The crisis exposed many significant structural weaknesses in the U.S. and global financial systems. Among them: Systemically important firms were allowed to operate with inadequate amounts of capital and insufficient liquidity buffers, and were overly reliant on short-term wholesale funding. They were excessively complex and interconnected with each other and with the shadow banking system. Large firms came up woefully short in monitoring, measuring and controlling the risks that could—and did—materialize under stress. Securitization markets suffered from a number of defects, including poor design for many securitized products and misaligned incentives in the credit ratings regime. This led to inflated credit ratings for many mortgage securitizations that subsequently performed poorly as mortgage delinquencies increased. There were significant problems in funding and derivative markets, including flaws in tri-party repo, money market mutual funds that were vulnerable to runs, and massive and opaque bilateral OTC derivative exposures. Finally, all of these problems were magnified by the lack of a good resolution process for large, complex financial firms that got into trouble. As a result, policymakers were forced to develop ad hoc interventions to contain contagion and to prevent the collapse of the U.S. financial system. We should never forget how close we came to a full-blown depression, and we must resolve to never allow a return to conditions like those that existed prior to the financial crisis. That said, it is entirely appropriate to take a critical look at the changes that were made to the regulatory regime.

First, I would start with regulations for small and medium-sized banking institutions. As I discussed earlier, we must ensure that the firms whose failure could impose the greatest costs on ordinary borrowers and savers have the capital, liquidity and risk management standards appropriate to that risk. But, the majority of banks in the United States do not come close to falling into this category. For smaller institutions, the regulatory and compliance burdens can be considerably lighter because the failure of such a firm will not impose large costs or stress on the broader financial system. Also, we must recognize that smaller firms have less ability to spread added compliance costs across their business. All else equal, an increase in compliance burden can create an unintended competitive advantage for larger institutions. We should also recognize the important role that smaller banking institutions have in supporting local communities around the country. The ability to lend to local businesses often depends on close bank-customer relationships, and on knowledge that is often difficult to develop when the home office is very distant. 5/6  BIS central bankers' speeches  There have been efforts by regulators at the Federal Reserve and elsewhere to reduce the regulatory requirements for such institutions, and that is something that we should continue to work on. Lawmakers could also evaluate statutory thresholds to see if they should be raised to apply to fewer, larger institutions. For example, the Dodd-Frank Act sets a higher prudential regime for those firms with $ billion or more in assets.