daniel k tarullo : rethinking the aims of prudential regulation speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the federal reserve bank of chicago bank structure conference, chicago, illinois, 8 may 2014. * * * among the questions posed by the organizers of this 50th annual conference on bank structure and competition is how the “ regulatory - supervisory framework has fundamentally changed. ” i think one answer is that the aims and scope of prudential regulation have been fundamentally redefined since the financial crisis. most significantly, a concern with financial stability and an increased emphasis on macroprudential regulation have informed major changes in both banking law and supervision. this salutary shift in perspective has important implications for prudential regulation. one is that prudential regulation must deal with threats to financial stability whether or not those threats emanate from traditional banking organizations. hence the need to broaden the perimeter of prudential regulation, both to certain nonbank financial institutions and to certain activities by all financial actors. a second implication – to which i will devote most of my remarks this morning – is that the aims of prudential regulation for traditional banking organizations should vary according to the size, scope, and range of activities of the organizations. by specifying these aims with more precision, we can shape both a more effective regulatory system and a more efficient one. that is, once we have specified the regulatory aims for a particular type of financial institution, we can more effectively rationalize and, as appropriate, differentiate the rules and requirements to be applied to each kind of institution. the legacy of a unitary approach to bank regulation when i was teaching banking law prior to my appointment to the board of governors, i noticed an interesting disconnect in the best casebooks in the field. an introductory chapter on the history and purposes of bank regulation revealed a complicated set of issues concerning changes in the structure and activities of banks, which, among other things, suggested that the rationales for regulating banks might vary depending on the size, business model, and affiliations of a bank. yet the remaining chapters of the casebooks treated bank regulation as a more or less unitary endeavor – with prudential rules applicable in about the same way to the activities and affiliations of all banking organizations, and only to banking organizations. to be sure, topics such as bank affiliations with nonbank financial institutions were, for practical reasons, more focused on

success will require cooperation across countries. 5 products for our markets as much as geographic diversification remains important, it ’ s not going to be easy or happen quickly. so, let ’ s look at this another way. we do need to develop new, fast - growing markets for our products, but we also need to develop new, fast - growing products for our markets. we have to grow and scale up production of high - value goods and services that we can export. the bc economy offers some leading examples of how this approach can work. on the services side, there are lots of success stories in vancouver — where the world ’ s first commercial quantum computer was built and now the home of one of canada ’ s most important technology hubs. activity in these hubs is driving strong growth in exports that are as easy to ship to south africa as they are to seattle. canadian exports of knowledge - intensive services such as research and development, computer and information services, and intellectual property grew by close to 12 percent over the past three years ( chart 5 ). it ’ s clear that digital services — including e - commerce, online education and application development — will be an important part of the future of trade. so will other bc specialties, such as video game production and animation studios. the pandemic is also accelerating growth in other technology services. doctors and hospitals are finding new ways to use technology to provide health care 4 w. steingress, “ the causal impact of migration on us trade : evidence from political refugees, ” canadian journal of economics 51, no. 4 ( october 2018 ) : 1312 – 1338. k. head and j. ries, “ immigration and trade creation : econometric evidence from canada, ” canadian journal of economics 31, no. 1 ( february 1998 ) : 47 – 62. 5 staff at the central banks of the g7 countries are working to raise awareness of the need for better measurement from a monetary policy perspective ( see the 2019 report of the g7 digitalization working group chaired by the bank of canada ). - 8virtually. with the explosion of remote office work, there are tremendous opportunities in areas such as cyber security, cloud computing and the development of virtual workplaces. given the worldwide nature of the pandemic, advances in the digital economy can more easily become scalable, fast - growing exports. chart 5 : knowledge - intensive sectors have been growing rapidly, positively contributing to canada's trade balance