and counterparties. an agenda to enhance market discipline can serve two purposes. first, establishing the realistic prospect of losses for investors and counterparties in a large financial institution should change their calculations in deciding whether to enter a transaction with the firm, and thus lead to a more complete incorporation of risk into the terms of such a transaction. second, the assessment of that risk by these financial actors, as reflected in the pricing of their investments and contracts with a firm, can itself provide valuable information to regulators. while the role of market discipline has been much discussed in academic and policy literature as a potentially central element of a financial regulatory system, it had not been significantly developed and implemented by regulators themselves. the crisis has pushed some market discipline ideas to the fore. here again, i think there are three important measures. first would be creation by congress of a special resolution procedure for systemically important financial firms. the federal deposit insurance act establishes such a process for banks, but not for the holding companies of which they are part, or for important financial firms that do not own commercial banks. a regime that raised the real prospect of losses for shareholders and creditors would add a third alternative to the unattractive existing options of bailout or disorderly bankruptcy. the consequent increase in market discipline before severe financial distress arises could be a key advance in the containment of the too - big - to - fail problem. a related innovation would be a requirement that each major financial institution draw up and submit for approval to its supervisors a plan for orderly wind - down in the event of serious liquidity or solvency difficulties. although even a good faith effort might not anticipate all the circumstances that may raise such difficulties, and thus might not adequately prepare an effective wind - down strategy, the development of such a plan would at the least be a useful supervisory exercise. it would, for example, provide an occasion for examining the relationships among the many separate corporate entities within a large financial organization. a second kind of market discipline initiative is a requirement that large financial firms have specified forms of " contingent capital. " numerous variants on this basic idea have been proposed over the past several years. while all are intended to provide a firm with an increased capital buffer from private sources at the moment when it is most needed, some also hold significant promise of injecting market discipline into the firm. for example, a regularly issued special debt instrument that would convert to equity during times of financial distress could add market discipline both through the pricing of

to the plate. finding the right path in life, more often than not, involves some missteps. my federal reserve colleagues and i experienced this as we struggled to address a financial and economic crisis that threatened the global economy. we brainstormed and designed a host of programs to unclog the plumbing of the financial system and to keep credit flowing. not everything worked but we kept at it, and we remained focused on the task at hand. i learned the lesson during this period that one ’ s response to the inevitable setbacks matters as much as the balance of victories and defeats. there is an unfortunate myth that success is mainly determined by something called “ ability. ” but research indicates that our best measures of these qualities are unreliable predictors of performance in academics or employment. psychologist angela lee duckworth says that what really matters is a quality she calls “ grit ” – an abiding commitment to work hard toward long - range goals and to persevere through the setbacks that come along the way. one aspect of grit that i think is particularly important is the willingness to take a stand when circumstances demand it. such circumstances may not be all that frequent, but in every life, there will be crucial moments when having the courage to stand up for what you believe will be immensely important. my predecessor at the fed, chairman ben bernanke, demonstrated such courage, especially in his response to the threat of the financial crisis. to stabilize the financial system and restore economic growth, he took courageous actions that were unprecedented in ambition and scope. he faced relentless criticism, personal threats, and the certainty that history would judge him harshly if he was wrong. but he stood up for what he believed was bis central bankers ’ speeches right and necessary. ben bernanke ’ s intelligence and knowledge served him well as chairman. but his grit and willingness to take a stand were just as important. i hope you never are confronted by challenges this great, but you too will face moments in life when standing up for what you believe can make all the difference. having dwelt for a moment on failure and grit, let me turn to the deeper meaning that underpins grit and can carry us beyond failure. the hard work of building a life that makes a difference is much easier to sustain when you are passionate about what you pursue. when i first came to the federal reserve 37 years ago, i was struck by the passion of my colleagues for the mission of the fed. and these many years later