the broader interests of management or shareholders. this can lead to excessive risk - taking, underinvestment in risk - reduction and risk - control mechanisms, and a focus on short - term returns at the cost of long - run viability. think about the trader who is compensated on short - term p & l and not long - term value creation. these issues can be amplified by the opacity intrinsic to many financial activities that allows misconduct to persist and erodes the cultural capital of the firm. 3 / 5 bis central bankers'speeches adverse selection adverse selection occurs when those particularly ill - suited for something are the most likely to participate. this could be a complicating factor in this context if conduct - related events change the composition of a firm ’ s workforce. firms with relatively low cultural capital ( and a relatively high tolerance of misconduct risk ) may attract and retain employees and clients more inclined to take inappropriate risks and push beyond internal limits and controls. further, high - quality directors, executives, and employees might leave such firms or decline to join them, depleting the firm ’ s human capital and contributing to the deterioration of cultural capital. role of the official sector these are some of the types of market failures that may explain why a firm might not invest enough in its cultural capital to mitigate risks, including misconduct risk. and they suggest a role for the official sector to encourage resiliency, including investment in cultural capital, beyond what the firm would choose to do on its own. that is, if firms don ’ t have sufficient incentives to overcome these forces, then the official sector should push toward a better outcome. in the case of misconduct risk, supervision seems like a particularly appropriate approach because the hard - to - define and evolving nature of behavior likely prevents easy regulatory solutions. 9 though some rule - writing could help re - align incentives, misconduct risk can take many different forms and, by its nature, seek to circumvent the rules. essential drivers of culture and of misconduct risk, for example, relate to leadership and “ tone from above, ” areas that are inherently behavioral and qualitative in nature. supervisors can assess behaviors in an ongoing manner and help to identify potential risks. 10 i ’ ll note that the need for a supervisory focus on employee misconduct and its underlying drivers dates back one and a half centuries to the origins of bank supervision. then, in the u. s., the emphasis was on the “ responsibility and integrity ” of bank managers

it serves as a primary benchmark for pricing in other financial markets, both domestic and global. last, but definitely not least, it ’ s vitally important for the effective transmission of monetary policy to the broader financial system and to the economy. thankfully, most days — most years — the treasury and related markets function incredibly well. but in the past decade, these markets have experienced three abrupt and notable disruptions, each of increasing severity. first was the so - called flash rally of october 2014 ; then, the repo market distress in september 2019 ; and third, the extraordinary dislocations at the onset of the covid - 19 pandemic in march of 2020. general george patton once said, “ prepare for the unknown by studying how others in the past have coped with the unforeseeable and unpredictable. ” it ’ s a good piece of advice — and one that 1 / 4 bis central bankers'speeches should guide our work on treasury market reform. the iawg report i mentioned earlier reviews these events, so i won ’ t repeat them here. however, two lessons are clear. first, the unforeseeable and unpredictable will happen, and can result in significant stresses in the treasury and related markets that may spread to broader financial conditions. second, when disruptions have been sufficiently severe and persistent, the market has not been able to quickly self - correct without official - sector intervention. the severe disruptions to the treasury and funding markets in march of last year illustrate these points. the incipient breakdown in market functioning quickly spread to other segments of the u. s. and global financial markets, risking a broad - based pullback in the availability of credit that is essential for our economy. the speed and extent of the market disruption necessitated immediate and dramatic action, the scale of which was truly unprecedented. at the new york fed, we are used to talking in very large sums, but even for us, the figures were staggering. we were offering overnight repos of up to $ 1 trillion, as well as substantial amounts of term repos of longer maturities. 2 the sizeable offerings were designed to meet the markets ’ needs and provide confidence that liquidity would be available. at their peak in mid - march of 2020, our repo operations reached nearly $ 500 billion. but repos alone were not enough to restore smooth market functioning. the fomc also directed the open market trading desk at the new york fed to engage in large