So, what does this imply when we consider revisions to the Dodd-Frank Act and other aspects of reform? Capital and Liquidity Standards It is important to maintain appropriate capital and liquidity standards for large, complex firms to mitigate external shocks and the risks they pose to the economy. In particular, we need to maintain our focus on firms whose impairment would have significant negative consequences for the rest of the financial system. Effective capital and liquidity standards help to limit these adverse consequences. At the same time, they work against conferring a competitive advantage to large banks from a perception that they may be too big to fail. Accordingly, large financial firms have had to more than double their stock of high-quality capital since the crisis. Prior to the financial crisis, large financial firms were not required to hold sufficient high-quality liquid assets to protect against runs, and, as a result, several would have failed if not for extraordinary government intervention. Today, the liquidity buffers for large financial firms have dramatically improved in terms of both their size and quality. This is due in part to investors’ demands, but also to the efforts by regulators and supervisors in the United States and abroad to develop appropriate liquidity standards for large banking institutions. Some have argued that capital standards alone would be sufficient to mitigate the risks of failure. I am not convinced.

(2007): Overborrowing and Undersaving: Lessons and Policy Implications from Research in Behavioral Economics, Discussion Paper, Federal Reserve Bank of Boston; Heidhues P. et al. (2010): Exploiting Naivete about Self-Control in the Credit Market, American Economic Review 100; Laibson D. et al. (2000): A Debt Puzzle, NBER Paper No. 7879; Meier, Sprenger (2008): Charging Myopically Ahead: Evidence on PresentBiased Preferences and Credit Card Borrowing; Azfar O. (1999): Rationalizing hyperbolic discounting, Journal of Economic Behavior and Organization, Vol. 38. 9  Hume, D. (1739), A treatise of human nature. 4  BIS central bankers’ speeches  encouraging sign, as it shows that deleveraging is not always inconsistent with economic growth. Turning to the indebtedness of households, the diagnosis does not point to easy solutions. Thus, regulatory measures at the microprudential level that enforce stronger discipline on the supply side of credit are all-important. Complementary macro-measures aimed at preventing excessive exuberance should also be deployed. In this context, I am referring to interest rate policies which – whenever feasible – “lean against the wind”, but also to more targeted macroprudential measures which directly address the dynamics of the credit market. The countercyclical capital buffer is an important example. Besides, facing more directly the behavioural biases that are at the root of the problem requires an increased level of “awareness”. In the words of Shefrin (2012), raising people’s awareness means “reminding ourselves of our psychological fallibilities so that we can avert some crises and mitigate others”.10 More specific consumer protection regulations or system design measures come as a second step.