positions going into the period of stress. this may be the typical experience in the future ; one hopes so, and the regulators are working in various ways to make it so - through the basel ii effort as one prominent example. but, unfortunately, we cannot count on that outcome. crises remain a threat, and the increasing complexity of the financial system and of the laws governing it are affecting how crises are likely to be managed. the greater variety and utilization of risk transfers will put new demands on information flows to answer the questions i posed earlier. the growing reach of major financial institutions across industry boundaries and national borders is increasing the necessity for cooperation and coordination among regulators here in the united states and around the world. at the same time, institutions manage risk on an integrated basis and understanding and dealing with the effect of financial instability and the feedback of their actions on markets and other institutions will call for an integrated overview. no institution can be “ too big to fail. ” handling the failure of a large, complex organization - imposing the costs of failure on management, shareholders, and uninsured creditors while minimizing the effects on the wider economy - will certainly be complicated. but we cannot allow the public interest in containing moral hazard to be held hostage to complexity. indeed, u. s. law requires that we do not. in dealing with the failure of an insured depository institution, the authorities are required to use the method that yields the least cost to the insurance fund unless they find that the least - cost method entails systemic risk and that a more costly method would mitigate that risk. in setting out a procedure to follow in such circumstances and holding authorities explicitly accountable for their decisions against a reasonably clear set of objectives, the law puts a premium on preparing for the type of analysis that will be needed. the federal reserve is in continuing conversations with other agencies on approaches to these issues. the growing complexity of institutions elevates the importance of avoiding crises, rather than managing them. we must continue to adapt our supervision of financial institutions and payment systems to encourage and reward good risk management and enhance market discipline.

credit, private parties may be persuaded that avoiding such an outcome is in their self - interest. but central banks must be careful that moral suasion is not perceived as coercion or an implied promise of official indemnification for private losses. if the central bank concludes that it must lend to individual depository institutions to avoid significant economic disruption, in most situations any such loans should be on terms sufficiently onerous to discourage reliance on public - sector credit. the federal reserve tries to find the approach that reduces the odds on economy - wide spillover effects while interfering as little as possible with the market and allowing people and institutions to suffer the consequences of decisions that turn out to be bad. nearly every major bout of financial instability has called for some degree of monetary easing - most often only temporarily until the threat of the low - probability but high - cost economic disruption has passed. other tools have been used occasionally, and an assessment of their costs and benefits has depended on the nature of the crisis. moral suasion was an element in dealing with the panicky private - sector actions associated with the sharp and apparently self - feeding market price breaks of 1987 and 1998. lending through the discount window helped to promote an orderly unwinding of distressed institutions in the period of prolonged and widespread problems among important intermediaries in the late 1980s and early 1990s. and such lending was crucial in getting liquidity to the right places after the disruption of 9 / 11. in each case, the nature of the response has depended on the state of the economy and financial markets before the event. when the economy is strong and financial systems robust, a shock to the financial system is less likely to feed back on the economy. information flows in a crisis clearly, judgments in a crisis must balance a number of difficult considerations in rapidly changing circumstances in which up - to - date, accurate, information is scarce. our experience suggests some of the key questions that might arise when confronting a crisis : how large is the financial disruption - how many firms or market participants are involved and how large are they? what is the potential for direct and indirect contagion, both domestic and international? who are the counterparties and what is their exposure? who else has similar exposures and might be vulnerable to further changes in asset prices that could be triggered by a firm ’ s failure and unwinding of positions? how long are the financial disruptions likely to last? are substitute providers of financial services available, and how easily and quickly