There is no logic to having the public underwrite through deposit insurance or subsidize through protective regulation the risktaking ventures of large financial institutions and their executives. There is a substantial case to be made for separating the “public utility” – or traditional core function of banking – from the risk-taking function. To be sure, financial problems are not limited to large institutions and their complex, opaque and conflicted operations. Regional and community institutions that have, for the most part, stuck to the public utility function have faced their own difficulties, especially in the context of construction lending. But while over 300 banks failed during the crisis, another 7,000 did not. Community and regional banks that are not too big to fail appear to have succumbed less to the herdlike mentality and promiscuous financial behavior that affected their megabank peers. Moreover, when smaller banks got into deep trouble, regulators generally took them over and resolved them. In the treatment of big banks, regulators, for the most part, tiptoed around them. Failing big banks were allowed to lumber on, with government support, despite the extensive damage they wrought. Big banks that gambled and generated unsustainable losses received a huge public benefit: too-big-to-fail support. Postcrisis, the large institutions are even larger: The top 10 now account for 64 percent of assets, up from 58 percent before the crisis and substantially higher than the 25 percent they accounted for in 1990.

Or at least make them more manageable, should one occur again. (In all candor, it would be more historically accurate to say “when one occurs again,” because crises and panics have occurred repeatedly throughout history, including three times just in my own career: the mid-1970s, the late 1980s and just recently). The Federal Reserve’s efforts to revamp the regulatory framework are being led by Governor Tarullo, who is providing focused, important leadership on this critical matter.5 The revamping is largely shaped by the Dodd–Frank Wall Street Reform and Consumer Protection Act (“Dodd–Frank”), which became law last summer. The act establishes a new regulatory infrastructure for promoting financial stability. Among its most prominent macroprudential features is the Financial Stability Oversight Council, an interagency body charged with detecting and deterring threats to the financial system. The act also establishes an Office of Financial Research, a mechanism for the orderly winding down of failing financial firms, and new responsibilities for the Federal Reserve in overseeing certain nonbank financial companies and certain payment, clearing and settlement utilities. The Federal Reserve Board is also directed to develop enhanced prudential standards for large banking organizations and systemically important nonbank financial firms. Dodd–Frank itself mostly provides only high-level direction, leaving an extraordinary number of details and critical decisionmaking to regulatory discretion. As a result, the ultimate nature and future of reform rest in the hands of regulators. As many of you are aware, the various regulatory agencies are presently seeking public comments on a range of issues involving implementation of Dodd–Frank.