unusual configurations of asset price movements is higher than normal. implications for risk management financial institutions and public policymakers have demonstrated an ability to respond flexibly to changing circumstances over the past several years. but what does this imply about their ability to adapt to the conditions that they may confront in the future? financial institutions one of the defining characteristics of financial institutions and markets of late has been a significant expansion in the tools available for managing risk. these tools are tested and refined over time. importantly, however, they rest on past experience and our understanding of events. thus, as firms look ahead, they must be cognizant of the challenges that activities or events outside our experience pose for their risk management. new products and new business lines, for example, are an ongoing challenge. historical data may be limited or not relevant for assessing risk in newly created products. such data limitations affect even standard risk - management tools such as value - at - risk analysis. recognizing the need to supplement standard risk - management tools, managers also routinely estimate their exposures under so - called tail events. tail events, that is, asset price movements that are much more extreme than our usual experience, often appear driven by unique and idiosyncratic circumstances, so their implications are open to question and a challenge to risk managers. should they be viewed as temporary deviations from a still - valid view of the usual distributions of possible outcomes, or are they a harbinger of a more permanent shift that suggests a need for re - assessment of risk - management models and practices? tail events, by their nature, also are likely to be accompanied by heightened uncertainties. during such periods, the reaction of other market participants may become more relevant in the assessment of one ’ s own risk. consider the management of market liquidity risk when asset prices are moving in unusual ways. a firm can no longer assume that it will be able to reduce its risk quickly by adjusting positions. trades may be possible mostly at smaller volumes, and large trades almost surely will have greater price effects than normally observed. other firms also may be trying to liquidate the same positions, creating further demands on diminished market liquidity. risk management must take into account the potential for the longer holding periods and more - severe asset price movements likely to be observed in such conditions and the possibility of concentrations of positions in some markets. the challenges posed by tail events are not limited to market liquidity risk. they have broader effects on the measurement and management of market and counterpart

procyclical effects without compromising the goals of disclosure and transparency. the federal reserve also helped lead the basel committee's development of enhanced principles of liquidity risk management, which were issued last year. 2 following up on that initiative, on june 30, 2009, the federal banking agencies requested public comment on new interagency guidance on funding and liquidity risk management, which is designed to incorporate the basel committee's principles and clearly articulate consistent supervisory expectations on liquidity risk management. 3 the guidance re - emphasizes the importance of cash flow forecasting, adequate buffers of contingent liquidity, rigorous stress testing, and robust contingent funding planning processes. it also highlights the need for institutions to better incorporate liquidity costs, benefits, and risks in their internal product pricing, performance measurement, and new product approval process for all material business lines, products, and activities. with respect to bank holding companies specifically, the supervisory program of the federal reserve has undergone some basic changes. as everyone is aware, many of the financial firms that lay at the center of the crisis were not bank holding companies ; some were not subject to mandatory prudential supervision of any sort. during the crisis a number of very large firms became bank holding companies – in part to reassure markets that they were subject to prudential oversight and, in some cases, to qualify for participation in various government liquidity support programs. the extension of holding company status to these firms, many of which are not primarily composed of a commercial bank, highlights the degree to which the traditional approach to holding company supervision must evolve. recent experience also reinforces the value of holding company supervision in addition to, and distinct from, bank supervision. large organizations increasingly operate and manage their businesses on an integrated basis with little regard for the corporate boundaries that typically define the jurisdictions of individual functional supervisors. indeed, the crisis has highlighted the financial, managerial, operational, and reputational linkages among the bank, securities, commodity, and other units of financial firms. the customary focus on protecting the bank within a holding company, while necessary, is clearly not sufficient in an era in which systemic risk can arise wholly outside of insured depository institutions. similarly, the premise of functional regulation that risks within a diversified organization can be evaluated and managed properly through supervision focused on individual subsidiaries within the firm has been undermined further ; the need for greater attention to the potential for damage to the bank, the organization within which it operates, and, in some cases,