Today, these institutional principles for monetary policy are enshrined in the statutes of central banks in all of the major advanced countries and a growing number of emerging markets. This much is now largely accepted for monetary policy and inflation-fighting. It is somewhat less well-accepted for financial policy and crisis-fighting. Yet, in theory and in practice, the case for placing financial stability policy in the hands of an arms-length institution is at least as strong, and arguably stronger, than for monetary policy. This is the case for three reasons. First, financial cycles are longer-lived than the typical business cycle. Chart 3 plots a measure of the cycles in credit and GDP in the UK over the past century (Aikman et al. (2010)). Peak-to-peak, the credit cycle lasts between 8 and 20 years, the business cycle between 2 and 8 years. The longer duration of credit cycles increases the chances of policymakers falling prey to disaster myopia. That is why “This time is different” has so often been the pre-crisis narrative (Reinhart and Rogoff (2009)). In an “information-rich-yetattention-poor” world, people in future may be even more prone to such myopia. 6  BIS central bankers’ speeches  Second, the financial cycle exhibits wider fluctuations, and imposes much larger costs, than the typical business cycle. As Chart 3 shows, the amplitude of the credit cycle is more than twice the business cycle. The costs of crisis dwarf those of business cycle fluctuations (Claessens et al. (2008), Jorda et al. (2011)).

For starters, the Federal Reserve now makes its most consequential supervisory decisions on a system-wide level through the Large Institution Supervision Coordinating Committee or “LISCC.” The committee comprises representatives across professional disciplines from several Reserve Banks and the Board of Governors. The New York Fed supplies only three of its 16 members. LISCC sets supervisory policy for the 15 largest, most systemically important financial institutions in our country and develops innovative, objective, and quantitative methods for assessing these firms on a comparative basis. LISCC also coordinates the supervision of the largest supervised institutions through its Operating Committee, which reviews and approves supervisory plans for exams, receives regular updates on major supervisory issues, and makes material supervisory decisions regarding matters that affect the firms’ safety and soundness. In this respect, the Operating Committee provides an important safeguard against regulatory capture by ensuring that no one person or Reserve Bank has the power to make a final decision on a matter of significance. Another procedural change is our increased application of cross-firm, horizontal review. This technique enables peer-to-peer comparison of banks, facilitates a better assessment of the overall health of the financial system, and safeguards against regulatory capture by providing insight from across the Federal Reserve System. The analysis is done not only at the level of the Board of Governors – for example, through CCAR and Dodd-Frank stress testing – but also within the New York Fed. We hold weekly discussions among senior supervisory and risk officers to identify developing concerns that may pose a systemic risk.