of banking, and it seems unlikely that centralizing this subtle activity through liquidity regulation can be done without efficiency costs. therefore liquidity regulation must not be overburdened, and central banks providing some well - designed and rule based economic counterincentives to an excessive reliance on the [ lender of last resort ] is an important contribution to reduce the burden put on regulation. ” i agree with ulrich there, and would emphasize that banks ’ core functions can be strengthened through the aims and standards set by regulation. 17 but the task is not just calibrating the combination of well - designed regulation and appropriate incentives for taking recourse to the lender of last resort. ulrich seems to ignore the importance of prudential supervision and its potential contribution to mitigating moral hazard. 18 regulation involves the development and promulgation of the rules under which banks and other regulated financial intermediaries operate. prudential supervision involves the monitoring and oversight of regulated institutions to assess whether they are in compliance with law and regulation and whether they are engaged in unsafe or unsound practices, and it ensures that firms are taking corrective actions to address any such practices. 19 regulation cannot be subtle, although its implementation, through supervision, likely can be. and let ’ s not forget that the tools available to prevent moral hazard generated by central bank liquidity facilities, such as penalty pricing, are rather blunt tools themselves. don ’ t get me wrong, i don ’ t mean to suggest that moral hazard is not something we should worry about when thinking about the liquidity provision tools that are integrated in our this is a feature of the ecb ’ s operating framework, which relies on a broad counterparty set and broad collateral base for its routine policy implementation operations. the bank of england ( 2013 ) describes some concrete steps it has taken to mitigate potential stigma. in addition to the liquidity regulation introduced by basel iii, the sec ’ s money market mutual fund reform should reduce imprudent risk - taking funded by the money fund industry. like liquidity risk management, credit risk management is also a core function of banks. however, i suspect few would suggest capital regulation is unnecessary. in 2012, the federal reserve launched the comprehensive liquidity assessment and review ( clar ) for firms in the large institution supervision coordinating committee ( liscc ) portfolio. like the comprehensive capital analysis and review, clar is an annual horizontal assessment, with quantitative and qualitative elements, overseen by a

joseph s tracy : the shape of the recovery remarks by mr joseph s tracy, executive vice president of the federal reserve bank of new york, at the connecticut business and industry association / metrohartford alliance economic summit and outlook 2011, hartford, connecticut, 7 january 2011. * * * it is a pleasure to be with you this morning. as the new year begins, it is instructive to look back over 2010 to try and discern what the shape of the recovery will look like over 2011. let me note at the outset that my comments are my own and do not necessarily reflect the views of the federal reserve bank of new york or the federal reserve system. just six months ago a topic of keen interest was whether the economy was experiencing a temporary soft patch or was heading into a double - dip recession. real gross domestic product ( gdp ) growth had slowed from 5 percent in the fourth quarter of 2009 to 3. 7 percent in the first quarter of 2010, and to only 1. 7 percent in the second quarter. soft patches are common in expansions but are difficult to distinguish from a more serious decline in momentum. examples of soft patches include the expansions in 1976 and 2002 ( chart 1 ). soft patches typically result when the initial boost from inventory restocking and fiscal stimulus from government spending fades and must be replaced by underlying strength in the economy. the concern six months ago was that a soft patch – amid an environment with little room for conventional monetary policy – could be particularly risky. however, growth picked up in the third quarter to an estimated 2. 6 percent, and as 2010 came to an end, economists were revising upward their growth forecast for 2011. the risk that the economy will enter a double - dip recession now seems quite low. the increased optimism reflects in part the compromise on the extension of the bush tax rates, the federal open market committee ’ s decision to purchase up to $ 600 billion in treasury securities, and stronger retail sales during the holiday season. while there are many factors that will affect the shape of the recovery in 2011, a key factor will be the degree of improvement in the labor market. from its peak in december of 2007, employment is down by 7. 4 million jobs and remains below its level in january 2000. that is, the “ great recession ” eliminated an entire decade ’ s worth of job growth ( chart 2 ). improved job growth is essential to generating the increase in disposable income that will support continued consumption growth which