the economy. events in recent years would indicate this is so. however, financial crises can never be entirely avoided. they will recur. those who legislate, regulate and oversee the markets will not be able to prevent this. so what can we do? to begin with, of course, we need to obtain the best possible overview and knowledge of events. we at the riksbank consider the work in the bank of international settlements within the g10 to be invaluable in this context. there is also other work, for instance under the auspices of the international monetary fund, from which we can learn. one consequence of this development is that we must take international conditions into account to a greater extent in our own work on stability analysis. we must also oversee developments in the financial markets more than we have done and not only concentrate on the major banks. we must try to be aware of when prices depart from reasonable levels and become a risk. with regard to risk management in individual institutions, it is becoming increasingly difficult to gain insight into what is happening. it is therefore necessary to spend more time on evaluating the systems and person involved. this is the view that has coloured the new oversight system for the banks, what is known as basel ii, which is about to be implemented. it is also our task to equip the systems and infrastructure so well that the effects of any future crises will be minimised. in addition, we must of course maintain preparedness for managing crises, something which has become more complicated as integration has increased and which now requires greater efforts by central banks and financial supervisory authorities. agents in the financial markets must also take responsibility. the risk management models in the financial institutions must be tested to a greater extent with regard to how they will function if market conditions change rapidly. var models need to be supplemented with stress tests that capture external events. extensive price fluctuations and changes in pricing dynamics may mean that historical relationships no longer apply. 4 / 5 this is the financial system as we usually refer to it. however, perhaps the greatest difference that has occurred in the financial markets is that households have become a significant agent, even in sweden. this applies first and foremost to households investing in mutual funds and pension companies. however, it applies to an increasing number of households, particularly through the new public pension system. households as a group therefore bear more direct financial risk now. this also raises important questions. are they prepared for this? what role do schools play in providing

william c dudley : the us financial system – where we have been, where we are and where we need to go remarks by mr william c dudley, president and chief executive officer of the federal reserve bank of new york, at the reserve bank of australia ’ s 50th anniversary symposium, sydney, 8 february 2010. * * * today, my remarks will focus on the u. s. and global financial systems : • what went wrong to produce the worst financial crisis in the past 70 years? • where are we now? • what should be our top priorities to ensure that this never happens again? as always, my views are my own and do not necessarily reflect those of the federal open market committee or the federal reserve system. with respect to what went wrong, it is important to recognize that the financial crisis occurred for a host of reasons and, thus, there is no single silver bullet to avoid such crises in the future. at the heart of the crisis was a tremendous buildup in leverage, which our regulatory framework failed to prevent. large amounts of opaque, illiquid, long - term assets were financed by short - term liabilities, and much of this financing occurred in the shadow banking system. when the housing bubble burst, financial asset prices fell and exposed the deep linkages and overall fragility of our system. interbank funding markets seized up, the shadow banking system crumpled and several major financial firms – banks and nonbanks alike – collapsed or approached the brink of collapse. extraordinary interventions of governments and central banks around the world were necessary to prevent a complete collapse of the financial system and the broader economy. as a general matter, regulators did not appreciate beforehand how vulnerable the system was to shocks. in particular, there was a failure to appreciate the important interconnections among the banking system, capital markets, and payment and settlement system. for example, the disruption of the securitization markets caused by the poor performance of highly rated debt securities led to significant problems for major financial institutions. these banks had to take assets back on their books, backstop lines of credit were triggered, and banks could no longer securitize loans, thus increasing the pressure on their balance sheets. this reduced credit availability, which increased the downward pressure on economic activity, which caused asset values to decline further, and in turn, increased the degree of stress in the financial system. moreover, regulators did not adequately understand how the dynamics of the system tended to exacerbate shocks, rather