not consider transparency to mean leniency. we hold banks of all sizes to high standards, commensurate with their size and risk, and being transparent does not dilute the rigor of our regulatory standards. transparency helps ensure that banks are aware of these standards and expectations so that they can work more effectively and efficiently to meet them. perhaps most importantly, though, we must implement the laws that congress has passed as they are written and not stretch that authority to venture into other areas of policymaking. for example, consider the distinction between ( 1 ) making sure institutions are managing all of their material risks and ( 2 ) instructing banks to make certain credit allocation decisions, that is, telling banks to make or not make loans to certain industries. the first objective - making sure financial institutions manage their material risks - is one of the central functions of a bank supervisor, and is fundamental to safety and soundness. but it is equally clear that the second objective - influencing a bank to make certain credit allocation decisions - is not the role of a banking regulator. if you look across the regulated banking sectors, you will find that each bank makes different credit decisions, reacting not only to market demand and economic conditions, but also implementing the bank's strategy. and to be clear, i share the widely held view that the appropriate role of the federal reserve is not to make credit allocation decisions for banks. 3 / 7 bis - central bankers'speeches the fed's role as a banking supervisor is not to replace a bank's management and board of directors in adopting a banking strategy and risk appetite. instead, it is to apply appropriate, targeted regulation and supervision, in order to be able to assess that when a bank engages in an activity, it does so in compliance with applicable laws and in a safe and sound manner. this can be a difficult balance to strike but it is something i believe we must always bear in mind whenever the fed uses or proposes using its regulatory or supervisory tools. banking regulation and supervision should not be the place to implement new policies that are not mandated by congress. in the past, i have shared my views about the fed's rulemaking agenda, which remain the same today. i continue to support changes based on our experience applying existing rules or prompted by new and emerging issues. however, any incremental changes to regulation should yield significant improvements to safety and soundness at reasonable cost, in consideration of the tradeoffs between cost and safety. and of course,

##e for the recent decisions of the federal reserve and our policy approach going forward. yesterday, chairman bernanke provided a detailed discussion of economic and financial developments and of the federal reserve ’ s policy strategy, so here i will just relate some key points of his discussion to the major themes that i have emphasized today. first, we are proceeding in a timely manner in countering any developments that might threaten economic or financial stability. the fomc has not been basing its decisions solely on the incoming flow of economic data ; for example, the sequence of interest rate cuts was initiated last fall even though growth in the gross domestic product had been quite strong in the third quarter. rather, our policy approach has reflected the rapid deterioration of financial market conditions, which has contributed to a worsening of the economic outlook and the emergence of pronounced downside risks to economic growth and employment. second, in my view, the federal reserve has been acting and will continue to act decisively, in the sense that our policy strategy reflects the evolution of the balance of risks and not simply a change in the modal outlook for the macroeconomy. the disruption in financial markets poses a substantial downside risk to the outlook for economic growth, and adverse economic or financial news has the potential to cause further strains. in that light, the federal reserve ’ s policy strategy is aimed at providing insurance to help avoid more severe macroeconomic outcomes. third, because we recognize that financial and economic conditions can change quickly, the federal reserve is prepared to respond flexibly to incoming information. of course, in making its decisions, the federal reserve also gives careful consideration to the outlook and risks associated with the second aspect of our dual mandate, namely, price stability. because longer - run inflation expectations appear to have remained reasonably well anchored, in my view, the easing of the stance of policy in response to deteriorating financial conditions seems unlikely to have an adverse impact on the outlook for inflation. nonetheless, we will continue to monitor incoming data on inflation and inflation expectations, especially given the potential risks to price stability that are associated with the rapid increase in energy prices and the depreciation of the dollar. in short, the fomc will determine the future course of monetary policy in light of the evolution of the macroeconomic outlook and the balance of risks to our objectives of maximum employment and price stability. conclusions the monetary policy that is appropriate during an episode of financial market disruption is likely to be quite different than in times of normal market functioning.