to address this risk? some policy makers have argued that public disclosure of information could help reduce the risk of future systemic financial crisis, by preventing the buildup of " excessive " leverage or concentrations of risk. the principal focus of attention, as in the immediate wake of the failure of long term capital management, has been on two quite different types of public disclosure. the first is information that would make it easier to evaluate the overall leverage or risk profile of major hedge funds and their counterparties, and thereby judge their vulnerability to a sharp movement in asset prices. the second is information about the actual positions of individual funds or institutions : information that would make it easier to identify concentrated exposures to specific risk factors, and thereby assess more accurately the potential impact of the failure of a major fund or institutions on the market as a whole. these pose very different challenges and offer different benefits. there are a number of crude measures of overall risk profile that, if disclosed to the market, would give counterparties information they do not now typically get about the risk of failure of the fund. one example is data on the size of daily variations in net asset value, var, or profit and loss over the previous quarter. this type of information would not reveal proprietary information about trading strategies or otherwise create substantial disincentives to risk taking. although these would provide some information on the overall risk profile of the fund, they would be lagging indicators, and they would carry the usual risk of providing false comfort in some circumstances and excessive concern in others. adopting such measures would give the institutions that provide financing and leverage to hedge funds a somewhat greater capacity to judge their direct risk to those funds. but that is not their principal challenge. the institutions already know the positions they are financing, and they can use the usual range of tools to measure the potential exposure, net of collateral, in those positions. and where they do not feel they have adequate information to evaluate the overall risk profile of the fund, they can manage that risk by taking less exposure, by requiring more margin, or by building a greater cushion of protection against overall risk. so the potential gains from a disclosure regime of this type would be limited, at least as compared with the cost of trying to put such a regime in place on the global scale that would be necessary to make it effective. by far the greater challenge is to assess the potential impact of the failure of a major hedge fund on the firm's other exposures and other counterparties. this is

, or when markets are particularly vulnerable to a more acute decline in liquidity. in this sense, liquidity is like confidence. and, like confidence, liquidity plays a critical role both in establishing the conditions than can lead to a financial shock, and in determining whether that shock becomes acute, threatening broader damage to the functioning of financial and credit markets. what role can policy play in reducing the vulnerability of markets to this type of dynamic? of course, central banks have a range of instruments they can use in the event of a crisis. by injecting liquidity into the system, and thus strengthening confidence, they can reduce the risk that temporary liquidity problems will result in default by otherwise solvent institutions, or damage to the payment system or credit process. but what can policy makers do ex ante to limit the risk of crisis? the most powerful instruments we have are those that affect the strength of the basic, fundamental shock absorbers in the financial system. when capital and liquidity cushions at the major institutions are strong, then markets as a whole are less vulnerable to the adverse spiral of asset price declines, increased volatility, and declining liquidity. and when the operational infrastructure is robust, markets will be able to absorb larger shocks and sharper changes in risk appetite with less risk of broader contagion. these shock absorbers are substantially stronger today than they have been in even in the relatively recent past. these issues are the principal focus of day - to - day supervision and market oversight in the major financial centers around the world. the federal reserve is actively involved in a range of efforts, working closely with the primary supervisors of the major global financial institutions and the critical parts of the financial infrastructure, to encourage further progress. in this context, we are working to put in place a stronger regulatory capital regime and to strengthen the capacity of firms to absorb losses in stress conditions. we are encouraging more sophisticated and more conservative management of credit exposures in over - the - counter ( otc ) derivatives and structured financial products, as well as of exposures to hedge funds. and we are encouraging a range of efforts to modernize the operational infrastructure that underpins the otc derivatives markets, and to improve the capacity of market participants to manage adversity. these efforts will all contribute to a more resilient system, one that is better able to withstand the effects of a major decline in asset prices or deterioration in credit. are there other tools that policy makers and market participants could use