge whether an institution has discriminated unlawfully or, therefore, whether unlawful discrimination is present in the market. despite their limitations, the hmda data supply a key insight into the aggregate disparities : they reflect in part a segmentation of the market by race and ethnicity. black and hispanic borrowers are more likely to obtain mortgage loans from institutions that tend to specialize in subprime lending. now, at least part of this segmentation of the market by race and ethnicity may reflect objective differences in borrowers ’ preferences or differences in credit - risk indicators, such as credit scores, that are not included in the hmda data. yet the segmentation may have more troubling causes, at least in part. segmentation may stem from borrowers being steered to lenders that charge higher prices than what is warranted by the credit characteristics of these borrowers. borrowers may also have different levels of financial literacy, or their knowledge of the mortgage lending process may be uneven - for example, they may not understand the importance of shopping and negotiating for the best loan terms. additional research is needed to explore all of these, and perhaps other, hypotheses. the board will continue to conduct and promote research that explores the racial and ethnic differences in the incidence of higher - priced lending. in june and july, the board is conducting hearings on the home equity lending market. these hearings, which i am chairing, are intended