by Calculated Risk on 3/01/2006 01:14:00 AM

The Washington Post reports: Fed Official Warns of Changes

A top Federal Reserve official warned yesterday that the U.S. financial system is evolving faster than the ability of investors, lenders and regulators to evaluate and manage the risks involved.

... he said, "there are aspects of the latest changes in financial innovation that could increase systemic risk" -- the danger that the losses of a few investors could set off a chain reaction of events that disrupts the broader financial system, as did the near-collapse of a heavily leveraged hedge fund in 1998.
...
"The complexity of many new instruments and the relative immaturity of the various approaches used to measure the risks in those exposures magnify the uncertainty involved," he said.
...
Many analysts have worried that the Fed's success in managing ... financial crisis ... during Alan Greenspan's 18-year tenure as Fed chairman have lulled many investors into underestimating financial risks.
...
Geithner said recent financial innovations have helped the economy absorb various financial shocks, "but they have not eliminated risk." He added, "They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial system from the effects of such a failure."

Geithner's speech: Risk Management Challenges in the U.S. Financial System