4 See Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and  Functions (2018). 5 See remarks by Randal K. Quarles, Early Observations on Improving the Effectiveness of Post-Crisis  Regulation, January 19, 2018. See also remarks by William C. Dudley, Lessons from the Financial Crisis, November 6, 2017. 6 7/8  BIS central bankers' speeches  6 For further discussion, see Ashcraft and Schuermann, Understanding the Securitization of Subprime Mortgage  Credit, Staff Report No. 318, March 2008. 7 See remarks by Lorie Logan, The Role of the New York Fed as Administrator and Producer of Reference Rates ,  January 9, 2018. See also the Alternative Reference Rates Committee. 8 See Financial Stability Board, Final Report on Foreign Exchange Benchmarks, and FX Global Code. 9 For further discussion of supervisory activities, see Eisenbach, Haughwout, Hirtle, Kovner, Lucca, and  Plosser, Supervising Large, Complex Financial Institutions: What Do Supervisors Do? February 2017. For a discussion of the complementarity of supervision and regulation, see Eisenbach, Lucca, and Townsend, The Economics of Bank Supervision, Staff Report No 769, January 2017. 10 For a discussion in the context of misconduct risk, see remarks by Kevin J. Stiroh, Misconduct Risk, Culture and  Supervision, December 7, 2017. See also Chaly, Hennessy, Menand, Stiroh, and Tracy, Misconduct Risk, Culture and Supervision, December 2017. 11 William C. Dudley, Opening Remarks at Reforming Culture and Behavior in the Financial Services Industry:  Expanding the Dialogue, October 20, 2016.

Some lessons on incentives that stand out for me include: Guarding against technical design flaws that can be manipulated and exploited for profit; Ensuring that incentives are aligned and consistent with desired behaviors; Recognizing how rules, however well-intentioned, can be gamed; and, Having appropriate mechanisms in place to identify problems early and to ensure rapid escalation and amelioration. Many of these issues and risks likely also apply to your companies. But, I think they are particularly important for financial institutions—especially those that are systemically important. The scale of such firms magnifies the impact of bad incentives on the financial system and economy. At the same time, that scale also makes it more difficult for senior management to properly control a firm’s activities and monitor the conduct and behavior of its employees. For these reasons, we need strong internal and external checks on banks—an area to which I will now turn. The complementary roles of regulation, supervision, and culture As I said earlier, a sound financial system is one that is safe and resilient, can support the 3/8  BIS central bankers' speeches  provision of financial services at a reasonable price to the real economy in good times and in bad, and promotes confidence and trust among its customers and counterparties. Financial institutions should be prudently managed and subject to strong internal checks—including risk management policies and procedures, internal controls, compliance, and audit. Meanwhile, an effective financial regulatory and supervisory regime should be as efficient, transparent, and simple as possible.