both the united states and countries around the world continue to trend upwards. as a policymaker, solid growth, a strong labor market, and inflation near our target are all exactly what i want to see. paradoxically, it ’ s precisely this sense that things have gotten so much better that worries me most. although we have seen marked improvements in the critical areas of capital, liquidity, and resolution, we have not yet fully addressed the root causes of many of the problems that have plagued the financial sector. i am thinking of not only the excessive risk - taking and leverage in the run - up to the crisis, but also the repeated scandals related to libor, fx, money laundering, sales practices ; unfortunately, the list goes on and on. underlying these scandals is often an inadequate corporate culture, where accountability and ethical conduct have fallen by the 1 / 3 bis central bankers'speeches wayside. the good times we ’ re in can exacerbate these problems in three ways. first, there ’ s a risk of complacency setting in — an “ if it ain ’ t broke, don ’ t fix it ” mentality. second, in a strong economy, the hard numbers that we tend to focus on when examining profits, losses, capital, and liquidity can look like everything ’ s coming up roses, even when an uncomfortable reality lies beneath. and, finally, culture is a long - run investment that takes many years to develop and requires constant reinforcement to preserve. if you let it erode, you can ’ t go to the market and obtain a new “ culture ” overnight. as i mentioned, establishing a more robust regulatory framework was absolutely necessary for a healthier, more resilient financial system. but, it is far from sufficient. the danger we face today is that people may conclude that the hardened defenses are enough, and other supervisory activities around culture, conduct, and governance are superfluous. this feeling that we ’ ve built a strong fortress able to withstand any onslaught may create a mood of complacency and detract attention from the dangers that could be growing within the walls of financial institutions. this problem is aggravated by the fact that the hard numbers studied by regulators and supervisors should look great when the economy ’ s doing well. profits are high and loan losses low when the economy is humming along. but, strong numbers in a strong economy don ’ t give you the full picture. they can ’ t always tell you whether

efficient and more resilient. they should help make markets better able to allocate capital to its highest return and better able to absorb stress. broad, deep and well - functioning capital markets complemented by strong, well - capitalized banks, able to provide liquidity in times of strain, make for a more efficient financial system : one which contributes to better economic growth outcomes over time. there are therefore compelling arguments in favor of a generally positive assessment of the consequences of innovation. does experience provide support for these arguments, or are these changes too new for us to know? the recent changes in credit markets have been dramatic. we have seen rapid growth of structured credit products, credit default swaps and new types of collateralized debt and loan obligations. although these instruments are very new, they are the natural extension of earlier innovations in credit markets. over a long period we have seen innovations ranging from the syndication of bank loans and the direct provision of credit through the capital markets, to the spread of asset - backed securities and products that separate different parts of the payments stream and different dimensions of the risk in a credit obligation into different instruments. these changes have contributed to a substantial reduction in the share of total credit held by banks. they have produced a greater separation or distance between the entity that first arranges a loan and those who end up holding the risk, and more intermediaries in that chain. and they have contributed to a dramatic increase in the number and diversity of creditors to any individual borrower, and a greater capacity to actively trade credit risk. we are now well into the third decade of experience with the consequences of these earlier innovations, and this history offers some useful lessons for evaluating the probable impact of the latest changes in credit markets. the ease with which the u. s. financial system absorbed the substantial scale of corporate defaults that peaked in recent years in 2002 provides some support for the argument that broader and deeper capital markets make the system more resilient. in general, there does not seem to be strong empirical support for the proposition that derivatives increase volatility in financial markets. volatility is not higher where derivatives are most prevalent. credit market innovation does not appear to have resulted in a large increase in leverage in the corporate sector, as some had feared. indeed, nonfinancial corporate leverage in the united states is currently low by recent historical standards. the overall degree of balance sheet leverage by corporations, for example, is higher in some more traditional financial systems than