its guarantees to bank deposits and the senior debt of banks. these and other measures ultimately proved successful in placing a floor under the downward spiral of the financial system. but it was against the backdrop of the need for massive taxpayer - backed assistance - - to firms and to markets more generally - - that congress and financial regulators developed responses to the woefully inadequate capital levels of prudentially regulated firms ; the systemic consequences of stress at previously non - prudentially regulated firms such as the free - standing investment banks ; the widespread failures of risk management within these firms ; the parallel failures in supervision of these firms ; and the fragility of a financial system that had become characterized by large amounts of runnable short - term funding. the first and, to my mind, still the most important element of regulatory strengthening was to increase the amount of capital held by banks to ensure they remained viable financial intermediaries that could finance economic activity. in fact, this effort began as part of the emergency stabilization efforts in early 2009, when we conducted a stress test of the 30 largest banking firms. where we determined a firm did not have enough capital, we required that it either raise equity in the public markets or take some of the remaining government tarp capital. the quick action in assessing the firms, recapitalizing them where needed, and sharing the results of the stress tests with the public stands as one of the turning points in the crisis. from there, we pursued a strategy of gradually strengthening ongoing capital requirements. with a few exceptions, the approach we took from the fall of 2009 onward allowed the banks to use retained earnings to build their capital. we also began development of the first quantitative liquidity regulations to be used in prudential regulation by the u. s. banking agencies. this initiative was, of course, a direct response to the liquidity squeezes encountered during the crisis itself. the capital and liquidity efforts were well underway by the time congress passed the dodd - frank wall street reform and consumer protection act ( dodd - frank act ) in mid - 2010. and congress was, of course, aware of these efforts. so it is perhaps not surprising that the provisions of the dodd - frank act relating to capital set some important qualitative standards for capital regulation rather than addressing capital levels as such. a law as long and wide - ranging as the dodd - frank act cannot be reduced to a single key premise or concern, excepting its general focus on financial stability and

ben s bernanke : lessons from the failure of lehman brothers testimony by mr ben s bernanke, chairman of the board of governors of the federal reserve system, before the committee on financial services, us house of representatives, washington dc, 20 april 2010. * * * chairman frank, ranking member bachus, and other members of the committee, i appreciate the opportunity to testify about the failure of lehman brothers and the lessons of that failure. in these opening remarks i will address several key issues relating to that episode. the federal reserve was not lehman ’ s supervisor. lehman was exempt from supervision by the federal reserve because the company did not own a commercial bank and because it was allowed by federal law to own a federally insured savings association without becoming subject to federal reserve supervision. the core subsidiaries of lehman were securities broker - dealers under the supervisory jurisdiction of the securities and exchange commission ( sec ), which also supervised the lehman parent company under the sec ’ s consolidated supervised entity ( cse ) program. importantly, the cse program was voluntary, established by the sec in agreement with the supervised firms, without the benefits of statutory authorization. although the federal reserve had no supervisory responsibilities or authorities with respect to lehman, it began monitoring the financial condition of lehman and the other primary dealers during the period of financial stress that led to the sale of bear stearns to jpmorgan chase. 1 in march 2008, responding to the escalating pressures on primary dealers, the federal reserve used its statutory emergency lending powers to establish the primary dealer credit facility and the term securities lending facility as sources of backstop liquidity for those firms. to monitor the ability of borrowing firms to repay, the federal reserve, in its role as creditor, required all participants in these programs, including lehman, to provide financial information about their companies on an ongoing basis. two federal reserve employees were placed onsite at lehman to monitor the firm ’ s liquidity position and its financial condition generally. beyond gathering information, however, these employees had no authority to regulate lehman ’ s disclosures, capital, risk management, or other business activities. during this period, federal reserve employees were in regular contact with their counterparts at the sec, and in july 2008, then - chairman cox and i negotiated an agreement that formalized procedures for information - sharing between our two agencies. cooperation between the federal reserve and the sec was generally quite good, especially considering the stress and turmoil of the period. in particular, the federal reserve,