Compensation practices are being reviewed to ensure that the incentives created by the compensation regime are consistent with a banking organization remaining in sound financial condition. Another key supervisory innovation has been the more extensive supervisory engagement on the processes that banking organizations use to assess and plan for their capital needs. Recently, the Federal Reserve completed a Comprehensive Capital Analysis and Review (CCAR) program for the 19 largest U.S. bank holding companies. The purpose of the CCAR process was to assess the way these institutions allocate capital over time against the risks they run, including how robust that allocation is to changes in the economic and financial environment. As part of this exercise, banking organizations had to show how their capital would hold up under a stress environment specified by the Federal Reserve, as well as how they expected their activities and capital positions to be affected by changes such as Basel III. The CCAR built on lessons learned during the crisis about the importance of taking a forward-looking and comprehensive approach to assessing capital adequacy, including an assessment of the level and composition of a bank holding company’s capital resources under stressed economic and financial market conditions. This exercise received considerable attention because an assessment of bank holding companies’ plans for increasing dividend payments and implementing stock buyback plans were an important part of the review. However, the CCAR’s focus was much broader than simply assessing proposed capital distributions.

Without such a requirement, large banks can gain a competitive advantage just through their size. Second, as discussed earlier, we have much more to do to ensure that we have a relatively level playing field. We need that to discourage regulatory arbitrage and beggar-thy-neighbor policies that might benefit narrow national constituencies at the expense of global financial stability. Third, we need closer cooperation among regulators. While regulators have successfully worked toward a much tougher regulatory regime for capital and liquidity, there are still huge opportunities for further progress. For example, regulators need to adopt more far-reaching protocols that allow for greater sharing of supervisory information on a cross-border basis to facilitate more effective supervision. But, this needs to be done carefully, so that proprietary business information is protected. Currently, regulators generally do not have access to the necessary information to fully assess the condition of foreign banks that operate within their borders. They have supervisory information about the activities and state of condition of the foreign bank branches and subsidiaries within their borders, but do not always have good access to information about the parent company or what the banking entity looks like on a consolidated basis. This has long been a difficult issue, though efforts are underway to find ways to enhance information-sharing. Similarly, protocols need to be developed to share regulatory information about systemically important financial market infrastructures that operate on a cross-border basis.