Stanley Fischer: Financial sector reform - how far are we?
Text of the Martin Feldstein Lecture by Mr Stanley Fischer, Vice Chair of the Board of
Governors of the Federal Reserve System, at the National Bureau of Economic Research,
Cambridge, Massachusetts, 10 July 2014.
* * *
Although the recession in the United States that started in December 2007 ended in June
2009, the impact of the Great Recession, which began when Lehman Brothers filed for
bankruptcy on September 15, 2008, continues to be felt in the United States, Europe, and
around the world.1 After the bankruptcy of Lehman Brothers, policymakers, working through
the G-20, quickly reached agreement on the macroeconomic policies needed to minimize the
damage done by the crisis. For their part, central bankers and supervisors of financial
systems, working through the newly established Financial Stability Board (FSB) and the
newly enlarged Basel Committee, rapidly developed a program for reform of the financial
sector and its supervision.
In this lecture I will ask how much has been achieved so far in implementing the ambitious
financial sector reform program that was widely agreed at the early stages of the global
financial crisis. From among the range of topics in which financial sector reforms have been
instituted since 2008, I focus on three: capital and liquidity for banks and other financial
institutions, macroprudential supervision, and the problem of too big to fail (TBTF).
What happened?
The 2007-09 crisis was both the worst economic crisis and the worst financial crisis since
the 1930s. Following the collapse of Lehman Brothers, many thought that we were about to
witness a second Great Depression. That did not happen, in large part because
policymakers had learned some of the lessons of the Great Depression. Nonetheless, the
advanced economies were put through severe economic and political tests. Fortunately,
policymakers succeeded in dealing with the situation better than many had feared they
would; unfortunately, we are still dealing with the consequences of the collapse and the steps
necessary to deal with it.
Former Congressman Barney Frank has been heard to say that economists have a
wonderful technique, that of the counterfactual, to analyze what has been achieved by
preventing disasters, but that real people base their judgments more on the current state of
the world than on disasters that have not happened. True as that may be, we should from
time-to-time allow ourselves to recognize that as bad as the Great Recession has been, it
would have been much worse had policymakers not undertaken the policies they did - many
of them unorthodox and previously untried - to deal with the imminent crisis that confronted
the United States and global economies after the fall of Lehman Brothers. And for that, we
owe them our gratitude and our thanks.
The financial sector reform program
Several financial sector reform programs were prepared within a few months after the
Lehman Brothers failure. These programs were supported by national policymakers,
including the community of bank supervisors.
The programs - national and international - covered some or all of the following nine areas:2
(1) to strengthen the stability and robustness of financial firms, "with particular emphasis on
standards for governance, risk management, capital and liquidity"3 (2) to strengthen the
quality and effectiveness of prudential regulation and supervision; (3) to build the capacity for
undertaking effective macroprudential regulation and supervision; (4) to develop suitable
resolution regimes for financial institutions; (5) to strengthen the infrastructure of financial
markets, including markets for derivative transactions; (6) to improve compensation practices
in financial institutions; (7) to strengthen international coordination of regulation and
supervision, particularly with regard to the regulation and resolution of global systemically
important financial institutions, later known as G-SIFIs; (8) to find appropriate ways of dealing
with the shadow banking system; and (9) to improve the performance of credit rating
agencies, which were deeply involved in the collapse of markets for collateralized and
securitized lending instruments, especially those based on mortgage finance.
Rather than seek to give a scorecard on progress on all the aspects of the reform programs
suggested from 2007 to 2009, I want to focus on three topics of particular salience
mentioned earlier: capital and liquidity, macroprudential supervision, and too big to fail.
Capital and Liquidity Ratios
At one level, the story on capital and liquidity ratios is very simple: From the viewpoint of the
stability of the financial system, more of each is better.
This is the principle that lies behind the vigorous campaign waged by Anat Admati and Martin
Hellwig to increase bank capital ratios, set out in their book, The Bankers' New Clothes:
What's Wrong with Banking and What to Do about It, and in subsequent publications.4
But at what level should capital and liquidity ratios be set? In practice, the base from which
countries work is agreement among the regulators and supervisors who belong to the Basel
Committee on Banking Supervision (BCBS). At one time the membership consisted of the
members of the G-10 plus Switzerland. It now includes the membership of the G-20 plus a
few other countries.5
Following the global crisis, the BCBS moved to the Basel III agreement, which strengthens
capital requirements, as opposed to Basel II, which tried to build primarily on measures of
risk capital set by internal models developed by each individual bank. This approach did not
work, partly because the agreed regulatory minimum capital ratios were too low, but also
because any set of risk weights involves judgments, and human nature would rarely result in
choices that made for higher risk weights. In the United States, the new regulations require
large bank holding companies (BHCs) to use risk-weighted assets (RWAs) that are the
greater of those produced by firms' internal models or the standardized risk weights, some of
which have been raised, thus mitigating the problem of the use of internal risk ratings.
