i j macfarlane : what is the biggest risk to financial and economic stability? introduction by mr i j macfarlane, governor of the reserve bank of australia, to the panel discussion on financial stability - consilium, coolum, 9 august 2003. * * * from the perspective of a developed oecd ( organisation for economic co - operation and development ) economy, what is the biggest risk to financial and economic stability? i suspect that at various stages over the past few decades, we would have come up with different answers. for much of the period, we would point to our apparent inability to control inflation, or to oil price shocks, or to governments ’ inability to control their finances. at other times, people would point to more purely financial vulnerabilities, such as fragile under - capitalised banking systems, excessive short - term international capital movements, poor prudential regulation or inadequate systems of governance. others would point to the tendency of governments, central banks or the imf ( international monetary fund ) to bail out failed systems and so create a moral hazard, as the main risk to future stability. you can make a good case for most of the candidates i have put forward. however, i think there is one other risk that we have become aware of that now seems to be larger than those i have listed above. i refer to asset price booms and busts. while the existence of these was recognised, they were usually regarded as historical curiosities, or at least very low frequency events ( e. g. once or twice a century ). the us experience in 1929 and its aftermath was the classic case until recently. but now that we have seen the world ’ s second largest economy - japan experience one in the 1980s, and the world ’ s largest one - the united states - experience one in the 1990s, they seem to be not quite so ‘ low frequency ’. we should also not forget that many other economies, including our own, experienced an asset price boom and bust in the late 1980s and early 1990s. although they were not of the size of the japanese one, or of the international significance of the us one, they were very costly to their respective economies. what can be done about this tendency of otherwise well - managed economies to exhibit periodical asset price booms and busts? one response would be to give the task to monetary policy, so you will probably expect me to expound on this subject. unfortunately, i must disappoint

for release on delivery 10 : 00 a. m. edt may 19, 2021 statement by randal k. quarles vice chair for supervision board of governors of the federal reserve system before the committee on financial services u. s. house of representatives may 19, 2021 chairwoman waters, ranking member mchenry, members of the committee, thank you for the invitation to testify today. last may, my colleagues and i came before you — in a virtual format for the first time — discussing our actions to maintain a strong banking sector as a source of support for consumers, households, and businesses. i ’ d like to thank the committee for its flexibility and its commitment to ongoing, open dialogue, especially in the course of such a challenging year. my remarks one year ago came after the onset of sudden and pervasive financial stress. 1 early turmoil in overseas financial markets quickly crossed borders and, within days, had reached almost every asset class and corner of the financial system. from the beginning, the causes of this strain were clear, rooted in the policy measures taken to address the outbreak of covid - 19. but at that time, the full implications of the covid event remained unclear, and the costs would continue to mount. the american economy and banking sector then remained at the edge of the storm, with one wave of stress behind us and others yet to come. today, the storm waters are receding. the economy is beginning a strong recovery, which owes much to an extraordinary, coordinated, and sustained campaign of support, by both congress and the federal reserve, that helped clear a path to the other side of the covid event. as the federal reserve ’ s recent reports detail, banking organizations have remained an important source of strength in this recovery. 2 entering the covid event, the banking system randal k. quarles, “ supervision and regulation report ” ( testimony before the committee on banking, housing, and urban affairs, u. s. senate, washington, d. c., may 12, 2020 ), https : / / www. federalreserve. gov / newsevents / testimony / quarles20200512a. htm. board of governors of the federal reserve system, supervision and regulation report, april 2021 ( washington : board of governors, april 2021 ), https : / / www. federalreserve. gov / publications / files / 202104 - supervision - andregulation - report. pdf