That is why resilience of financial institutions is valued. 1/7  BIS central bankers' speeches  The supervisory program for the largest banks implemented since the financial crisis builds on that foundation and explicitly acknowledges the potential impact that distress at a large bank could have on financial markets or the economy. This approach to large bank supervision has been codified in Supervision and Regulation Letter 12–17, or SR 12–17.2 This framework expresses two complementary goals for the Federal Reserve’s program for large bank supervision: (1) Enhanced resiliency of the firm to lower the probability of failure or inability to serve as an intermediary and (2) Reduced impact on the financial system or economy in the event failure or material weakness does in fact occur. To analysts of credit, this will sound familiar because it is essentially a probability of default/loss given default or PD/LGD framework. The key elements of enhanced resiliency, or lower PD, in this framework include capital, liquidity, corporate governance, management of core businesses, and recovery planning. A reduced impact of distress, or lower LGD, depends on effective management of critical operations, support for banking offices, and strong resolution planning. As an aside, the implementation of enhanced standards for the largest, most systemically important financial firms reflects a core tenet of the Federal Reserve’s supervisory program, namely that supervisory expectations should be tailored to the risks that individual institutions face and the potential impact that distress might have on the broader financial markets or economy.

This occurs through a wide range of institutions including bank holding companies, banks, and other firms supervised by the Federal Reserve System.1 In that context, a healthy bank maintains a strong balance sheet, measured by conventional metrics like capital, liquidity and asset quality; has a durable business model that generates a sustainable stream of earnings commensurate with a properly-defined risk profile; and has the appropriate controls in place that include, among other things, a robust risk management framework, a strong audit function, and effective oversight by the board of directors. All of these factors make a financial institution stronger and lower the chance that a shock such as an unexpected deterioration of credit quality or operational loss would drive the firm into insolvency, result in a loss of confidence by the firm’s creditors, counterparties, investors or customers, or force the firm to curtail its core activities. That is, a healthy firm is more resilient. This is true for financial institutions of all sizes and represents a baseline supervisory goal. I should emphasize that resiliency is not the ultimate aim, but rather a means to broader policy objectives. A resilient firm, for example, is more likely to provide a sustainable flow of financial services—broadly defined to include credit intermediation, payments, and risk transfer—through the cycle and across a range of possible macroeconomic outcomes; a resilient firm is less likely to harm the economy or consumers through excessive risk-taking; and a resilient firm is less likely to put taxpayer funds at risk.