As shown in Figure 4, an increased supply of bills issued by the U.S. Treasury in late 2017 was accompanied by a tightening of the spread between rates on 3-month T-bills and overnight indexed swaps (OIS)—a spread between two risk-free instruments that can be thought as reflecting the premium associated with bills’ money-like characteristics in normal times.22  5 / 10  BIS central bankers' speeches  While this is an area worthy of further research, I personally am not compelled by the notion that the public sector can calibrate its supply of money-like assets at the short-end of the curve to exactly remove any remaining externalities from the private creation of money-like assets. In particular, for the last few years in the U.S., because of the various large-scale asset purchase programs, the provision of overnight money-like assets from the Federal Reserve has likely been in excess of investor demand; however, spreads between rates on money-like assets have remained, and in some cases become more variable and larger. This suggests that other forces are in play. One such force is the adjustment of the financial industry to the new regulatory landscape. It is important that the private sector make this adjustment to better align incentives. The role of the central bank’s provision of money-like assets is to ease and support this adjustment, not substitute for it. This is especially true given that private-sector balance sheets are now less elastic in the short-run with respect to fluctuations in the demand and supply of money-like assets.

Clearly, these institutions are engaged in substantial activities outside the traditional banking role. It is within these very largest banks, and perhaps a few slightly smaller yet highly complex or interconnected ones, that systemic risk is concentrated. If the enhanced-supervision requirements are not highly graduated and imposed primarily on the very largest banks, it is not difficult to imagine how the costs associated with such supervision could lead mid-tier banks that exceed the $ billion threshold – yet fall well short of megabank status – to seek merger partners in order to achieve sufficient scale by which to help cover the cost of regulation. This would compound the problem rather than alleviate it. With regard to enhanced standards for such important factors as capital and liquidity requirements, leverage limits and risk management, Dodd–Frank instructs regulators to differentiate among these banks. Enhanced supervision can be implemented on a graduated scale, based on the extent of assets beyond $ billion and possibly other factors. Let us do that fully, then, applying these measures along a highly graduated scale, with only minimal added mandates directed at mid-tier banking organizations. However, when it comes to the top 10 or so, I would apply Dodd–Frank extensively and vigorously. I would apply all the elements of heightened supervision – from enhanced standards for capital and liquidity requirements, leverage limits and risk management to the additional measures of living wills and credit-exposure reports, concentration limits, extra public disclosures and short-term debt limits – with full force.