If we are hit by a critical crisis in one or more of the major financial institutions today, the regulatory and supervisory framework is not sufficient. Second, we need to move forward and find a modified framework before problems arise. My experience is that if a crisis hits an unprepared authority, the choice of solution will suffer. Third, we should move ahead gradually, since there are obvious political difficulties and it is uncertain what the first-best solution would look like. In a political world, it is difficult to achieve first-best directly. Instead we have to move stepwise and ensure that we have our compass firmly in our hands to ensure a move in the right direction. To solve some of the problems of coordination of information and assessments, I propose the establishment a new pan-European body, a European Organization for Financial Supervision (EOFS). The idea is to create a separate agency to follow the major cross-border banking groups in Europe. The EOFS should only focus on the presently about 40 truly cross-border banking groups and not deal with the about eight thousand European banks with a predominately national character. The EOFS should have three tasks: It should gather information about the banking groups and their activities in different countries. Importantly, it should also create unified risk-assessments of each cross-border banking group. Finally, it should also oversee the activities and risks of these banking groups. To achieve these tasks, there is a need for a separate agency, staffed with a sufficient number of competent employees.

Conclusions Looking back over the run-up to the financial crisis and its initial stages, it is obvious now with the benefit of hindsight that short-term tactical missteps and long-term strategic miscalculations were made by both the private and public sectors. Many of the long-term strategic miscalculations were related to allowing perverse incentives to build within the financial system and allowing significant gaps in the regulatory framework to persist. The financial reform proposals currently being considered by Congress are appropriately trying to ensure that such perverse incentives are removed from the financial system and exploring ways to endow regulators with an efficient resolution mechanism for systemic financial institutions. Some of the short-term tactical missteps were the failure of banking regulators to force high quality capital raises early enough in the crisis, and the failure of the private sector to engage in adequate liquidity contingency planning and the failure of regulators to recognize the vulnerability of the system to erosion in liquidity conditions. As the crisis intensified to unparalleled heights and without an efficient resolution process in place, the ability of the Federal Reserve, and then other governmental agencies after the TARP appropriation, to act with speed and flexibility was vital to stabilizing the system. However, hindsight is much less definitive on some of the lessons about the underlying stability of the financial system. In Alan Greenspan’s thoughtful review of the crisis he summarized the issue this way: 9 “The aftermath of the Lehman crisis traced out a startlingly larger negative tail than most anybody had earlier imagined.