More recently, in some jurisdictions the use of leverage ratios based on period-end reporting of assets—as compared to period averages in the United States—has encouraged window-dressing behavior by some banks at quarter-end. So, while the reforms have mostly had the intended effect of encouraging safer institutions, authorities and financial institutions should also be mindful of potential unintended consequences. Conclusion To sum up, we have made considerable progress toward a more resilient and robust financial system. While we should do more to make the regulatory regime more efficient, transparent, and simple, there are outstanding issues that still require additional work—such as the crossborder resolution of large global banks. We should also focus more on incentives, which can help ensure that regulations are dynamic and work well, and that banks are incentivized to take action early to steer away from trouble. Finally, regulation and supervision are necessary but not sufficient—they must be supplemented by bank cultures that encourage ethical behavior, the early identification of problems, and a willingness to address those problems proactively. Thank you for your kind attention. I would be happy to take a few questions. 1  Won Chai, Gerard Dages, James Hennessy, Beverly Hirtle, Thomas Noone, Kevin Stiroh, Katherine Tilghman Hill, and Emily Yang assisted in preparing these remarks. 2 See Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report (January 2011). 3 For further discussion, see remarks by Kevin J. Stiroh, A Perspective on Supervisory Objectives and Trade-offs,  February 23, 2017.

This, combined with a business model in which the loans were packaged, turned into securities and sold on the market, meant that the incentive for lenders to correctly assess and subsequently monitor the risks was very low, since they did not retain the risks of the loan. Not only were the advantages associated with a model of this kind – which allows the risk assumed by the institutions to be managed with greater flexibility – not correctly harnessed, but the model eventually gave rise to transactions in which institutions had no incentive to select borrowers correctly. They became mere intermediaries for the credit granted by the system, mere commission earners, interested solely in the volume of operations. Many institutions also made mistakes in their management systems, such as their staff remuneration arrangements. The remuneration of the managers of many institutions was linked to short-term profits, without any consideration of the levels of risk being assumed to obtain them. Other banks, especially in central and northern Europe, made mistakes not so much in their lending as in their securities investments, using very unrealistic, or unjustifiably optimistic, risk assessments. In a context of abundant liquidity at the international level, many financial institutions sought higher profits by investing in this type of complex instrument associated with the subprime segment as a mechanism to compensate for the fact that lending margins were narrower than in the past, relying excessively on the assessment of their credit quality by rating agencies.