What has been achieved? Globally
• The minimum tier 1 capital ratio has been raised from 4 percent to 6 percent of
RWA.
• There is a minimum common equity tier 1 capital ratio of 4.5 percent of RWA.
• There is a capital conservation buffer of 2.5 percent of RWA, to ensure that banking
organizations build capital when they are able to.
• A countercyclical capital buffer has been created that enables regulators to raise
risk-based capital requirements when credit growth is judged to be excessive.
• A minimum international leverage ratio of 3 percent has been set for tier 1 capital
relative to total (i.e., not risk-weighted) on-balance-sheet assets and
off-balancesheet exposures.
• There is a risk-based capital surcharge for global systemically important banks
(G-SIBs) based on these firms' systemic risk.
In addition, in the United States
• The Federal Reserve is planning to propose risk-based capital surcharges for U.S.
G-SIBs, based on the BCBS proposal for G-SIBs.6
• The relevant U.S. regulators (the Fed, the Office of the Comptroller of the Currency,
and the Federal Deposit Insurance Corporation (FDIC)) have raised the Basel III
leverage ratio for U.S. G-SIBs to 5 percent; U.S. G-SIBs that do not achieve this
ratio will face limits on their ability to distribute dividends and to pay discretionary
employee bonuses.7
• Foreign banking organizations with U.S. nonbranch assets of $50 billion or more will
have to form U.S. intermediate holding companies that will have to meet essentially
the same capital requirements as U.S. BHCs with $50 billion or more of assets.
Many of these rules do not apply to community banks, in light of their different business
models.
One more point on bank capital: The Swiss and Swedish regulators have already gone far in
raising capital requirements, including by requiring bail-in-able secondary holdings of capital
in the form of contingent convertible capital obligations (CoCos). The United States may be
heading in a similar direction, but not by using CoCos, rather by requiring minimum amounts
of "gone-concern" loss absorbency - in the form of long-term debt - that would be available
for internal financing recapitalization through a new orderly liquidation mechanism created by
the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
In addition to enhanced capital ratios and tougher measures of risk-based capital, the Basel
III accord includes bank liquidity rules, another key element of global financial regulatory
reform. The Basel Committee has agreed on the Liquidity Coverage Ratio (LCR), which is
designed to reduce the probability of a firm's liquidity insolvency over a 30-day horizon
through a self-insurance regime of high-quality liquid assets (HQLA) to meet short-term
stressed funding needs. The BCBS is also working to finalize the Net Stable Funding Ratio
(NSFR), which helps to ensure a stable funding profile over a one-year horizon.
The bottom line to date: The capital ratios of the 25 largest banks in the United States have
risen by as much as 50 percent since the beginning of 2005 to the start of this year,
depending on which regulatory ratio you look at. For example, the tier 1 common equity ratio
has gone up from 7 percent to 11 percent for these institutions. The increase in the ratios
understates the increase in capital because it does not adjust for tougher risk weights in the
denominator. In addition, the buffers of HQLAs held by the largest banking firms have more
than doubled since the end of 2007, and their reliance on short-term wholesale funds has
fallen considerably.
At the same time, the introduction of macroeconomic supervisory stress tests in the United
States has added a forward-looking approach to assessing capital adequacy, as firms are
required to hold a capital buffer sufficient to withstand a several-year period of severe
economic and financial stress. The stress tests are a very important addition to the toolkit of
supervisors, one that is likely to add significantly to the quality of financial sector supervision.
Macroprudential policy and supervision
In practice, there are two uses of the term "macroprudential supervision."8 The first relates to
the supervision of the financial system as a whole, with an emphasis on interactions among
financial markets and institutions. The second relates to the use of regulatory or other
noninterest-rate tools of policy to deal with problems arising from the behavior of asset prices.9
For instance, when central bank governors are asked how they propose to deal with the
problem of rising housing prices at a time when the central bank for macroeconomic reasons
does not want to raise the interest rate, they generally reply that if the need arises, they will
use macroprudential policies for that purpose. By that they mean policies that will reduce the
supply of credit to the housing sector without changing the central bank interest rate.
