Then, when the boom turned to bust, real home prices reversed course, declining by about 40 percent on a national basis, with larger price declines in several states.1 The magnitude of the national price declines was unprecedented during the postwar period. The evolution of the financial crisis illustrates a number of key issues, including the potential hazards of financial innovation, the procyclicality of the financial system, and the importance of confidence in sustaining effective financial intermediation. The housing boom resulted from several factors. Innovations in subprime mortgage lending enabled moderate-income households to purchase homes with negligible down payments. This led to an increase in the demand for housing, which helped push up home prices. Home price appreciation masked the potential riskiness of such lending and, in turn, sustained the wisdom of 1/7  BIS central bankers' speeches  the easier underwriting standards. As long as home values were rising, subprime borrowers could either refinance their loans or sell their homes when the initial teaser rates expired. Thus, losses on subprime and other mortgage lending were low, reinforcing the belief that such loans were “safe.” Easier mortgage underwriting practices were also supported by the ability of mortgage originators to pool their mortgages into collateralized debt obligations (CDOs), transforming lowquality assets into triple-A-rated securities. Investors, including banks, relied too heavily on credit ratings and didn’t do sufficient due diligence on the underlying quality of the assets and the assumptions that underpinned the triple-A ratings.

But, I would prefer having such a tool available in extremis given the potential need to buy time for coordination and critical decision-making. I think it is important to ensure that one can “get to the weekend.” Finally, the work needed to ensure that CCPs can always recover has not yet been completed. This is an issue of increased importance given that their role in the financial system has become more prominent. Where the pendulum may have swung too far At the same time, there are some areas where the pendulum may have swung too far, where the costs of regulation—including compliance costs and the potential impact on the provision of services—are likely to exceed the benefits. In this vein, I favor regulatory relief for smaller banking organizations. First, such firms individually are not systemically important, and therefore do not pose a significant risk to the viability of the U.S. financial system. Second, the regulatory burdens on smaller firms can be heavy because they don’t have the scale over which compliance and other regulatory costs can be spread. Regulatory requirements should be appropriately calibrated to avoid inadvertently creating a competitive advantage for larger financial firms. 5/7  BIS central bankers' speeches  I also think that the Volcker rule could be modified so that its implementation would be less burdensome. As I see it, regulators could review the criteria for permissible market-making. Trading activity should be viewed as market-making when it is customer-facing and inventories are not excessively large or stale.