Remarks by Mr Roger W Ferguson, Jr, Vice Chairman of the Board of Governors of the US Federal Reserve System, at the Institute of International Finance Spring 2006 Membership Meeting, Zurich, 31 March 2006.
I am pleased to participate in the panel discussion at this Institute of International Finance Spring 2006 Membership Meeting. As I will make clear, I think meetings of this sort, by contributing to the dialogue between the leaders of financial institutions and policymakers, can play a critical role in increasing mutual understanding and improved decisionmaking by both groups. The financial environment can best be described as "dynamic." Financial innovations have been coming at a rapid pace in recent years; new financial products have been introduced and are expanding rapidly, and new institutions have taken on prominent roles in key financial markets. Financial technologies have improved as well and have the potential to contribute to the efficiency and resilience of financial markets. However, with new products and institutions comes the potential for new risks to financial stability. As a result, we policymakers are likely to be torn. On the one hand, we may want to encourage welfare-improving innovations by limiting the extent of regulation. On the other hand, because of possible systemic concerns, some policymakers may want to regulate innovative instruments and institutions even as they are developing. In my view, policymakers can best balance these goals by expending the effort needed to understand financial innovations as they emerge and by avoiding overregulation that may stifle valuable innovations.
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