On the other hand, the monitoring and operation of the system should be divided between the two arms on the basis of their size, e.g. balance sheet. Another regulatory framework, which developed historically, takes the form of institutional regulation. It reflects institutional segmentation within each country, with insurance companies, securities houses, mortgage lending companies and banks becoming the concern of differing regulatory bodies. Institutional regulation becomes less practicable as the barriers between operating in differing functional and geographical financial markets have been eroded. BIS Review 55/1997  -4-  In between, the regulatory system may be organised along mixed functional/institutional lines. As banks, securities houses and insurance companies compete in each other’s turf, there is now a less meaningful difference between institutions and functions. One model, colloquially known as “Twin Peaks”, consists of a Financial Stability Commission, with responsibility for systemic risk, the prudential supervision of all major institutions, and conduct of business regulation of wholesale activities, and a Consumer Protection Commission, which could be in charge of conduct of business regulation in retail markets, as well as detecting market manipulation and insider dealing. It would also carry out prudential supervision of those stock brokers and fund managers who deal with private clients, and of independent intermediaries. This is essentially the model adopted by the Wallis Commission. Approaches to Regulation The latest mantra on financial regulation is the International Monetary Fund’s approach, which calls for “Internal Governance, Official Oversight, and Market Incentives”(Lindgren, 1996). To this, I would add, “Robust Financial Infrastructure”.

Because I am certain all of you have committed to memory everything I said then, I’ll keep my remarks on LIBOR today short and to the point: We have only 459 days until the availability of LIBOR can no longer be assured, and everyone needs to put their nose to the grindstone in their efforts to prepare for the move off LIBOR. In the immortal words of Captain Jean Luc Picard—make it so! Before I continue on to today’s topic or quote other favorite Star Trek characters, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System. The Heart of the Economy The markets that are the center of attention today—the Treasury market, the repo market, and the mortgage-backed securities market—represent the heart of the circulatory system of our financial system and our economy, and indeed the global economy. When they are working smoothly, all the other parts of the system can perform as they should. But, the opposite is true as well. If these critical markets break down, credit stops flowing, and people can’t finance the purchase of a car or a home, businesses can’t invest, and the economy suffers, resulting in lost jobs and income.1 Financial markets aren’t static—they evolve over time in response to changes in technology, regulation, and business models. The Treasury market is not immune to this process of change.