preceded this crisis, but they may have amplified the dimension of the boom and they were important to how the crisis unfolded and to how policy has responded. in many respects, financial innovation over this period outpaced the system ’ s capacity to measure and limit risk, to manage the incentive problems in the securitization process and to provide for an appropriate degree of transparency through meaningful disclosure. once the performance of the underlying assets began to deteriorate, these weaknesses in the system magnified the uncertainty about the scale of potential losses and added to the intensity of pressures that accompanied the crisis. the growth in leverage and liquidity risk outside of banks made the system vulnerable to a sharp erosion in liquidity, but without the protections established to limit the risk of classic bank runs. the large share of financial assets held in institutions without direct access to the fed ’ s traditional lending facilities complicated the ability of our traditional policy instruments to contain the damage to the financial system and the economy. this crisis provides a stark illustration of how hard it is for a supervisory and regulatory framework designed principally around banks to contain the impact of financial shocks in a manner that mitigates the risks to the broader economy. elements of reform what broad principles and objectives should guide reform? i would like to outline some of the key elements of a stronger framework of regulation and oversight, and identify some of the harder questions we will need to answer to implement this framework. these questions are more fundamental than questions of the allocation of responsibility across supervisors, market regulators and central banks and thus must be resolved before turning to those questions. i focus here on the issues related to financial stability, and do not try to address the equally important areas of consumer and investor protection, market integrity or the role of the government - sponsored entities in housing. i believe the most important imperative is to build a financial system that is more robust to very bad outcomes and more resilient to shocks. this means ( 1 ) a system in which the major institutions are less vulnerable to shocks ; ( 2 ) a system that is less vulnerable to margin spirals and a generalized pull - back in liquidity and funding ; and ( 3 ) a system that is more able to withstand the effects of failure of a major financial institution. looking past the immediate crisis, a more resilient system must be built on stronger and better designed shock absorbers, both in the major institutions and in the infrastructure of the financial system. at the level of the financial institution, the key financial shock

##2k problem. this is reflected in money market rates. norges bank ’ s instruments are effective in terms of rapidly supplying large quantities of liquidity if this should prove necessary. the central bank will supply sufficient liquidity to the money market in connection with the year 2000, as we normally do throughout the year. should it prove necessary to depart from the collateral requirement, a risk premium will be applied. 8. conclusion to sum up and conclude : norges bank places emphasis on promoting financial stability. as a result of the banking crisis, norges bank has strengthened its surveillance of the financial sector. in cooperation with other public authorities in norway and internationally, we will contribute to developing framework conditions for financial institutions and financial markets that reduce the likelihood of future crises. a priority task is to enhance the resilience of the payment and settlement system in the face of a crisis situation. it is still likely that financial crises will recur. in the last 20 years, three quarters of imf member countries have experienced a banking crisis. not even a perfectly healthy macroeconomic policy and the development of an effective supervisory system constitute a guarantee against crises if the banks fail to exercise sound banking. herd mentality and over - optimism that are rapidly reversed seem to be a recurrent phenomenon. systems and contingency schemes are therefore required to handle crises in order to limit the adverse effects and reduce the risk of recurrence. the most important preventive measure is to promote sound banking. subject to the statutory rules applying, the responsibility for sound banking primarily rests with the banks themselves.