Measures to raise both the quantity and quality of capital at the large, systemically important firms, known as G-SIFIs, such as Basel III and enhanced prudential standards, are aimed at reducing the probability of failure. The work on recovery and resolution planning, as set out in the Key Attributes for Effective Resolution Regimes, a new global standard published in 2011, aims at mitigating the cost of failure by developing the institutional arrangements and concrete plans to place a failing G-SIFI into resolution. These initiatives at the global level have been mirrored at the national level in many countries. I’d draw special attention to stress testing in its role in reducing the probability of failure and to resolution planning in reducing failure’s social cost, because both represent an important shift of focus for the supervisory community. Both processes focus attention on the far adverse tail of the probability distribution of outcomes for a firm. Technology, financial modeling, and risk management theory and practice have greatly expanded and enhanced the supervisors’ ability to analyze and address those severe adverse outcomes. Another part of the regulatory reform agenda addresses weaknesses in short-term funding markets. Efforts here include seeking to reduce the reliance on intraday credit in the tri-party repo market, to strengthen risk management in the repo and other short-term funding markets, and to make progress toward developing a collateral liquidation mechanism to prevent fire sales of collateral in distressed markets.

In my personal view, the reconsideration of business plans needs to incorporate the longterm macroeconomic and technology trends even as they incorporate the lessons learned from the financial crisis. Those business plans need to look ahead five years or more to position the financial firms and, with them, the financial system for the opportunities and risks that lie ahead. We will need to meet the long-term challenges of changes in the global macroeconomy, the distribution of growth opportunities and the distribution of wealth, and the speed and power of technological change. 4  BIS central bankers’ speeches  Since so much opportunity has developed elsewhere in the world, how will the public sector reform agenda impact the global banking activities of financial institutions? We do not know yet how the reform agenda will affect the international activities of G-SIFIs, although we can see some early indications. Higher capital requirements and more stringent prudential standards are causing some firms to re-examine their correspondent and business relationships and make new cost-benefit assessments. The greater focus on stress testing and resolution planning may lead to more discussion of firm structure, including the number of subsidiaries, the alignment of the corporate structure with the firm’s business activities, the management of intragroup exposures, the use of parent guarantees, and the correlation of the firm’s capital and liquidity structure with the firm’s business and legal entity structure. In my personal view, discussion will no doubt lead to action, in the best scenario, by the large, systemically important financial firms themselves.