most interconnected firms. in my view, however, robust competition from the bottom - up is the better way forward. third, stronger capital and liquidity buffers, more effective boards of directors, and more rigorous risk - management practices are important safeguards. and, here, there has been some substantial progress. but additionally, firms should have the burden of persuasion to demonstrate that they can fail without need for extraordinary government support. simplifying corporate forms and structures so firms can quickly be unwound, particularly across borders, would be a welcome development. in a global economy with integrated financial markets, big is not bad. but, greater dispersion of assets and liabilities demands unprecedented international cooperation. u. s. leadership is critical to establish the new rules of a new financial architecture. policy coordination with our group of 20 colleagues should not take a backseat. alternative theory of the case : if too - big - to - fail prevails … we should not fool ourselves. government interventions during the past couple of years, however necessary, revealed a set of policy preferences. expectations hardened that governments will come to the rescue of large ailing markets and large failing firms. these expectations must be unlearned by market participants. and the government ’ s role must be explicitly delineated. these changes won ’ t happen overnight. but, eradicating the too - big - tofail problem should be the predominant policy goal. if we fail to achieve this critical objective, the next - best regime may involve choosing a point between two competing models for systemically - significant firms : regulating what financial institutions can do, and regulating how they do it. 5 clear rules – more focused on the “ what ” than the “ how ” – could liberate firms from the corridors of washington so they can get back to business. supervisors, of course, would still serve an important role, leaning against the prevailing winds, providing guidance to firms, and ensuring best practices. but, washington would steer clear of managing the affairs of private firms. obscuring the choice altogether – both directing the “ what ” and ordering the “ how ” – strikes me as imprudent. washington finds itself perhaps too interested in scrutinizing the day - today management and operations of financial firms. are they loaning too little to small businesses? too much to big developers? are loans to large corporations too cheap? and see paul tucker ( 2009 ), “ the crisis management menu, ” speech at

, well - understood bankruptcy protocols. this replication would provide clearer rules of the road for classes of creditors in advance of any resolution. still, the financial architecture requires additional reforms to mitigate the too - big - to - fail problem. preferred theory of the case : resurrecting market discipline to redress too - big - to - fail moral hazard in the financial system is higher than any of us should countenance. there is a high burden on policymakers to mitigate it. some newly - empowered and untested regulatory structure is not likely – in and of itself – to be sufficient to tackle institutions that are too - bigto - fail, particularly as memories of the crisis fade. regulation is too important to be left to regulators alone. we must resurrect market discipline as a complementary pillar of prudential supervision. otherwise, the too - big - to - fail problem – exacerbated by recent events – could undermine our financial system and do long - term harm to the real economy. the growing specter of government support threatens to weaken market discipline, confuse price signals, and create a class of institutions that operate under different rules of the game. this state is not acceptable. we need a system in which insolvent firms fail. market discipline only works if governments can demonstrably and credibly commit to allow firms to fail. this system isn ’ t just about giving government officials better options on sunday nights. it is about making sure that market discipline is operative in the prior months and years to avoid altogether the proverbial sunday night judgments. i don ’ t preach the infallibility of market discipline in policing risks. market discipline, like regulatory discipline, is imperfect. it too has a tendency to become lax late in economic booms and excessively tight in busts. but, a system must be designed so that market discipline works – not to the exclusion of regulatory discipline – but in support of it. they should serve as complementary pillars, bolstering one another as needed. so, how do we design a new financial architecture that – in addition to improved resolution authority – more squarely confronts the too - big - to - fail problem? it isn ’ t simple or easy or ripe for a quick - fix. but, we cannot afford to be discouraged. the stakes are too high. first, in order to resurrect market discipline from the ash - heap of the recent crisis, stakeholders – that is, shareholders,