At the level of the financial system as a whole, a critical element is the infrastructure of payment and settlement systems, and the body of contract documentation and market practices that underpin financial activity. A resilient infrastructure is one that is capable of withstanding the effects of the failure of a large financial institution. As we speak this objective is being tested by reality.
By reducing the centrality of any one institution to the system’s stability, a stronger infrastructure also contributes to reducing moral hazard. A critical priority in this area is to address weaknesses in the operational infrastructure of overthe-counter derivatives markets. The work undertaken by the NY Fed to this end should be commended by all the jurisdictions.