relatively little compensation for risk, thus weakening market discipline ; in addition, creditors will not have much incentive to monitor the firms ’ risk - taking. as a result, as predicted by principal - agent theory, firms thought to be too big to fail tended to take on more risk, as they faced little pressure from investors and expected to receive assistance if their bets went bad. this problem is an example of what economists refer to as moral hazard. the resulting buildup of risk in too - big - to - fail firms increased the likelihood that a financial crisis would occur and worsened the crisis when it did occur. one response to excessive risk - taking is stronger oversight by regulators, and the recent legislation and the rules and procedures being developed by the federal reserve and other agencies will subject systemically critical firms to tougher regulatory requirements and stricter supervision. the federal reserve has also been involved in international negotiations to raise the capital and liquidity that banks are required to hold. however, the problem of toobig - to - fail can only be eliminated when market participants believe authorities ’ statements that they will not intervene to prevent failures. if creditors believe that the government will not rescue firms when their bets go bad, then creditors will have more - appropriate incentives to price, monitor, and limit the risk - taking of the firms to which they lend. the best way to achieve such credibility is to create institutional arrangements under which a failure can be allowed to occur without widespread collateral damage ; if failures can take place more safely, the authorities will no longer have an incentive to try to avoid them. the financial reform legislation took an important step in this direction by creating a resolution regime under which large, complex financial firms can be placed in receivership, but which also gives the government the flexibility to take the actions needed to safeguard systemic stability. this new regime should help restore market discipline by putting a greater burden on creditors and counterparties to monitor the risk - taking of large financial firms. the insights of economists proved valuable to policymakers in many other contexts as well : in the setting and oversight of bank capital standards, in the decision to provide the market with extensive information gleaned during the bank stress tests in the spring of 2009, in the design of the fed ’ s liquidity facilities for nondepository institutions, in the analysis of the collapse of the securitization market, and in the measures taken to protect consumers from deceptive or inappropriate lending, to name a few. many of the key ideas

and effective execution of the plan, the federal reserve provides several different payment services, such as fedwire, ach, check, and cash ; therefore, the banking industry is not totally dependent upon any single system for executing payments. alternatives are available in the event of a disruption in a segment of the electronic payment system. we recognize that despite their best efforts, some depository institutions may experience operating difficulties, either as a result of their own computer problems or those of their customers, counterparties, or others. these problems could be manifested in a number of ways and would not necessarily involve funding shortfalls. nevertheless, the federal reserve is always prepared to provide information to depository institutions on the balances in their accounts with us throughout the day, so that they can identify shortfalls and seek funding in the market. the federal reserve will be prepared to lend in appropriate circumstances and with adequate collateral to depository institutions when market sources of funding are not reasonably available. the terms and conditions of such lending may depend upon the circumstances giving rise to the liquidity shortfall. our preparations for possible liquidity difficulties also extend to the foreign bank branches and agencies in the u. s. that may be adversely affected directly by their own computer systems or through difficulties caused by the linkage and dependence on their parent bank. such circumstances would necessitate coordination with the home country supervisor. moreover, consistent with current policy, foreign central banks will be expected to provide liquidity support to any of their banking organizations that experience a funding shortfall. closing remarks as i indicated at the outset, the federal reserve views its year 2000 preparations with great seriousness. as such, we have placed a high priority on the remediation of date problems in our systems and the development of action plans that will ensure business continuity for the critical financial systems we operate. while we have made significant progress and are on schedule in validating our internal systems and preparing for testing with depository institutions and others using federal reserve services, we must work to ensure that our efforts remain on schedule and that problems are addressed in a timely fashion. in particular, we will be paying special attention to the testing needs of depository institutions and the financial industry and are prepared to adjust our support for them as required by experience. we believe that we are well - positioned to meet our objectives and will remain vigilant throughout the process. as a bank supervisor, the federal reserve will continue to address the industry ’ s preparedness, monitor progress, and target for