, exchange - traded market when the trading halt ends? what kinds of problems might domestic specialists and market makers have in restarting if the market has moved away from them during the halt? recent changes to shorten the duration of the circuit breakers likely would ameliorate these concerns somewhat, but the worry remains. - 3another important change in the financial landscape in the years since the crash has been a greater focus on risk management by both market participants and supervisors. developments of new instruments, both on and off exchanges, and of new methods for evaluating risk, have given market participants powerful new tools to allow them to absorb market shocks. similarly, risk management tools have been enhanced at clearing organizations. regulators must respond to these new tools. to fully utilize their benefits, regulators will need to approach regulation and supervision in different ways. a good example is to be found in the approach by banking supervisors to developing a capital requirement for market risk. after initial fits and starts, the basle supervisors ’ committee embraced the concept of using banks ’ internal models as a basis for a capital requirement for market risk. the federal reserve has taken this process of employing new approaches to regulation a step further with its pre - commitment proposal. pre - commitment allows banks to commit to the maximum loss they will experience over the next quarter in their trading portfolio ; this commitment becomes their capital requirement. the proposal gives banks incentives to establish the commitment in a prudent fashion through fines and disclosures if it is violated. economists in the audience will recognize this proposal as an application of an incentive - compatible approach to regulation. i suspect that there are far more areas in our regulatory structure in which incentive - compatible approaches could be implemented. self - regulatory organizations also may find such an approach beneficial, particularly in this era in which sros are being asked to assume more and more regulatory responsibilities. incentive - compatible regulation essentially tries to harness the self - interest of market participants to achieve broader public policy goals. by using such an approach, our overall goal is to make individual market participants more resilient and better able to withstand shocks. this, after all, is the most basic ( and probably the most effective ) protection for firms faced with events such as the 1987 crash. at a macroeconomic level, public policies also should ensure that markets and the economy itself can withstand shocks. while the 1987 crash did not have significant, real economic effects, this is not always the case with stock market crashes. such episodes are generally accompanied by dramatic increases

, resulting in greater reliance on remote work, reductions in nonessential travel, and changes to cre usage and valuations. - 7in downside scenarios, there could be some persistent damage to the productive capacity of the economy from the loss of valuable employment relationships, depressed investment, and the destruction of intangible business capital. a wave of insolvencies is possible. as the federal reserve board ’ s may financial stability report highlighted, the nonfinancial business sector started the year with historically elevated levels of debt. 10 already this year, we have seen about $ 800 billion in downgrades of investmentgrade debt and $ 55 billion in corporate defaults — a faster pace than in the initial months of the global financial crisis. several measures of default probabilities are somewhat elevated. it remains vitally important to make our emergency credit facilities as broadly accessible as we can in order to avoid the costly insolvencies of otherwise viable employers and the associated hardship from permanent layoffs. finally, in keeping with the global nature of the pandemic, foreign developments could impinge on the u. s. recovery. the international monetary fund estimates that real global gross domestic product dropped at an annual rate of about 18 percent in the second quarter after falling nearly 13 percent in the first quarter. while the potential for a fiscal response across the euro area is positive and important, there has been some renewal of tensions between the united states and china, and the outlook for many emerging markets remains fragile. the federal reserve moved rapidly and aggressively to restore the normal functioning of markets and the flow of credit to households and businesses. the forceful response was appropriate in light of the extraordinary nature of the crisis and the see board of governors of the federal reserve system ( 2020 ), financial stability report ( washington : board of governors, may ), https : / / www. federalreserve. gov / publications / files / financial - stability - report20200515. pdf. - 8importance of minimizing harm to the livelihoods of so many americans. with the restoration of smooth market functioning and credit flows, our emergency facilities are appropriately moving into the background, providing confidence that they remain available as an insurance policy if storm clouds again move in. while it is welcome news that 7. 5 million jobs were added in the past two months, it is critical to stay the course in light of the remaining 14. 7 million job losses that have not been restored since the covid