This calls for strengthening the system’s resilience, in terms of both a better financial infrastructure and stronger shock absorbers in financial institutions. At the level of the infrastructure, a resilient system is one that is able to withstand the effects of the failure of a large financial institution.
By reducing the centrality of any one institution to the system’s stability, stronger infrastructure should also contribute to reducing moral hazard. A critical priority in this area is to address weaknesses in the operational infrastructure of over-the-counter derivatives markets, and the work undertaken by the NY Fed to this extent should be commended by all the jurisdictions.