, i was committed to treating every consumer and institution fairly and respectfully and fostering open communication. this working group will follow those same principles. we are looking for ways to optimize our supervision and regulation to ensure it adapts to the on - the - ground realities of an evolving industry and changing consumer expectations while maintaining the safety and soundness of our banking system. let me close by saying a few words about monetary policy and the federal reserve ’ s dual mandate. as a community banker, it was my job to support local businesses and consumers. i draw upon this experience often when thinking about monetary policy, because it has given me a personal and practical understanding of how the federal reserve ’ s goals of fostering maximum employment and stable prices directly affects individuals as well as the broader financial system and economy. the congress has given the federal reserve independence to pursue these goals, because our work is critical to our economy, to businesses, to families, and to communities. i am deeply committed to fulfilling this mandate. 1 / 2 bis central bankers'speeches if confirmed by the senate, i will continue the important work i have begun and be committed to accountability, transparency, and clear communication in all of my responsibilities at the federal reserve. thank you for the honor of this hearing, and i look forward to answering the committee ’ s questions. 2 / 2 bis central bankers'speeches

reactions are characterized by a dramatic shift to maximize short - term value, and are an extension of human behavior that manifests itself in all forms of human interaction – a set of responses that does not seem to have changed over the generations. i defy anyone to distinguish a speculative price pattern for 1999 from one for 1899 if the charts specify neither the dates nor the levels of the prices. if this paradigm turns out to be the appropriate representation of the way our economy and our financial markets will work in the future, it has significant implications for risk management. probability distributions estimated largely, or exclusively, over cycles excluding periods of panic will underestimate the probability of extreme price movements because they fail to capture a secondary peak at the extreme negative tail that reflects the probability of occurrence of a panic. furthermore, joint distributions estimated over panicless periods will underestimate the degree of correlation between asset returns during panics when fear and disengagement by investors result in simultaneous declines ( or, in rare instances, increases ) in values as investors no longer adequately differentiate among degrees of risk and liquidity. consequently, the benefits of portfolio diversification will tend to be significantly overestimated by current models. such a view of the world would also have important implications for approaches to the prudential oversight of capital adequacy for banks and other financial institutions. regulatory minimum capital requirements for banks ’ trading portfolios are now based on the banks ’ own internal risk measurement models. furthermore, regulators are exploring the potential for using an internal models approach to credit risk in the banking book. some may now argue that the periodic emergence of financial panics implies a need to abandon models - based approaches to regulatory capital and to return to traditional approaches based on regulatory risk measurement schemes. in my view, however, this would be a major mistake. regulatory risk measurement schemes are simpler and much less accurate than banks ’ risk measurement models. consequently, they provide banks with the motive and the opportunity to engage in regulatory arbitrage that seriously undermines the regulatory standard and frustrates the underlying safety and soundness objective. specifically, they induce banks to reduce holdings of assets where risks and regulatory capital are overestimated by regulators and increase holdings of assets where risks are underestimated by regulators. it would be far better to provide incentives for banks to enhance their risk modeling procedures by taking account of the potential existence and implications of discontinuous episodes. scenario analysis can highlight vulnerabilities to the kind of flights to quality