##makers should balance the benefits and costs of regulation by taking care to tailor laws and regulations to meet their stated goals as effectively and efficiently as possible. the documentation requirements should take into account the size and resources of the institution, and they should not overwhelm the activities themselves. there is still room to improve cra in this respect. a great deal of justification is required to demonstrate that certain activities qualify for consideration under the regulations. much of this is related to the need to demonstrate a benefit to an institution's assessment area. in order to simplify the regulation's approach to meeting the credit needs of lower - income areas, it may be necessary to consider a different way of measuring impact. moreover, measuring performance for any institution must take a broad view of community needs, balancing quantitative measures of performance with consideration of the quality of the credit, investments, and services extended. or, as the introductory piece in revisiting the cra, by olson, chakrabarti, and essene, suggests, the story of cra may be one of a regulation that began by measuring process, evolved to a system of measuring outputs, but perhaps, in the future, needs to measure outcomes in lower - income communities. finally, any new cra regulation should be flexible. one of cra's strengths has been the flexibility that the consideration of a bank's performance context provides. the regulatory agencies'ability to redesign cra regulations over the years kept it relevant as the financial markets changed. for example, recent revisions recognized the difficulty in meeting the credit needs of rural communities that do not have clearly delineated neighborhoods with differing income levels. it also offered added incentives for financial institutions to provide assistance in disaster areas. these provisions may not have been possible if congress had dictated the exact terms of the cra evaluation that regulators should apply in determining an institution's cra rating, and, as a general matter, i believe that congress was wise not to be overly specific in the cra. conclusion the future health of communities depends on each of us doing our part to focus attention on the needs of those communities that have been affected by the combined impact of foreclosures and a weak economy. at the encouragement of congressman frank, the federal reserve banks of boston and san francisco were inspired to broaden policy discussions by inviting cra experts to contribute to a very thoughtful volume on the future of cra. in formulating a new approach to cra, i would recommend keeping

the problems of the past and deny how much has changed. the task is to refashion a regulatory structure so as to encourage the efficient allocation of capital to productive uses, while protecting the financial system from the defects and excesses that are inherent in financial markets. for those of us at the regulatory agencies, i believe there should be a three - part response : • first, the agencies should adjust their policies and practices in light of the lessons learned from examination of past shortcomings or of new problems revealed by the crisis ; • second, we should contribute to the discussion of possible congressional initiatives that could provide useful new legislative authorities to help contain systemic risk and the problem posed by institutions that are too - big - to - fail ; and • third, we should be developing ideas and proposals that are not appropriate for adoption now – and, indeed, may never be – but are worthy of consideration to inform the debate on policy alternatives. as to internal policies and practices under existing authority, before i arrived at the board, the federal reserve had undertaken a systematic review of supervisory practices in the precrisis period. that process is yielding a variety of lessons, which will be implemented to improve the process of consolidated supervision. at the same time, because even the highest quality supervision has its limits, particularly in the oversight of large, complex institutions, it is important to attend to other regulatory tools. the three pillars of rules, supervision, and market discipline laid out in the basel ii capital framework should be the foundation for regulation of financial institutions more generally. with respect to applicable rules, a parallel board process of examining current regulations has already led to numerous initiatives, many in conjunction with our fellow american regulators and the foreign regulators in the basel committee on banking supervision. some of the more important of these initiatives include upgrading the quality of capital held by regulated institutions, overhauling the capital requirements applicable to market risk, and assessing the various ways in which regulation has had an undesirable pro - cyclical effect. while it is clear that improved capital regulation alone would not have prevented the financial crisis, it is equally clear that large financial institutions should have been required to hold higher levels of capital in the pre - crisis period. bookstaber, op cit. stephen morris & hyun song shin ( 2008 ), " financial regulation in a system context, " brookings papers on economy activity ; markus brunnermeir et al. ( 2009 ), the fundamental principles of financial regulation. there is one