##economic interventions will carry less potential for increasing moral hazard than would the discount window lending that was a prominent feature of crisis management when depositories funded more credit. market - intermediated finance also requires us to live with less control and less knowledge than we had when banks were dominant. greater uncertainty about where risks are lodged is the flip side of better dispersion of those risks, especially to less regulated sectors, and of more resilience of the whole system. gathering additional information about the risk profiles of currently less regulated institutions is unlikely to yield insights that can be acted upon and may create a false sense of comfort among market participants, which could make the system substantially more risky. we need to have confidence in the invisible hand. but confidence does not mean blind faith, a thought that brings me to what we can productively do to reduce systemic risks within the boundaries that i just described. although credit derivatives and other derivatives have facilitated the dispersion of risk, the mechanisms for carrying out this function are highly dependent on a small number of institutions that are critical to the functioning of the markets. these institutions are the principal dealers in the otc derivatives markets and often also among the leading clearing firms for exchange - traded derivatives. they also originate securitized assets, and provide financing to other originators, and often provide financing to the buyers of those assets, including buyers of the riskiest tranches. if their ability to perform these functions were impaired when a shock hit the economy or the financial markets, the ability of the buyers and sellers to manage their positions, provide trading liquidity, and facilitate stabilizing financial flows would in turn be impaired. consequently, our efforts to manage the potential for systemic risk focus on these core institutions, nearly all of which already are subject to prudential supervision. in light of the possibility of unusual asset price movements, which i discussed earlier, we need to encourage these institutions to practice robust enterprise - wide risk management. a critical aspect of such risk - management efforts is the use of stress tests across the various aspects of their businesses that allow them to ascertain and appropriately limit their market and counterparty exposures in a scenario in which credit spreads widen rapidly and asset market liquidity decreases markedly. good risk management can limit potential losses under many circumstances, but these institutions will still be vulnerable to major unexpected events, and their viability will depend on their capital cushions. as a consequence, we also need to strengthen the connection of capital to risk by moving forward with

interest - only loans. finally, this supervisory tool has been used to urge creditors to work with homeowners who are unable to make mortgage payments. reviews of non - depository subprime mortgage lenders this supervisory guidance, together with market forces, has contributed to adjustments in subprime lending practices, particularly by federally supervised banks. however, we are all keenly aware that ongoing issues in the subprime market require additional action to address the very real and significant impact that rising delinquencies and foreclosures are having on individuals and communities. various outreach and research efforts by the federal reserve have deepened our understanding of the issues and revealed that many of the most - worrisome practices are found in credit extensions by nondepository lenders and brokers, many of which are outside the supervisory scope of the federal banking agencies. the federal reserve board is committed to deterring abusive lending and ensuring that all lenders are complying with consumer protection laws. to that end, the board has taken the lead in launching a pilot project involving consumer compliance reviews of selected nondepository lenders that have significant subprime mortgage operations. the board ’ s partners in the project are the office of thrift supervision, the federal trade commission, and the states ( through the conference of state bank supervisors and the american association of residential mortgage regulators ). as part of this project, the board will examine nonbank subsidiaries of bank holding companies for compliance with laws that the federal reserve enforces. these laws include the truth in lending act, the equal credit opportunity act, the home ownership and equity protection act, the real estate settlement procedures act, and the home mortgage disclosure act. the other partners in the project will conduct similar reviews of nondepository subsidiaries of thrift holding companies, independent mortgage lending companies, and mortgage brokers doing business with these entities. the partner agencies will share information about the examinations, review the lessons learned, and seek additional ways to cooperate to ensure effective and consistent supervision of these entities. at the conclusion of the reviews, the agencies will analyze the results and determine whether the project is to be continued and, if so, what the focus of future reviews will be. regulatory initiatives in addition to exercising supervisory authority, the federal reserve is using its regulatory power to review the truth in lending act ( tila ) regulations, with the intent of making the disclosures that help consumers understand their loan terms more effective. to be effective, disclosure