When appropriate, U.S. authorities have adopted different standards than those proposed in international forums. Finally, following the financial crisis, the Federal Reserve developed a capital stress testing supervisory program—known as the Comprehensive Capital Analysis and Review (CCAR). CCAR has become an integral part of ensuring appropriate capital levels. By imposing a discipline of forward-looking capital assessment on our largest firms, CCAR helps protect the safety and soundness of the largest financial institutions—and therefore the stability of the entire financial system. The CCAR process consists of two parts. First, the quantitative assessment evaluates whether a firm holds a sufficiently large capital buffer so that it can continue to be a viable financial 3/6  BIS central bankers' speeches  intermediary even in a stressed market and macroeconomic environment. Second, the qualitative assessment evaluates whether the firm’s risk management and capital planning processes are well-developed and well-governed. CCAR has helped to strengthen the capital levels of the largest financial institutions, and has pushed these firms to steadily improve their risk management and capital planning processes. While appropriate capital and liquidity standards are necessary, they must be augmented by a supervisory regime that can assure the quality of a firm’s governance, controls, risk culture and compliance with applicable laws and regulations. As we saw with JPMorgan Chase in the “London Whale” episode and with Wells Fargo more recently, effective risk management and governance is a necessary complement to having adequate capital and liquidity buffers.

I believe that this threshold could be raised significantly without unduly increasing the risk to the broader financial system. Second, policymakers might reexamine the implementation of the Volcker Rule to ensure that it is efficiently achieving its policy objectives. The fact is that most market-making activity has an element of proprietary trading. The market maker that bids successfully often does so based on a view on which way the market might be headed in the near term. Thus, the line between market-making and proprietary trading is not always clear-cut, which makes regulation in this space difficult. Some market participants have argued that the Volcker Rule has contributed to the decline in market liquidity of corporate bonds. Although I view the evidence on this point as inconclusive, it may be worth considering giving greater discretion to trading desks that facilitate client business to intervene when markets are illiquid and volatile. Also, community banks are subject to the Volcker Rule even though they typically do not engage in proprietary trading, or sponsor or retain ownership interests in hedge funds or private equity funds. This seems like an unnecessary burden that drives up compliance costs without a significant corresponding public benefit, so we also should exempt community banks from the Volcker Rule. Third, although CCAR is a vital part of our bank regulatory toolkit, I believe that we should consider changes that might lessen the burden it places on banks. In this vein, the Federal Reserve recently removed the CCAR qualitative assessment for large, non-complex firms.