These are important questions that regulators and supervisors are asking in the Basel Committee and in the Financial Stability Forum, and I represent the Federal Reserve System on both of these bodies. Naturally, these types of questions underscore the importance of stress testing and scenario analysis that focus on market-wide events.
Such stress tests would include the potential for key counterparties to fail or suffer difficulty at the same time, for market liquidity to erode and remain low for some time, and for market participants to view the bank itself as an impaired counterparty.