lessons ; i will pick three : • first, the inadequate assessment of counterparty risk, a task fundamental to lending and investment decisions, was in many ways at the core of the problem. key market participants were allowed to grow through greater leverage and alter market terms in crucial ways, largely unchecked by traditional disciplines. commercial banks, for whom judging credit risk is their life blood, were as guilty as any other institutions. traditional practices of creditors of covering their exposures by requiring collateral that was marked - to - market proved insufficient as market values fell, creating a circular and expanding effect. • second, market participants shared an insufficient recognition of the role of market liquidity in risk management. an important point here is the link between credit and market risk, and the fact that market prices can change sharply when key market participants pull out. in the proverbial “ race for the door, ” nearly everyone gets trampled. • the last point i will note relates to the over - reliance by practitioners on quantitative tools. sophisticated measurement techniques can help greatly in providing insights about the dimensions of risk and sources of possible problems. but, like chains, models are only as strong as their weakest links. every model has assumptions that must be tested, and its limitations must be understood. during periods of market stress nearly “ all bets are off ”. business practices change, otherwise stable and expected correlations in market rates and prices disappear, and sometimes panic ensues. well thought out and designed contingency plans and scenario analysis tailored to specific strategies and portfolios are necessary to prepare for these events and to evaluate an institution ’ s risks. that point was brought home last year. measuring market and credit risk in banks fortunately, progress is being made as banking organizations - typically the largest us and foreign institutions - find better ways to quantify their risks. with market risk - the “ easy ” one - the federal reserve and other regulators built on industry practices for measuring a bank ’ s “ value at risk ” when implementing a new regulatory capital standard for the banking system last year. basing capital requirements on a bank ’ s internal calculations of its largest expected daily trading loss at a 99 % confidence level was an important step, we thought. it produced a standard far more sensitive to changing levels of risk than was the earlier approach. it provided a reasonably consistent standard among banks and also was compatible with current management practice of the world ’ s more progressive banks. last year ’ s events have not changed our view

ben s bernanke : monetary policy and the global economy speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the department of economics and sticerd ( suntory and toyota international centres for economics and related disciplines ) public discussion in association with the bank of england, london school of economics, london, 25 march 2013. * * * i ’ m very pleased to participate in this conference honoring my good friend mervyn king. as mervyn noted in a recent speech in new york, we had adjoining offices at mit as young academics and never imagined that 30 years later we still would be colleagues – as central bankers. 1 now, as then, i value his advice and insight. the topic of this session is lessons learned from the financial crisis. for me, perhaps the central insight is that the recent crisis, despite its many exotic features, was in fact a classic financial panic – a systemwide run of “ hot money ” away from assets whose values suddenly became uncertain. in that respect, the crisis was akin to many other financial crises faced by governments and central banks – including that most venerable of central banks, the bank of england – over the centuries. the response to the crisis likewise followed the classic prescriptions of liquidity provision, liability guarantees, asset evaluation and disposition, and recapitalization where necessary. although the crisis had classic features, to a significant extent it took place in a novel institutional context, making diagnosis and response more challenging : for example, in the united states, collateralized wholesale funding rather than conventional bank deposits constituted the hot money, and run pressure was experienced not only by banks but by diverse other institutions, such as structured investment vehicles. in addition, the scale and complexity of globalized financial institutions and markets made it difficult to predict how the crisis might spread or to coordinate the response. one of the few positive aspects of this episode was the extraordinary degree of international cooperation achieved among policymakers, including the bank of england and the federal reserve, in responding to the crisis. because i have developed these themes in some detail elsewhere, i thought today i would tackle a different and more recent issue that has arisen in the aftermath of the crisis – the issue of whether, in the widespread easing of monetary policies, we are seeing a competitive depreciation of exchange rates. 2 like other aspects of the crisis, the notion of competitive depreciation has strong classical antecedents, particularly in relation to the global great