points. by their nature, subsidies distort the establishment of competitive market prices, and create incentives that misalign private risks with private gains. such distortions undermine the error self - correcting mechanisms that support strong financial markets. we must be very careful that in the name of free market efficiency we do not countenance greater powers and profits subsidized directly or indirectly by government. conclusion mr. chairman, in conclusion, the board believes that as the congress moves toward financial modernization the newly created structure of financial organizations should limit, in so far as possible, the real and perceived transfer of the subsidy inherent in the safety net to nonbank activities. to maintain a level playing field for all competitors, nonbank activities must be financed at market, not subsidized, rates. the board also believes that financial modernization should not undermine the ability and authority of the central bank of the united states to manage crises, assure an efficient and safe payment system, and conduct monetary policy. we believe all of these require that the federal reserve retain a significant and important role as a bank supervisor. in today ’ s structure, we have adequate authority and coverage to meet our responsibilities. but should erosion occur, as would likely be the case if new activities are authorized in bank subsidiaries, the congress would have to consider what changes would be required in the board ’ s supervisory authority to assure that it continues to be able to meet its central bank responsibilities.

more rapidly than in earlier times - - in large part reflecting new technologies - - and require a coordinated international response. crisis management and systemic risk second only to its macrostability responsibilities is the central bank ’ s responsibility to use its authority and expertise to forestall financial crises ( including systemic disturbances in the banking system ) and to manage such crises once they occur. in a crisis, the federal reserve, to be sure, could always flood the market with liquidity through open market operations and discount window loans ; at times it has stood ready to do so, and it does not need supervisory and regulatory responsibilities to exercise that power. but while sometimes necessary in times of crises, such an approach may be costly and distortive to economic incentives and long - term growth, as well as an insufficient remedy. supervisory and regulatory responsibilities give the federal reserve both the insight and the authority to use techniques that are less blunt and more precisely calibrated to the problem at hand. such tools improve our ability to manage crises and, more importantly, to avoid them. the use of such techniques requires both the authority that comes with supervision and regulation and the understanding of the linkages among supervision and regulation, prudential standards, risk taking, relationships among banks and other financial market participants, and macroeconomic stability. our financial system - - market oriented and characterized by innovation and rapid change - - imparts significant benefits to our economy. but one of the consequences of such a dynamic system is that it is subject to episodes of stress. in the 1980s and early 1990s we faced a series of international debt crises, a major stock market crash, the collapse of the most important player in the junk bond market, the virtual failure of the s & l industry, and extensive losses at many banking institutions. more recently, we faced another mexican crisis and, while in the event less disruptive, the failure of a large british merchant bank. in such situations the federal reserve stands ready to provide liquidity, if necessary, and monitors continuously the condition of depository institutions to contain the secondary consequences of any problem. the objectives of the central bank in crisis management are to contain financial losses and prevent a contagious loss of confidence so that difficulties at one institution do not spread more widely to others. the focus of its concern is not to avoid the failure of entities that have made poor decisions or have had bad luck, but rather to see that such failures - - or threats of failures - - do not have broad and serious impacts on