health of banks would raise additional concerns during the course of a crisis. a third principle is that the actions taken to prevent a crisis should not raise the odds of creating more problems in the future. in particular, the problem of moral hazard is a significant concern. if market participants begin to rely too much on regulators and central bankers to manage possible future crises, they may act in a way that has the effect of raising the risk of a financial crisis. for example, they may fail to engage in adequate due diligence when extending credit to other market participants or to maintain adequate capital for the risks they undertake. and they might come to believe that the government possesses more tools and resources than are actually available to shield them from the consequences of poor risk management. the central bank can draw from a menu of actions that involve varying degrees of moral hazard. those actions range from loans to individual institutions that otherwise would not have access to credit, to moral suasion, to open market operations, which allow the markets to distribute credit and should not cause distortions in private - sector decisionmaking. heightened uncertainty is the key characteristic of episodes of financial instability. the central bank may not have any more information than market participants do ; in economic models based on such uncertainties, it is the central bank ’ s willingness to act in the face of uncertainty that differentiates it from other market participants and gives it a positive role to play during financial crises. its willingness to act ameliorates the negative effects of the uncertainty of other market participants about the solvency of counterparties and the status of markets. still, the more information the central bank has, the easier it is for it to choose the best course of action. policymakers want to choose the path with the lowest moral - hazard consequences to leave market participants with incentives to manage risk appropriately. but policymakers are in a difficult position in a crisis. the costs of not acting forcefully enough will be immediate and obvious - - additional disruption to the financial markets and the economy. the costs of acting too forcefully - - of interfering unnecessarily in markets and creating moral hazard - - manifest themselves over a longer period and may never be traceable to a particular policy choice. the natural inclination to take more intrusive actions that minimize the risks of immediate disruption is probably exacerbated by ignorance and uncertainty ; the less you know, the easier it is to imagine bad outcomes and the more reliant you may be on people in the market whose

endorsed the chartering of a dormant bank, referred to as newbank, which would be available for activation to clear and settle u. s. government securities. such activation would occur if an existing clearing bank could not operate and no well - qualified bank stepped forward to purchase its clearing business. similarly, the federal reserve bank of new york, and other regulatory bodies have met with major dealers to strengthen the clearing and settlement infrastructure for the credit derivatives markets. conclusion maintaining the stability of the financial system and containing the systemic risk that may arise in financial markets is central to the federal reserve ’ s mission. recent financial crises within the united states have been well contained. however, with the rapid evolution of the financial system, there is a real possibility that markets are evolving faster than the efforts by market participants to better control risk and to improve the payment and settlement infrastructure. new markets have been tested to some extent - - by the stock market crash, by the widening of spreads in 2001 and 2002, and by the problems of the auto companies and their suppliers. so far, despite some glitches, markets have adapted and changed when deficiencies became obvious. no doubt, markets and institutions have become more flexible and resilient. but perhaps we have also been lucky ; prudence dictates that we identify points of weakness and strengthen them. and, in a rapidly evolving financial system, we need to think creatively about where the weakness might be and how disturbances might be transmitted and amplified. thus, this conference has the potential to contribute materially to our ability to continue to fulfill our most basic mandate : to foster an efficient, stable financial system in support of our nation ’ s economic welfare.