role during a financial crisis. this role represents a fundamental purpose behind the creation of the federal reserve system and the reason why the federal reserve is expected to take the leading role in maintaining financial stability and mitigating breakdowns in the financial markets. the federal reserve may inject liquidity through open market operations. to provide liquidity in a more targeted manner, the federal reserve may lend through the discount window to any depository institution and may also lend to any individual, partnership or corporation in “ unusual and exigent circumstances. ” these different ways to inject liquidity thus give the federal reserve a choice in how it will supply liquidity to institutions and the overall economy. the new financial structure and the broadening mandate for central banks traditionally, the federal reserve ’ s supervisory responsibilities and its financial stability concerns have centered on commercial banks. this approach reflects the multifaceted role of banks including : their responsibilities in the payments system, their participation in the credit intermediation process, and their role as a source of liquidity and acting as a counterparty in financial transactions. i think we would all agree, though, that the current market turmoil points out how much the financial system has changed over the past several decades. recent events illustrate that financial disruptions can arise from outside of the traditional banking channels, while taking on new dimensions and features. as an example, many of the recent problems arose from mortgage - backed securitization activities that not only involved u. s. banking organizations, but also brought in a complex mixture of other firms. such firms have included investment banks, mortgage originators, credit rating agencies, mortgage servicers, securities issuers, asset managers, investors and financial institutions across many different countries. this experience clearly indicates that more of the credit process is now taking place outside of the banking system and within a much broader global financial marketplace. investment banks, in particular, are an important segment in this expanding marketplace as they go beyond their traditional focus on underwriting and distribution of securities and private placement activities. today, we can see that investment banks derive an increasing portion of their business from more sophisticated securities and derivatives activities, mortgage and commercial lending, and the operation of thrift and industrial loan company subsidiaries. the current financial crisis also shows the extensive and complex set of counterparty risks to which major institutions are now exposed and the difficulties such risks may pose in maintaining market confidence and addressing problems at individual institutions. in fact, the collapse of bear stearns provides a striking example

thomas m hoenig : the high cost of exceptionally low rates speech by mr thomas m hoenig, president of the federal reserve bank of kansas city, at the bartlesville federal reserve forum, hosted by bartlesville chamber of commerce, bartlesville, oklahoma, 3 june 2010. * * * the views expressed by the author are his own and do not necessarily reflect those of the federal reserve system, its governors, officers or representatives. i appreciate the opportunity to join you here today. bartlesville plays an especially important role in the history of the federal reserve bank of kansas city. after congress passed the federal reserve act nearly a century ago, a special committee was appointed to determine where the nation ’ s 12 regional federal reserve banks would be located and what regions those banks would serve. when that committee met in kansas city to discuss business relationships in the central united states, frank phillips was among those who attended and spoke in favor of locating our bank in kansas city and having it serve oklahoma. the support from mr. phillips and others from oklahoma was absolutely critical to the eventual decisions that established the bank in kansas city and included oklahoma in the tenth federal reserve district that we serve. a few years after our founding, we opened our oklahoma city branch. this morning, the community and business leaders who serve on the branch ’ s board of directors – including bartlesville ’ s own k. vasudevan – met here in bartlesville, which seems especially appropriate. this is not the only connection between the federal reserve ’ s founding and oklahoma. the senate sponsor of the federal reserve act was one of oklahoma ’ s first senators, robert owen. senator owen, like mr. phillips, recognized the importance of having the central bank of the united states tied directly to america ’ s main streets and not isolated in washington or on wall street. that structure is at least as important today as it was a century ago. it is my hope that, after much debate, the regulatory reform legislation now under discussion in washington will affirm in its final version the importance of these regional responsibilities. it is our job as the regional headquarters of the nation ’ s central bank to serve as the link between our communities and national policy deliberations. although these policy issues are always important to our nation, today we find ourselves at a unique and difficult point. we are attempting to support an economic recovery, but in doing so, also avoid fostering the next crisis. it is this challenge that i