it is very difficult to predict in advance of a crisis which parts of the firm will be under greatest stress, what geographical regions may be affected most severely, and what the condition in various markets and economies will be, as well as the stability of counterparties and similarly situated institutions. furthermore, governments may be see basel committee on banking supervision, cross - border bank resolution group ( 2009 ), report and recommendations of the cross - border bank resolution group ( basel : basel committee, september ), and financial stability forum ( 2009 ), fsf principles for cross - border cooperation on crisis management ( basel : fsf, april 2 ). ( the financial stability forum subsequently was renamed the financial stability board. ) understandably reluctant to rely too much upon a wind - down plan developed by an internationally active financial firm that so mismanaged itself that it is on the brink of failure, placing other institutions at peril. finally, management of an institution can be expected to seek to preserve as much value for shareholders as possible in its planning, whereas the supervisors'objective in a crisis is to achieve an orderly resolution, which will often entail winding down or restructuring the insolvent firm in ways that effectively wipe out shareholder interests. the living will requirement could be broadened so as to make it into a potentially very useful supervisory tool for healthy firms, as well as a resource in the event that resolution became necessary. under this approach, the firm would, in addition to developing a resolution plan, be required to draw up a contingency plan to rescue itself short of failure, identify obstacles to an orderly resolution, and quickly produce the information needed for the supervisor to orchestrate an orderly resolution. these plans will need to evolve as the organization's business and economic conditions evolve and will need to become a regular part of normal supervisory processes. a living will of this type could remove some of the uncertainty around a possible resolution. it would force firms and their supervisors to review contingency plans regularly. as part of their ongoing oversight, supervisors could target the areas where a firm's planning falls short of best practice. indeed, by focusing on the legal, contractual, and business relationships among the firm's subsidiaries, this requirement could yield significant benefits for prudential supervision in normal times, quite apart from its benefits in a stressed environment. central to the success of a living will as a supervisory tool is the quality of information it would make available in a crisis. some of the information would be relatively

achieve improved macroeconomic performance. during this period of turmoil, the fed has increasingly been called upon to be a steadying influence. when appropriate, and after due consideration, the fed has chosen to employ its balance sheet, authority, and credibility to lessen the harm to the real economy. that is our role and responsibility. but we should resist the temptation to play a larger role than statutorily mandated or economically prudent. good - faith pleas for relief in the name of financial stability will continue for some time, and the fed should carefully consider the facts and circumstances. that period of consideration may require us, however, to be cognizant of the perils of popularity and decline to take action, including when it may be more properly considered or better addressed by the fiscal authorities. so it is, financial stability has become the watchword of the global economy. but its frequency in our lexicon should not be confused with clarity as to its meaning or the timing of its achievement. nor should it be construed as the sole beacon of policy. what is financial stability? it is perhaps easier to define by its absence. 10 financial instability is a situation in which stresses on markets and institutions are sufficiently severe that the intermediation between borrowers and savers is threatened, with the prospect of significant risks to the broader economy. financial stability, moreover, should not be equated with an absence of volatility. if some unexpected news arrives, markets adjust, often sharply. generally, these adjustments are not cases of financial instability. a healthy and wellfunctioning financial system will reward well - managed risk - taking and punish imprudence, sometimes harshly. such outcomes are not pretty and can be marked by large and pervasive losses, but most do not necessitate extraordinary policy interventions. nonetheless, circumstances of pronounced financial instability, while rare, do arise. in the most recent episode, we policymakers deemed it necessary to take significant actions to mitigate the risks to the real economy. financial firms became highly protective of their balance sheets and sought to disengage en masse from the provision of credit. the fed responded, introducing lending facilities designed to support liquidity in overnight and shortterm funding markets. with the approval of the congress, treasury also took significant action, making large capital injections directly into banks to help jump - start the credit intermediation process. this action was supplemented by various forms of government guarantees. but bold official policy