Before proceeding, I must indicate that the views I am about to express are my own and do not necessarily reflect the views of other members of the Board of Governors or the Federal Reserve more generally. Few subjects are more important for central bankers than the efficiency and stability of our financial system. The term "financial instability" is often poorly defined.
Some argue that financial instability occurs when imperfections or externalities in the financial system are substantial enough to create significant risks for real aggregate economic performance. Others argue that financial stability is potentially absent, or that financial instability is on the horizon, when they perceive that some important set of financial asset prices seem to have diverged sharply from fundamentals.