And if this situation were to persist, overall macroeconomic performance could be threatened. In an earlier period of financial turmoil, this phenomenon was termed "fear-induced disengagement." 6 Assessing financial stability The Federal Reserve is well positioned to monitor developments in financial markets and assess the quality of market functioning.
The core functions of financial institutions – creating, distributing, and owning risk – have remained the same, but the type of firm performing the various functions appears to have changed dramatically. This conflation of roles has the potential to alter some incentives in the credit extension process.