but that they also undertake their own assessment. and i would suggest that the value of independent due diligence on the part of market participants is especially high for newer and more - complex products. encouragingly, we have examples of some firms recognizing the potential risks of broad market disruptions, for example, if there were dramatic and unexpected price movements, or if market illiquidity set in. those firms faring better typically use a number of tools to assess risk positions that draw on differing underlying assumptions. such tools provide management with more information and different perspectives on its potential risk exposures. in the best cases, the tools are flexible enough to allow perspectives on risk to change as business conditions change. for example, they can help identify when risk concentrations are changing as a result of market movements or changes in counterparty positions. liquidity risk management now i wish to consider the third fundamental. liquidity risk management. banks, of course, have been managing expected liquidity demands since the beginning of banking itself. 4 because of its central role in the business of banking, liquidity risk requires rigorous and effective management. naturally, financial institutions both large and small must pay careful attention to liquidity risks, even if they manifest themselves in different ways. regarding recent events, a number of financial firms were surprised by the extent of market disruptions and were forced to take funding actions not anticipated in their contingency funding plans, including some decisions to support affiliates that were based on reputational concerns rather than contractual obligations. at the same time, some institutions were able to avoid more serious problems from these events by aligning treasury functions more closely with risk - management processes and incorporating information from all businesses into global liquidity planning, including actual and contingent liquidity risk. they also made attempts to embed market liquidity premia or apply market liquidity haircuts in pricing models and valuations. 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 banks'own funding liquidity. again, we see the trouble that risk concentrations can cause if an institution has not tried to identify them in advance and take steps to mitigate their effects. as with other risk areas, supervisors suggest extensive use of firm - wide stress testing to ensure the incorporation of low - probability but potentially severe liquidity events that may have the potential to

risk that may not be apparent from using information gleaned from normal times. the ssg report emphasizes this point, but the u. s. banking agencies have also highlighted its importance for smaller - and medium - sized institutions, for example in the guidance on commercial real estate ( cre ) concentrations we issued at the end of 2006. after on - the - ground supervisors reported seeing increases in cre concentrations at many institutions across the country, supervisors examined historical data on risks associated with cre concentrations to provide the basis for developing supervisory guidance. that guidance counseled banking organizations with high cre exposures relative to capital to engage in stress testing to evaluate behavior of those exposures and the impact on capital in adverse circumstances. some financial institutions already employ stress tests, but they should re - check their robustness in light of recent events. for example, banking organizations might benefit from expanding tests to include a wider set of variables to stress and to consider shocks they might have considered much less probable one or two years ago. banks should also remember that past experience is not always predictive of future events, meaning that they should be somewhat creative in designing potential shocks. in cre, for example, banks should move beyond considering single - name risk and include scenarios involving broader risks to the cre sector and how such risk may be correlated in times of stress with other parts of the portfolio. in addition, a number of risk - measurement and risk - quantification challenges relate to valuation practices, particularly with new products. firms should have greater motivation for applying proper valuation practices as part of good risk management. 3 at the center of these practices is the ability to make appropriate judgments about the quality of information being randall s. kroszner, 2007, " innovation, information, and regulation in financial markets, " speech delivered at the philadelphia fed policy forum, philadelphia, november 30. used for valuations. the process usually starts with an initial experimentation phase in which market participants learn a great deal about the product's expected performance and risk characteristics, preferably under different market conditions. conducting due diligence about new products can be costly and take time, but it is usually worth it. unfortunately, in some recent cases new products were developed very quickly and not properly " road - tested. " in observing the valuation challenges, the " trust but verify " adage has equal application. market participants must ensure that they do not make valuation decisions based solely on excessive reliance of external ratings or evaluations,