##izing our efforts now. finally, the practice of risk management must permeate all levels of your institutions, from the executive offices to the trading rooms. the senior management of most large financial institutions now have a variety of sophisticated measures and reports on their firms ’ exposures, making it possible for them to track credit and market risks on a daily basis. but if the insights gleaned from these risk management tools are not incorporated into the operations of the front line, where both trading and credit decisions are made, they will be of little help when they are needed most. this is especially true for this audience because of the constant and rapid evolution of the fixedincome markets. against the backdrop of the budget surplus in the united states, there are expectations for a continued reduction in the supply of u. s. treasury securities. borrowers in a variety of markets – including corporate, agency, and, to a lesser extent, emerging market and mortgage - backed securities – have taken this opportunity to meet investor demand with a greater volume of new issues and larger offering sizes. in addition, expectations for increased investor demand for euro - denominated investments, together with the possibility of reduced participation by speculative and arbitrage trading accounts, are likely to have an effect on spreads of fixed - income securities to treasuries. traders in various fixed - income markets already have begun to note increased levels of spread volatility and expectations for higher absolute spreads relative to historical levels in response to these market dynamics. in this environment, managing market risk will become more difficult as the nature of fixedincome spread products changes. as we recently have learned, spread relationships that had endured for many years can break down suddenly, thereby increasing the already complex task of hedging positions. the increase in the liquidity premium for on - the - run treasury securities last fall resulted in increased hedge - related activity in both the interest - rate swap and treasury futures markets. traders have continued to explore the usefulness of non - treasury fixed - income securities as hedging vehicles. risk managers must, therefore, be especially rigorous in analyzing their firms ’ positions and hedging strategies, particularly when historical experience may not be as predictive a guide as it once seemed to be. i am encouraged by some recent market efforts to improve risk management practices. in lending, the risk - return discipline has been greatly enhanced at some international banks. these institutions have introduced measures to compare credit spreads with historical loss rates on well

institutions is everywhere we look. 3 / 5 bis central bankers'speeches from artificial intelligence to machine learning to natural language processing, there seems to be unlimited potential for more efficient operations, better analytics and more accurate predictions, and more personalized product development. but, how will advances in technology, particularly the adoption of new technologies, such as artificial intelligence, influence the behavioral risks associated with human decision - making? and how does technology introduce new risks that prompt a rethinking of responsibility and customer relationships — especially with regard to privacy and information security? moreover, the disruptive potential of innovation is likely to exacerbate an already complex environment as decision - making becomes more opaque and new roles and responsibilities are introduced. for example, what will effective governance and risk management look like? do artificial intelligence and machine learning introduce new model risk? or operational risk? or conduct risk? what does it mean to supervise or regulate conduct if decisions are made by selflearning algorithms? more broadly, what culture and conduct risk will be embedded in technology - driven financial services in the future? these are hard questions for financial firms and for the official sector, and our approach to the reform of financial industry culture will need to address them. conclusions to return to the beginning of this discussion, culture reform in finance is a complex problem. causal relationships are difficult to isolate, linkages are constantly changing, and accurate prediction is impossible. that does not mean that we are powerless, or that we should accept complexity as an excuse for not trying to foster change. rather, we need a long - term commitment that brings the appropriate tools and approaches to bear. the costs and potential consequences of market failures associated with misconduct risk and culture suggests that it is vitally important that we do so. both financial firms and the official sector should focus attention on investigating and asking questions to better understand the underlying drivers, motivations and risks behind the behaviors of individuals and groups. we should ensure that we look at behaviors and outcomes from multiple perspectives, so we can gain a more robust understanding of the operating environment as a whole. no single perspective is likely to provide all of the insights. experimentation and iteration, use of narrative and story - telling, and innovative methods for harnessing diversity of perspective are thought to be effective ways of tackling complex problems and we all need to innovate, adapt and seek new approaches. 12 i think this focus on conduct and culture is entirely consistent with a traditional supervisory focus on resilience, both