some large global financial firms that created and held complex credit products. recent events have highlighted the need for risk - management improvements in four fundamental areas : risk identification and measurement, liquidity risk management, governance and risk control, and valuation practices. first, for risk identification and measurement, as all of you here know, good information is the lifeblood of sound risk management. a good risk - management structure is designed to identify the full spectrum of risks across the entire firm, gathering and processing information on an enterprise - wide basis in real time. in short, you cannot manage your risks if you do not know what they are. recent events have illustrated that many large, complex institutions had exposures to subprime mortgages that ran across independent business lines, through off - balance - sheet conduits such as structured investment vehicles, and with respect to numerous counterparties such as monoline financial guarantors. but too few institutions fully recognized their aggregate exposure to risks that turned out to be highly correlated. latent risks from certain complex products and certain risky activities are particularly problematic because for further discussion of plans to strengthen the resiliency of the framework, refer to randall s. kroszner ( 2008 ), " risk management and basel ii, " speech delivered at the federal reserve bank of boston ama conference, may 14. they can manifest themselves when market turbulence sets in. stress testing and scenario analysis are essential because they can reveal potential risk concentrations that may not be apparent when using information gleaned from normal times. the second fundamental area is liquidity risk management. because of its central role in the business of banking, liquidity risk requires rigorous and effective management. recent events have shown that during times of systemwide stress, liquidity shocks can become correlated, so that the same factors that can lead to liquidity problems for the bank's assets or off - balance - sheet vehicles can simultaneously put pressure on a bank's own funding liquidity. because risk concentrations have the potential to manifest themselves during times of stress and at that time adversely affect capital positions, it is particularly important that firms assess how liquidity events could place pressure on capital levels. the third fundamental, governance and risk control, has been a key factor that has differentiated performance across financial institutions during the recent turmoil. firms that operated with the two main ingredients for solid governance and controls – thorough information and strong incentives – have come through this tumultuous period in better condition. lastly, supervisors'comparative reviews

stability of the financial system, of which the banks are a central component. it is natural that in a time of crisis and uncertainty, such as the present, the banks should exercise special caution in their credit policy. moreover, the supervisor of banks and i encourage the banks to be more careful and not to take unnecessary risks – – but this too must be to the right degree. hence it is essential that the banks, which are one of the most crucial elements in the economy's ability to continue to grow, strike the correct balance between their credit policies, which at this time must be cautious, and the needs of the economy, particularly the business sector, for finance. i am not speaking only about the supply of bank credit, but also about its cost. recently the bank of israel reduced the interest rate sharply, with the purpose of helping to lower the cost of credit to the business sector and households. in practice the banks hardly reflected these cuts in the cost of credit they offered. and here again, although in this special period spreads are expected to increase, it is important to maintain a sense of proportion and not act excessively. to put it another way, i repeat what i said to you in previous years, " good bankers can make good loans in bad times, " and i have every confidence that in this hall we have good bankers. as an economist, i would like to explain this issue by noting that this relates to externalities. thus, if all banks significantly tighten their credit policy the economy will grow more slowly, thereby retrospectively justifying the step they took. on the other hand, if every bank takes into account that even slight easing of its credit policy in its marginal decisions will make the economy grow faster, this will retrospectively justify their decision. one of the bank of israel's roles is to help to achieve the right balance. to do this we will, monitor the amount of credit each bank gives, among other things. we see no conflict between our responsibility to support the return of the economy to rapid, sustainable growth, and our responsibility to support the stability and strength of the whole financial system, and specifically of the banking system. the financial crisis is still with us, and is too soon to predict when it will end. we do know, however, that it will end, and the economy will return to growth rates similar to those of the last few years. hence the importance of not wasting valuable time. and i am saying this when the steps formulated