households ’ credit, debt and delinquencies and what economic consequences will that have? this monitoring and research on household debt and credit conditions helps us better understand the connections between financial market developments, the broader economy and families ’ well - being. we follow a variety of metrics, including lending activity, the level of interest rates and of interest rate spreads, survey data on lending standards, delinquency rates on loans, and home and other asset price changes. one new, key source of information on household debt and credit conditions is the new york fed ’ s consumer credit panel. as you heard a few moments ago, these data are now available for all of 2010. they come from a nationwide sample covering all households where at least one member has a credit report. the records tell us about five major categories of household debt – mortgages, home equity lines of credit, and credit card, auto and student loans. to set the stage, one can think about the recent path of household debt in three phases. during the run - up to the recession – the years leading up the crisis – households borrowed a lot of money. they took on higher credit cards balances, auto loans, student loans and, especially, mortgages. bis central bankers ’ speeches as the crisis unfolded in 2008, many families ’ debt burdens proved unsustainable : delinquencies rose dramatically and household debt began to fall sharply. now, we appear to be entering a process of gradual convalescence, as delinquencies begin to subside and some households begin to expand their borrowing again. the nature of the run - up to the crisis has been well - documented, so let me focus here on the latter two phases : the crisis and convalescence. during the crisis, weakness in the housing market contributed to financial strains as many families found that their mortgages were “ underwater, ” that is, their homes were now worth less than their mortgage balances. as a result, they had no financial buffer they could tap if their finances came under stress. and, as the economy weakened further, many households faced sharply reduced incomes as family members lost their jobs or had their work hours cut. so, more families found it difficult to pay their credit card bills and other debt obligations on time. as a consequence of these strains, households began the painful process of deleveraging. they started reducing the amount of debt they owed, relative to their income. during the runup to

##igate these risks by improving the infrastructure was hampered by classic collective action problems, magnified by the greater number and diversity of participants. all these challenges merit attention. they describe some of the risks that have accompanied the substantial benefits of credit market innovation. and they help illustrate why these broad changes in financial markets may have contributed to a system where the probability of a major crisis seems likely to be lower, but the losses associated with such a crisis may be greater or harder to mitigate. what should policymakers to do mitigate these risks? we cannot turn back the clock on innovation or reverse the increase in complexity around risk management. we do not have the capacity to monitor or control concentrations of leverage or risk outside the banking system. we cannot identify the likely sources of future stress to the system, and act preemptively to diffuse them. the most productive focus of policy attention has to be on improving the shock absorbers in the core of the financial system, in terms of capital and liquidity relative to risk and the robustness of the infrastructure. these issues are the principal focus of day - to - day supervision and market oversight in the major financial centers around the world. the federal reserve is actively involved in a range of efforts, working closely with the primary supervisors of the major global financial institutions and the critical parts of the financial infrastructure, to encourage further progress. in this context, we are working to put in place a stronger regulatory capital regime and to strengthen the capacity of firms to absorb losses in stress conditions. we are encouraging more sophisticated and more conservative management of credit exposures in over - the - counter derivatives and structured financial products, as well as of exposures to hedge funds. and we are encouraging a range of efforts to modernize the operational infrastructure that underpins the over - the - counter derivatives markets, and to improve the capacity of market participants to manage a major default. the stronger these shock absorbers, the more resilient markets will be in the face of future shocks, and the more confident we can be that banks will be a source of strength and of liquidity to markets in periods of stress and that the financial system will contribute to improved economic performance over time. thank you.