haste to reverse course — undermine the robustness and resiliency of the financial system. the u. s. housing market boom and bust at the heart of the crisis was the u. s. housing boom and bust. between 1997 and 2006, u. s. home prices nearly doubled in real terms on a national basis. then, when the boom turned to bust, real home prices reversed course, declining by about 40 percent on a national basis, with larger price declines in several states. 1 the magnitude of the national price declines was unprecedented during the postwar period. the evolution of the financial crisis illustrates a number of key issues, including the potential hazards of financial innovation, the procyclicality of the financial system, and the importance of confidence in sustaining effective financial intermediation. the housing boom resulted from several factors. innovations in subprime mortgage lending enabled moderate - income households to purchase homes with negligible down payments. this led to an increase in the demand for housing, which helped push up home prices. home price appreciation masked the potential riskiness of such lending and, in turn, sustained the wisdom of 1 / 7 bis central bankers'speeches the easier underwriting standards. as long as home values were rising, subprime borrowers could either refinance their loans or sell their homes when the initial teaser rates expired. thus, losses on subprime and other mortgage lending were low, reinforcing the belief that such loans were “ safe. ” easier mortgage underwriting practices were also supported by the ability of mortgage originators to pool their mortgages into collateralized debt obligations ( cdos ), transforming lowquality assets into triple - a - rated securities. investors, including banks, relied too heavily on credit ratings and didn ’ t do sufficient due diligence on the underlying quality of the assets and the assumptions that underpinned the triple - a ratings. implicit in these ratings was the assumption that a large, national decline in home prices was extraordinarily unlikely. the rise in home prices led to a surge in construction activity, which helped to sustain the housing boom for a time. this effect was particularly powerful in states such as arizona, california, florida, and nevada. rising home prices also bolstered the economy by supporting consumption, as households monetized these gains by cash - out refinancings and home equity lines of credit. the housing boom was also supported by an accompanying financial boom. the financing activity associated with

fundamental value, which can increase insolvency risk. and, it is important that they not be overly reliant on short - term wholesale funding, which can evaporate during times of stress. second, when we identify potential sources of instability that could amplify shocks, we need to make structural changes to the financial system to reduce or eliminate them. for example, the financial crisis made it clear that changes were needed in how tri - party repo transactions were unwound each day, net asset values were calculated for prime money market mutual funds, and otc derivative obligations were cleared, settled, and risk - managed. third, there should be a viable and predictable resolution regime. we need to be able to resolve a large, systemically important bank or securities firm in a way that limits contagion and stress on the rest of the financial system, while at the same time protecting the taxpayer against loss. meanwhile, central counterparties ( ccps ) — through which most standardized otc derivatives must now be cleared — need to be open for business for the financial system to operate effectively. here, the emphasis should be on ensuring that these financial market utilities can open for business the day after the failure of one or more of their participants. credible resolution regimes for large banks and securities firms — and credible recovery regimes for ccps and other critical financial market utilities — should help support confidence during times of stress. these measures would make the financial system less prone to booms and busts. financial intermediaries would be more robust to stress when busts inevitably occur, and contagion to the broader system would be reduced when a systemically important firm fails. such changes should reduce the likelihood of the failure of a large, systemically important firm and the negative consequences of such a failure on the broader financial system. these steps should help to ensure that credit flows can be sustained throughout the business cycle. considerable progress so, where are we relative to what is needed? as i see it, there has been considerable progress. the nation ’ s largest banks are much safer as a result of substantially higher capital and liquidity requirements, as well as robust stress tests. this enhanced resiliency has been achieved without a significant negative impact on the broad availability of credit — recognizing that it is now more difficult for households with low credit scores to obtain a mortgage. most importantly, improving the capacity of such firms to continue to lend during times of stress should make the overall economy more stable.