Capital markets play a comparatively larger role in our financial system. As a consequence, shocks get  2  BIS Review 9/2005  diffused more broadly, and weakness in traditional intermediation channels can be offset by the strength in other channels. Here in the United States, financial innovation has advanced farther and more rapidly than elsewhere. This reflects a regulatory model that is more supportive of competition, of financial innovation, and of market-driven improvements in risk management. The U.S. financial system has embraced opportunities for risk transfer much more rapidly and extensively than other systems. Finally, we have larger and more developed venture capital, private equity, and hedge fund segments within our financial system. These are important sources of liquidity, they add depth and breadth to capital markets, and they play a valuable arbitrage role in reducing or eliminating mispricing in the financial markets. However, no system is invulnerable to stress and crisis. Recent U.S. financial history is not a history of the uninterrupted achievement of ever higher returns. The stock market crash of ’87, the stress that surrounded the Russian default and the collapse of Long Term Capital Management, and the more recent fall in equity prices that came with the collapse of the technology boom all posed significant potential threats to financial stability. In each case, however, with a swift monetary policy response and other actions the process of recovery and repair was reasonably quick. The relative ease with which we managed through these events has reinforced confidence in the stability of the system.
BIS Review 9/2005  3  All this suggests we should complement sensible macroeconomic policy choices with further investments to strengthen the financial system. Let me end by thanking Vernon Jordan and the Economic Club of Washington for providing a forum for thinking about the economic agenda of the country, and for giving me the opportunity to share a few thoughts with you tonight. Thank you. 4  BIS Review 9/2005