Sector-specific regulatory and supervisory policies in the financial sector were used
extensively and systematically in the United States in the period following World War II until
the 1990s and are now being used in other advanced and developing countries. Elliott,
Feldberg, and Lehnert review the use of such measures in the United States.10 Frequently,
these policies were aimed at encouraging or discouraging activity in particular sectors, for
example agriculture, exports, manufacturing, or housing; sometimes broad, non-interest-rate
measures were used to try to deal with inflation or asset-price increases, for instance, the
use of credit controls.
The issue of how monetary policy should relate to asset-price inflation had been on the
agenda of central bankers for many years before the Lehman Brothers' failure.11 The issue
became more prominent in the United States in the 1990s and the first few years of this
century, and temporarily culminated in the Fed's "mopping-up" approach, namely that
monetary policy - meaning interest rate policy - should not react to rising asset prices or
suspected bubbles except to the extent that they affect either employment and/or price
stability. Operationally, this approach was much more likely to lead to action after the bubble
had burst than as it was forming.12 The policy was tested in the bursting of the tech bubble in
2001 and appeared to be successful as the economy recovered from 2002 onward.13
However, the mopping-up doctrine did not include the second element of the
macroprudential approach - the use of regulatory and supervisory measures to deal with
undesired asset-price movements when the central bank interest rate was judged not to be
available for that purpose.
At present, the word macroprudential is used primarily in the second sense - of the use of
regulatory and supervisory noncentral bank interest rate tools to affect asset prices. In this
sense, the use of the word takes us back to a world that central bankers thought they had left
by the 1990s.14
Now, from etymology to economics: I want to review my experience with macroprudential
policies - in the second sense of noninterest regulatory and supervisory policies - as
Governor of the Bank of Israel to draw a few key lessons about the use of these policies. To
set the background: There was no financial crisis in Israel during the Great Recession. As
domestic interest rates declined along with global rates, housing prices began to rise.15 This
is a normal part of the textbook adjustment mechanism and is expected to encourage an
increase in the rate of homebuilding. The rate of building increased, but not sufficiently to
meet the demand for housing, and prices continued to rise.16
The banks are the largest financial institutions in Israel and dominate housing finance. The
supervisor of banks reports to the governor of the central bank. Starting in 2010, the
supervisor began to implement a series of measures to reduce the supply of housing finance
by the banks. Among the measures used were increasing capital requirements and
11
Among the suggested solutions was the proposal that the consumer price index should include the prices of
assets as representing the costs of future consumption. See Armen A. Alchian and Benjamin Klein (1973),
"On a Correct Measure of Inflation," Journal of Money, Credit, and Banking, vol. 5 (1), part 1, pp. 173-91.
12
As is well known, support for the mopping-up approach was not unanimous, with, for example, researchers at
the BIS, notably Claudio Borio and Bill White, presenting the view that monetary policy should be used to deal
with asset-price inflation. See Claudio Borio and William R. White (2003), "Whither Monetary and Financial
Stability? The Implications of Evolving Policy Regimes (PDF)," paper presented at "Monetary Policy and
Uncertainty: Adapting to a Changing Economy," a symposium sponsored by the Federal Reserve Bank of
Kansas City, held in the Jackson Hole, Wyo., August 28-30. See also Raghuram Rajan (2005), "Has Financial
Development Made the World Riskier? (PDF)" paper presented at "The Greenspan Era: Lessons for the
Future," a symposium sponsored by the Federal Reserve Bank of Kansas City, held in the Jackson Hole,
Wyo., August 25-27.
13
It could be argued that the low interest rates of the 2003-06 period were the result of the mopping-up
approach. I do not see any necessary connection between the mopping-up doctrine and monetary policy in
the period following the mopping up of the hi-tech boom.
14
According to the ProQuest database, of the roughly 1,600 articles referring to the term "macroprudential" after
the start of the Great Recession, almost all refer to regulatory and supervisory interventions.
15
House prices tended to increase more rapidly in countries that did not experience a financial sector crisis
during the Great Recession. For a more detailed account, see Stanley Fischer (2014), "Macroprudential Policy
in Action: Israel," in George A. Akerlof, Olivier J. Blanchard, David Romer, and Joseph E. Stiglitz, eds., What
Have We Learned? Macroeconomic Policy after the Crisis (Cambridge, Mass.: The MIT Press), pp. 87-98.
