financial or operational linkages and, absent strong risk controls, can themselves be a source of contagion in times of stress. thus, it is critical that systemically important payment, clearing, and settlement systems and activities be subject to strong and consistent prudential standards designed to ensure the identification and sound management of credit, liquidity, and operational risks. unfortunately, the current regulatory and supervisory framework for systemically important payment, clearing, and settlement arrangements is fragmented, creating the potential for inconsistent standards to be adopted or applied. in light of the increasing integration of global financial markets, it is important that these arrangements be viewed from a systemwide perspective, and that they be subject to strong and consistent prudential standards and supervisory oversight. the federal reserve has direct supervisory responsibility for some of the largest and most critical systems in the united states and has a role in overseeing several other systemically important systems. but a coherent framework for supervision of these systems does not exist, and our current authority depends to a considerable extent on the specific organizational form of these systems. chairman frank's discussion draft would provide the federal reserve with additional authorities to ensure that appropriate standards and oversight are applied to systemically important payment, clearing, and settlement arrangements. improving the securitization process the financial crisis revealed a number of significant shortcomings in the securitization process that contributed importantly to the stresses experienced by the markets as well as to the outsized losses some firms faced once markets began to deteriorate. the ability of brokers and lenders to readily securitize and sell to third parties loans that they were making, regardless of their risks, contributed to the overall decline in underwriting standards in the years leading up to the crisis. moreover, capital requirements failed to provide adequate incentives for firms to maintain capital and liquidity buffers sufficient to absorb extreme systemwide shocks without taking actions that could tend to amplify the effects of the shocks. in addition, institutional investors of all sorts – including financial institutions, pension funds, and overseas investors – put excessive reliance on the rating agencies'assessment of the risks associated with a range of structured products. in part, investors'reliance on ratings reflected the lack of transparency of many structured products, which made independent assessments of risk difficult. however, it subsequently became clear that the rating agencies had not themselves understood the extent of the risks associated with complex structured instruments, particularly those related to subprime mortgages. once those risks were realized, the ratings

of many of these securities were downgraded sharply, with investors taking very large and unexpected losses. addressing these weaknesses will require action on several fronts. as i noted earlier, the basel committee has announced improvements to bank capital standards for securitizationrelated exposures, thereby better aligning these standards with the risks presented by securitizations. improved transparency regarding the individual loans backing a securitization, as well as regarding the originators of such loans, also is needed to reduce the opacity that has impeded effective discipline in the market for asset - backed securities ( abs ) and encouraged undue reliance on credit rating agencies. chairman frank's discussion draft would advance this goal by authorizing the securities and exchange commission ( sec ) to develop enhanced disclosure requirements for abs, including loan - level information and information identifying the originators or brokers of the underlying loans. 6 using authority granted by the congress in 2006, the sec already has adopted or proposed several rules to improve the transparency, quality, and integrity of the credit rating process for securitizations and other structured finance products. 7 requiring that originators or securitizers of loans packaged for securitization retain some exposure to the credit risk associated with the loans also could help restore confidence in the securitization market and encourage the application of sound underwriting criteria to all loans, including those intended for securitization. the details of such a requirement are probably best left to rulemaking by the implementing agencies. complexities are created by the broad range of assets that are, or may be, securitized, as well as by the different approaches that may be taken to securitization. a credit exposure retention requirement may thus need to be implemented somewhat differently across the full spectrum of securitizations in order to properly align the interests of originators, securitizers, and investors without unduly restricting the availability of credit or threatening the safety and soundness of financial institutions. charter conversions and regulatory arbitrage finally, i am pleased to note that one potential gap, which i know is of interest to this committee, already has been addressed by the joint efforts of the banking agencies. the dual banking system and the existence of different federal supervisors create the opportunity for insured depository institutions to change charters or federal supervisors. while institutions may engage in charter conversions for a variety of sound business reasons, conversions that are motivated by hopes of escaping current or prospective