do not represent core banking risks will only serve to further distract bank management and supervisors. in addition to issuing interagency supervisory guidance to banks on managing climaterelated financial risks, the board recently issued the results of a pilot climate scenario analysis, which was designed to learn about large banks'climate risk - management practices. 7 this report goes into significant detail on the technical aspects of the scenario analysis and underlying results. while exploring even remote risks can help build resiliency for the future, i think the report itself included some acknowledgment that these exercises may have limited utility in the short - term for managing risk. for example, the report acknowledges that participants " suggested that climate - related risks are highly uncertain and challenging to measure, " and that " [ t ] he uncertainty around the timing and magnitude of climaterelated risks made it difficult... to determine how best to incorporate these risks into [ banks'] risk - management frameworks on a business - as - usual basis. " 8 participants also noted that scenario design choices, assumptions, data challenges, and modelling challenges all played a material role in the analysis. 7 / 9 bis - central bankers'speeches banks already have ongoing obligations to manage all material risks, and while scenario analysis generally is not intended to be predictive, i think the uncertainty and unreliability of the results from this exercise suggest that resources may be better devoted to dealing with more tangible and immediate financial risks. we should rightly be concerned about regulatory pressure on a single issue that could lead to the misallocation of risk - management resources away from risks that may be more material, such as interest rate, liquidity, and cyber risks. closing thoughts we continue to be at an inflection point in the bank regulatory reform agenda. the pending proposals, including the basel iii capital proposal, the g - sib surcharge, new long - term debt requirements, amended resolution plan guidance, contemplated changes to the regulatory approval of merger and acquisition activity, and revisions to the interchange fee cap will have a lasting impact on banks of all sizes and their current and future customers. my hope is that you and other interested stakeholders play an active role in this process by sharing your views and concerns with regulators. this input provides valuable insights into the specific impacts - intended and unintended - of changes to the bank regulatory framework. voicing your concerns enables us to identify, and where needed, address, the real - world consequences of regulatory and

##gement brings falling prices. in the more extreme manifestation, the inability or unwillingness to differentiate among degrees of risk drives trading strategies to seek ever - more - liquid instruments that presumably would permit investors immediately to reverse decisions at minimum cost should that be required. as a consequence, even among riskless assets, such as us treasury securities, liquidity premiums rise sharply as investors seek the heavily traded “ on - the - run ” issues - a behavior that was so evident in the fall of 1998. while we can readily describe the process of sharp reversals in confidence, to date economists have been unable to anticipate it. nevertheless, if episodic recurrences of ruptured confidence are integral to the way our economy and our financial markets work now and in the future, the implications for risk measurement and risk management are significant. probability distributions estimated largely, or exclusively, over cycles that do not include periods of panic will underestimate the likelihood of extreme price movements because they fail to capture a secondary peak associated with extreme negative outcomes. furthermore, joint distributions estimated over periods that do not include panics will underestimate correlations between asset returns during panics. under these circumstances, fear and hence disengagement on the part of investors holding net long positions often lead to simultaneous declines in the values of private obligations, as investors no longer materially differentiate among degrees of risk and liquidity, and to increases in the values of riskless government securities. consequently, the benefits of portfolio diversification will tend to be overestimated when the rare panic periods are not taken into account. the uncertainties inherent in valuations of assets and the potential for abrupt changes in perceptions of those uncertainties clearly must be adjudged by risk managers at banks and other financial intermediaries. at a minimum, risk managers need to stress test the assumptions underlying their models and consider portfolio dynamics under a variety of alternative scenarios. the outcome of this process may well be the recommendation to set aside somewhat higher contingency resources reserves or capital - to cover the losses that will inevitably emerge from time to time when investors suffer a loss of confidence. these reserves will appear almost all the time to be a suboptimal use of capital, but so do fire insurance premiums - until there is a fire. more important, boards of directors, senior managers, and supervisory authorities of financial institutions need to balance emphasis on risk models that essentially have only dimly perceived sampling characteristics with emphasis on the skills,