16
The supply of land to the market in Israel is fundamentally controlled by the government, which owns more
than 90 percent of the land.
provisioning against mortgages; limiting the share of any housing financing package indexed
to the short-term (central bank) interest rate to one-third of the total loan, with the remainder
of the package having to be linked to either the five-year real or five-year nominal interest
rate; and, on different occasions, limiting the loan-to-value (LTV) and payment-to-income
(PTI) ratios.17 Additional precautionary measures were implemented in the supervision of
banks.18
The most successful of these measures was the limit of one-third imposed in May 2011 on
the share of any housing loan indexed in effect to the Bank of Israel interest rate.
Competition among the banks had driven the spread on floating rate mortgages indexed to
the Bank of Israel rate down to 60 basis points, which meant that mortgage financing was
available at an extremely low interest rate. The term-structure was relatively steep, so that
the requirement that the remaining two-thirds of any financing package had to be indexed to
a five-year rate - whether real or nominal - made a substantial difference to the cost of
housing finance. In addition, increases in both LTV and PTI ratios were moderately effective.
However, increasing capital charges had very little impact in practice.
There are three key lessons from this experience. First, the Bank of Israel did not have good
empirical estimates of the effectiveness of the different macroprudential measures.19 This
problem is likely to be relevant in many countries in large part because we have relatively
little experience of the use of such measures in recent years.20 Policymakers may thus be
especially cautious in the use of measures of this type.
Second, measures aimed at reducing the demand for housing are likely to be politically
sensitive.21 Their use requires either very cautious and well-aimed measures by the
regulatory authorities, and/or the use by the government of subsidies to compensate some of
those who end up facing more difficulty in buying housing as a result of the imposition of
macroprudential measures. Indeed, it often appears that there is a conflict between cautious
risk management by the lenders and the desire of society to house its people decently.
Third, there is generally a need for coordination among several regulators and authorities in
dealing with macroprudential problems of both types.
There are many models of regulatory coordination, but I shall focus on only two: the British
and the American. As is well known, the United Kingdom has reformed financial sector
regulation and supervision by setting up a Financial Policy Committee (FPC), located in the
Bank of England; the major reforms in the United States were introduced through the
DoddFrank Act, which set up a coordinating committee among the major regulators, the Financial
Stability Oversight Council (FSOC).
17
For more details, see Fischer (2014).
18
Mortgages in Israel are not nonrecourse loans; in the event of nonpayment, the lender can seek to attach
other assets of the borrower in addition to the house itself.
19
Typically the impact was calculated based on an estimate of how much a measure would increase the
effective interest rate paid by the borrower, but this calculation generally resulted in an overestimate of the
impact of the policy change.
20
Elliott, Feldberg, and Lehnert (2013) present empirical results on the use of macroprudential (sense 2)
measures in the United States, but their results are at too high a level of aggregation to be useful in making
decisions on the deployment of specific supervisory or regulatory measures. The literature is growing. For
example, Kuttner and Shim examine the effects of actions in 57 countries since the 1980s on house prices
and housing credit growth. See Kenneth N. Kuttner and Ilhyock Shim (2013), "Can Non-Interest Rate Policies
Stabilise Housing Markets? Evidence from a Panel of 57 Economies," Bank for International Settlements
working paper no. 433 (Basel: BIS, November).
21
This is a general problem but is particularly the case in the Israeli context where the bulk of the male
population is conscripted into the armed forces for three years at a relatively low salary, and there is a general
view that young couples deserve to be able to buy an apartment when they marry.
In discussing these two approaches, I draw on a recent speech by the person best able to
speak about the two systems from close-up, Don Kohn.22 Kohn sets out the following
requirements for successful macroprudential supervision: to be able to identify risks to
financial stability, to be willing and able to act on these risks in a timely fashion, to be able to
interact productively with the microprudential and monetary policy authorities, and to weigh
the costs and benefits of proposed actions appropriately. Kohn's cautiously stated bottom
line is that the FPC is well structured to meet these requirements, and that the FSOC is not.
In particular, the FPC has the legal power to impose policy changes on regulators, and the
FSOC does not, for it is mostly a coordinating body.
