equity of a surviving entity. this approach would have the effect of concentrating the firm - wide losses on the parent company ’ s private sector equity holders and creditors. the spoe approach places a high priority on what your own president weidmann recently described as “ the principle of liability ”, meaning that those who benefit should also bear the costs. perhaps the greatest challenge for the resolution of a systemic global bank is the possibility that public or private actors in different countries might take local actions that would cause the overall resolution to spin out of control. creditors and counterparties of solvent operating bis central bankers ’ speeches subsidiaries might rush for the exit if they are unsure of their status. as a subsidiary comes under increasing stress, authorities might preemptively ring - fence local assets. the process of resolution will need to be fully worked out and understood beforehand by market participants, regulatory authorities, and the general public. it will be absolutely essential to build trust among all parties, and especially between regulatory authorities. much remains to be done in eliminating “ too - big - to - fail ”. the federal reserve is considering a requirement that systemic institutions maintain sufficient long - term debt at the parent company level to absorb losses and recapitalize operating subsidiaries in the event of failure. we expect to propose such a requirement later this year. i share the view expressed recently by several of my board colleagues that the work of large bank resolution is not complete, and that further measures may be necessary. no one should doubt that the federal reserve is committed to completing this project. reaching agreement on a cross - border resolution process will be challenging. our financial services industries and our economies differ in many ways. but we have a shared interest in financial stability, in reducing moral hazard, and in protecting taxpayers. on that note, i will briefly discuss the fed ’ s proposal for oversight of foreign banks operating in the united states, which carries out a mandate from the congress under the dodd - frank wall street reform and consumer protection act. 22 our proposal represents a targeted set of adjustments aimed at reducing the risks posed by the u. s. operations of large foreign banks to u. s. financial stability that were revealed during, and in the aftermath of, the recent financial crisis. the proposal is not intended to create a disadvantage for foreign banks in the u. s. market. rather, the proposal is part of a larger set of regulatory reforms that substantially raises standards for all banking organizations operating in the united states and aims to achieve the goals

macroprudential regulation. a second challenge for central banks is that the crisis revealed the need for a much more active set of macroprudential monitoring and regulatory policies – that is, a reorientation toward safeguarding financial stability through the containment of systemic risk. the failure to attend to, or even recognize, financial stability risks was perhaps the most glaring public sector deficiency in the pre - crisis period. this was a fault by no means limited to central banks. on the contrary, systemic risk had also come to seem more theoretical than real to many academics and financial market participants. even most of those inside and outside the official sector who argued for stronger capital or other prudential standards did not appreciate the degree to which the secondary mortgage market had turned into a house of cards. still, regardless of formal mandates, central banks are better positioned than most other government agencies to see and evaluate the emergence of asset bubbles, excessive leverage, and other signs of potential systemic vulnerability. in some respects this second challenge is an extension of the first, since the safety and soundness of large institutions must take account of the relative correlation of their asset holdings, interconnectedness, common liquidity constraints, and other characteristics of large banking organizations as a group. similarly, systemic risks and too - big - to - fail problems can increase if large, highly leveraged firms may operate outside the perimeter of statutory microprudential oversight, as was the case prior to 2008 with the large, free - standing investment banks in the united states. and market discipline will be badly compromised if financial market participants believe that an insolvent counterparty cannot be resolved in an orderly fashion and thus is likely to receive government assistance under stress. here again, domestic and international efforts have already produced significant reform programs, though implementation of some of these programs is less advanced than basel 2. 5 and basel iii. domestically, the federal reserve ’ s annual stress tests examine the effects of unexpected macroeconomic shocks on asset classes held within all major regulated firms. the dodd - frank act gave the financial stability oversight council ( fsoc ) authority to bring systemically important firms that are not already bank holding companies within the perimeter of federal reserve regulation and supervision. the fsoc is actively considering several firms for possible designation. finally, the dodd - frank act gave the federal deposit insurance corporation orderly liquidation authority for systemically important financial firms, thereby creating an alternative to the hobson ’ s choice of bailout or bankruptcy that authorities faced in 2008