other supervisors and identify areas where we can work in parallel to highlight issues we see in the major markets and encourage change among the major institutions. we are in the process, for example, of consulting with these and other authorities on the use of stress testing and scenario analysis in the largest institutions. these efforts of course complement a substantial amount of cooperation in other contexts in the u. s. and internationally in the financial stability forum, the joint forum and the basel committees on banking supervision and payment and settlement systems. these initiatives help keep the supervisors closer to developments in markets, more informed of differences in approaches across the functional and geographic lines of supervision, somewhat more nimble in responding to potential problems and closer to creating a more integrated supervisory framework. the evidence to date suggests that dramatic growth in new instruments for risk transfer and the greater role of nonbank financial institutions have contributed to a more stable and more efficient financial system. but these changes present continuing challenges for the discipline of risk management. and these challenges are likely to continue to require a substantial level of investment by financial institutions to improve the sophistication of the risk management process and the operational infrastructure that supports these markets. thank you. note : i want to thank stefan walter, robard williams, tim clark and beverly hirtle of the staff of the federal reserve bank of new york for assistance and comments.

. it provides a mechanism for expanding the range of collateral against which we provide funds to the market – in effect to change the composition of our balance sheet – in ways we cannot do through traditional open market operations. and it does this in a way that may be more effective in mitigating a broader marketwide liquidity shortage than does the existing discount window facility, in part because of the perceived stigma in recourse to a facility that has come to be regarded as a source of funds for individual institutions facing a temporary, exceptional need for liquidity. because the quantity of funds to be injected is known in advance, this mechanism poses fewer complications for our ability to reduce volatility in the fed funds rate around the target. the auction facility and other measures we have taken to address market liquidity problems do not directly address the balance sheet or capital constraints facing financial institutions. nor can they be expected directly to reduce the perceived risk in exposure to other financial counterparties. but by providing a more effective form of access to liquidity, these new measures can help reduce the uncertainty that gives institutions the incentive to secure liquidity in ways that might lead to a further deterioration on market conditions. major financial institutions in the united states and elsewhere entered this period of adjustment with capital substantially above the various regulatory thresholds. these capital cushions have enabled banks to expand their balance sheets as they have met contingent commitments and as the economics of other non - bank financing vehicles have deteriorated. this has been an important part of the adjustment process in markets. we have also seen some early steps by a range of different institutions to bring new capital into the banking and financial system. this is a healthy development. it reduces the need for further asset sales to preserve capital ratios. and it gives those institutions that acted earlier and on a more substantial scale the flexibility to play a greater role in markets and in the economy going forward. finally, let me say something about future challenges in this area that are of special relevance to today ’ s conference and to the research agenda in which you are all engaged. we are already involved in a coordinated review with other central banks and supervisors of how we should adapt policy and supervision in the wake of this financial crisis. two issues are of particular interest in the context of this conference. the first relates to the incentives we create, through regulation and supervision and other policies, for influencing how financial market participants manage liquidity risk. several aspects of the existing capital framework and other parts of the policy and regulatory framework affect