After reviewing the structure of the FSOC, Kohn presents a series of suggestions to
strengthen its powers and its independence. The first is that every regulatory institution
represented in the FSOC should have the goal of financial stability added to its mandate. His
final suggestion is, "Give the more independent FSOC tools it can use more expeditiously to
address systemic risks."23 He does not go so far as to suggest the FSOC be empowered to
instruct regulators to implement measures somehow decided upon by the FSOC, but he
does want to extend its ability to make recommendations on a regular basis, perhaps on an
expedited "comply-or-explain" basis.
Kohn remarks that he does not hold up the U.K. structure of macroprudential supervision as
ideal for all countries at all times and further notes that the U.K. system vests a great deal of
authority in a single institution, the Bank of England. This element is not consistent with the
U.S. approach of dispersing power among competing institutions.
These are important, and difficult, issues. Kohn's proposals clearly warrant serious
examination. It may well be that adding a financial stability mandate to the overall mandates
of all financial regulatory bodies, and perhaps other changes that would give more authority
to a reformed FSOC, would contribute to increasing financial and economic stability.
Financial reform and TBTF
Diagnoses of what went wrong with the financial system at the start of the Great Recession
in the United States generally placed heavy emphasis on the problem of too big to fail. The
TBTF problem derives from the typical response of governments confronted by the potential
failure of a large bank, which is to intervene to save the bank and some of its noninsured
creditors.24 In the words of Governor Tarullo, "...no matter what its general economic policy
principles, a government faced with the possibility of a cascading financial crisis that could
bring down its national economy tends to err on the side of intervention."25
I will start by discussing some of the main steps in the links between TBTF and the crisis,
and between the financial sector reform program and TBTF. We begin with the link between
TBTF and government intervention: Once investors believe that governments will intervene
to prevent large banks from becoming bankrupt, they become willing to lend to these banks
at lower rates than they would lend without the implicit guarantee. This could lead to such
banks becoming larger than optimal and to encouraging them to take more risks than they
would absent expected government intervention to reduce the likelihood of their becoming
bankrupt.
A great deal of empirical work has attempted to measure the premium - in terms of a lower
cost of financing - that the large banks typically receive. The results vary, but a
representative set of estimates - that of the International Monetary Fund in its April 2014
issue of the Global Financial Stability Report - reports that in 2013 their estimates of the
premium were approximately 15 basis points in the United States, 25-60 basis points in
Japan, 20-60 basis points in the United Kingdom, and 60-90 basis points in the euro area.26
The estimated premium in the United States was higher at the height of the financial crisis,
and has been declining since then in response to the significant steps made in the regulatory
reform agenda.
Do large banks, with lower costs of financing, take bigger risks? The empirical relationship
between bank size and their risk-taking has been examined by Laeven, Ratnovski, and Tong,
who find that "large banks tend to have lower capital ratios, less stable funding, more
marketbased activities, and (to) be more organizationally complex than small banks."27 From this
they conclude that "[l]arge banks are riskier, and create more systemic risk, when they have
lower capital and less-stable funding. [They] create more systemic risk (but are not
individually riskier) when they engage more in market-based activities or are more
organizationally complex."28
The key to these results is the recognition that banks have several sources of financing, and
that the more they rely on market interest rate-sensitive short-term funding, the less stable
they are likely to be. Organizational complexity is certainly an issue: Maintaining managerial
control, especially risk control, in a multi-activity bank, where individual rewards may be
massive, is extremely difficult - think for instance of Baring's in the late 1990s, or Societe
Generale, or the so-called London Whale at JPMorgan Chase. Strong risk management is
essential but faces the hurdle of the structural incentives for risk-taking implied by limited
liability for individuals and by what may be a human proclivity to take risks.29 But of course,
banks that are heavily consumer deposit financed also fail from time to time, as a result of
bad lending decisions.
It could be that large banks can finance themselves more cheaply because they are more
efficient, that is, that there are economies of scale in banking. For some time, the received
wisdom was that there was no evidence of such economies beyond relatively modest-sized
banks, with balance sheets of approximately $100 billion. More recently, several papers have
found that economies of scale may continue beyond that level. For example, the title of a
paper by Joseph Hughes and Loretta Mester, "Who Said Large Banks Don't Experience
Scale Economies? Evidence from a Risk-Return Driven Cost Function"30 suggests that large
institutions may be better able to manage risk more efficiently because of "technological
advantages, such as diversification and the spreading of information...and other costs that do
26
International Monetary Fund (2014), Global Financial Stability Report (Washington, D.C.: IMF, April),
chapter 3.
