promote greater use of central counterparties, increased regulatory and public transparency, wider involvement of exchanges and electronic trading platforms for actively - traded products, and stronger operational and risk management practices. third, the financial system cannot operate efficiently without leverage. the preferences of businesses and households in their regular economic activities require that intermediation and maturity transformation be conducted somewhere in the financial system. of course, much of the turmoil we witnessed across financial markets was due to the build - up of excessive leverage in the system, and we cannot miss the chance to learn from this painful lesson. but we should also understand that a reduction in leverage to near zero in the financial system is not desirable, as it would significantly reduce the efficiency of credit intermediation. instead, discussion should be focused on how to make the use of leverage less procyclical, to identify those sources of leverage that are most productive and to better monitor the vulnerabilities that can result from excessive leverage. conclusion the crisis offered a rare view into how our capital markets function under extreme stress. those circumstances revealed vastly different degrees of robustness across alternative segments of our financial system. at one end of the spectrum, markets for certain dollar assets demonstrated considerable resilience to financial stress and were extremely appealing to investors in stress circumstances. at the other end, the crisis highlighted that segments of u. s. credit markets had structural shortcomings that must be addressed to ensure the viability of these markets going forward. those shortcomings have necessitated two waves of policy response. the first wave was aimed at putting out the fire. to that end, the crisis demonstrated that u. s. and global authorities have the ability and willingness to respond in a manner that meets dollar funding needs in a time of crisis and that promotes broader market stability. the second wave is aimed at building a sounder financial system for the future. those efforts are still underway, and the reform process may be long and involved. however, i am hopeful that many of the shortcomings are likely to be addressed, and that we will emerge from this episode with a more robust and efficient financial system.

##ted basis. the resilience of foreign exchange markets owed in part to the availability of cls bank for eliminating time gaps in the settlement of different currencies, to the efficient collateral exchange achieved through credit support annexes and to the standardization of trade documentation. credit intermediation and market disruption while those capital markets demonstrated meaningful resilience to financial stress, that was not the case for other parts of the financial system – namely, those involved in more complicated forms of credit intermediation. many of the most acute problems were driven by a build - up in leverage in which large amounts of opaque, illiquid, long - term assets were financed by short - term liabilities. these activities took place both in traditional financial intermediaries and in what is often referred to as the shadow banking system. the shadow banking system performs a function similar to that carried out by banks and other financial institutions. in particular, it takes the short - term, highly liquid investments that households and other investors want to hold, and it uses them to fund the longer - term, relatively illiquid loans that businesses and households demand to finance their economic activity. however, while a bank performs this transformation of maturity, liquidity and credit risk from end to end within a single institution, the shadow banking system involves a wide range of institutions and markets in the process. in particular, the shadow banking system has included money market mutual funds, enhanced money funds, other real money accounts and securities lenders as providers of short - term funding ; banks, industrial loan companies, independent finance companies and other non - bank firms as originators of private credit ; and an array of entities including structured investment vehicles ( sivs ), securities arbitrage conduits, real estate investment trusts, broker dealers, clearing banks, hedge funds, mortgage insurers, monoline insurers and credit rating agencies as part of the maturity and credit transformation between the lenders and the borrowers. given the number of steps and firms involved, the process of intermediating credit through this system was a complicated one. however, it is not the multiplicity of steps itself that was problematic ; indeed, analogous steps would be taking place within a financial intermediary in the traditional banking system. what was problematic was that these steps involved a wide range of firms that did not have adequate coverage under any one regulatory umbrella and that did not operate with the benefit of either government - guaranteed liabilities or the federal reserve ’ s discount