27
Luc Laeven, Lev Ratnovski, and Hui Tong (2014), "Bank Size and Systemic Risk (PDF)," International
Monetary Fund Staff Discussion Note 1404, May.
28
Large banks also hold less capital than small banks because they are more diversified - for example, small
U.S. banks have larger geographical concentrations and larger single-name concentrations than larger banks.
29
In this regard one cannot fail to be impressed by the fact that in countries with a death penalty for corruption,
some people appear nonetheless to be willing to take the chance of becoming rich illegally.
30
See Joseph P. Hughes and Loretta J. Mester (2011), "Who Said Large Banks Don't Experience Scale
Economies? Evidence from a Risk-Return-Driven Cost Function (PDF)," working paper 11-27 (Philadelphia:
Federal Reserve Bank of Philadelphia, July).
not increase proportionately with size." That said, these authors conclude that "[W]e do not
know if the benefits of large size outweigh the potential costs in terms of systemic risk that
large scale may impose on the financial system." They add that their results suggest that
"strict size limits to control such costs will likely not be effective, since they work against
market forces..."
The TBTF theory of why large banks are a problem has to contend with the history of the
Canadian and Australian banking systems. Both these systems have several very large
banks, but both systems have been very stable - in the Canadian case, for 150 years.31
Beck, Demirguc-Kunt, and Levine (2003) examined the impact of bank concentration, bank
regulation, and national institutions on the likelihood of a country suffering a financial crisis
and concluded that countries are less likely to suffer a financial crisis if they have (1) a more
concentrated banking system, (2) fewer entry barriers and activity restrictions on bank
activity, and (3) better-developed institutions that encourage competition throughout the
economy.32 The combination of the first finding with the other two appears paradoxical, but
the key barrier to competition that was absent in Canada was the prohibition of nationwide
branch banking, a factor emphasized by Calomiris and Haber in their discussion of the
Canadian case.33 In addition, I put serious weight on another explanation offered in private
conversation by a veteran of the international central banking community, "Those Canadian
banks aren't very adventurous," which I take to be a compliment.34
Why is the TBTF phenomenon so central to the debate on reform of the financial system? It
cannot be because financial institutions never fail. Some do, for example, Lehman Brothers
and the Washington Mutual failed in the Great Recession. Other banks were merged out of
existence, often at very low prices, with the FDIC managing the resolution process. Banks in
the United Kingdom and in Europe failed during the Great Recession. It cannot be because
equity-holders never lose in bank crises. It could be because until now, bond holders in large
banks rarely have lost significantly in crises - rather, for fear of contagion, they ended up
being protected by the government.
Almost certainly, TBTF is central to the debate about financial crises because financial crises
are so destructive of the real economy. It is also because the amounts of money involved
when the central bank or the government intervenes in a financial crisis are extremely large,
even though the final costs to the government, including the central bank, are typically much
smaller. In some cases, governments and central banks even come out slightly ahead after
the crisis is over and the banks have been sold back to the private sector. Another factor
may be that the departing heads of some banks that failed or needed massive government
assistance to survive nonetheless received very large retirement packages.
One can regard the entire regulatory reform program, which aims to strengthen the resilience
of banks and the banking system to shocks, as dealing with the TBTF problem by reducing
the probability that any bank will get into trouble. There are, however, some aspects of the
financial reform program that deal specifically with large banks. The most important such
measure is the work on resolution mechanisms for SIFIs, including the very difficult case of
G-SIFIs. In the United States, the Dodd-Frank Act has provided the FDIC with the Orderly
Liquidation Authority (OLA) - a regime to conduct an orderly resolution of a financial firm if
the bankruptcy of the firm would threaten financial stability. And the FDIC's
single-point-ofentry approach for effecting a resolution under the new regime is a sensible proposed
implementation path for the OLA.
Closely associated with the work on resolution mechanisms is the living will exercise for
SIFIs. In addition, there are the proposed G-SIB capital surcharges and macro stress tests
applied to the largest BHCs ($50 billion or more). Countercyclical capital requirements are
also likely to be applied primarily to large banks. Similarly the Volcker rule, or the Vickers
rules in the United Kingdom or the Liikanen rules in the euro zone, which seek to limit the
scope of a bank's activities, are directed at TBTF, and I believe appropriately so.
What about simply breaking up the largest financial institutions? Well, there is no "simply" in
this area. At the analytical level, there is the q