, one that led to a vigorous response with the creation of the bank term funding program and invoking the systemic risk exemption to guarantee all depositors of svb and signature bank. i think it is an oversimplification to point to any one factor as the root cause of the failure of svb. there were a number of issues that contributed to the firm ’ s ultimate failure. these events included rapid growth, poor risk management, poor public communication, a lack of supervisory attention to core risks, and an insufficiently robust supervisory response to the buildup of interest rate and funding risk. these issues were exacerbated by operational and technological problems with fedwire and discount window lending. the cumulative effect of these issues likely accelerated the firm ’ s failure and increased the scope of the resulting financial harm. but certainly, this is a clear example of where the federal reserve ’ s proactive tools — supervision of risk management, and the operation of liquidity support and payment tools — could have been much more effective. therefore, the virtue of supervision as a proactive measure to support financial stability comes with a cautionary note. ineffective supervision itself can compound financial stability risks by allowing the buildup of risk without commensurate risk - management measures or - 8supervisory attention. one protective measure that we can take to support effective supervision is to ensure that focus on traditional risks is not lost or diluted. one example of a supervisory and regulatory distraction is from the fed ’ s recent focus on climate risk. recently, the federal reserve conducted a pilot climate scenario exercise with a subset of the largest u. s. global systemically important banks ( g - sibs ) and issued guidance to large institutions on managing climate - related financial risk. this regulatory attention and focus on one specific, non - core risk could reasonably call into question whether regulatory priorities are focused sufficiently on key risks. firms are already required to manage all material risks, and prioritizing climate risk in this way could lead to the misallocation of risk - management resources. regulatory approaches to promote financial stability second, where regulation may create or exacerbate financial stability risks, we need to take a close look at whether those risks are justified by the safety and soundness benefits of the regulation. for example, consider the threat to financial stability resulting from market illiquidity. liquidity is essential to effective market functioning, and liquidity in the u. s. treasury market is particularly important due to its critical

role in the u. s. and global financial systems. 7 this is an area that, in relative terms, has recently experienced stress events as in the september 2019 repo market stress, and the so - called “ dash for cash ” in march of 2020. these events raised concerns about the resiliency of u. s. treasury markets. even today, some indicators signal low market liquidity through market depth in u. s. treasury cash markets, which have been at levels below historical norms. 8 see financial stability report, 9 – 10. figure 1. 11 in financial stability report, 10. - 9banks play an important role in providing liquidity, and there are clear signs that liquidity in treasury markets is low. 9 while there may be a number of reasons for reduced treasury market liquidity, i would note two specific factors and ongoing risks : ( 1 ) concerns by banks about balance sheet capacity to engage in low - margin market activities, and ( 2 ) the cumulative regulatory burden on banks when they engage in market - making activities, which includes most recently the proposed increase in capital costs for market making activity proposed by the basel iii endgame rulemaking, and an apparent lack of interest in addressing the constraints on bank activities caused by bank leverage ratios. ultimately, liquidity in the u. s. treasury market has the potential to amplify or dampen shocks to the financial system. where we can take proactive regulatory measures to ensure that primary dealers have adequate balance sheet capacity to intermediate treasury markets in times of stress, we should do so. this could include amending the leverage ratio and g - sib surcharge for the largest u. s. banks. and where we can take into consideration the impact of regulatory reforms on financial stability, we must at least acknowledge the tradeoffs and the potential downside risks that regulatory changes could create. this is particularly important when considering significant increases to capital requirements, especially those of the scale contemplated by the basel iii proposal, including the market risk capital increases. adopting regulatory changes to mitigate these concerns may not be sufficient to promote market liquidity, but it would be an important step toward building resiliency in advance of future stress events. in my view, it would be better to fix the roof now, while the sun is shining, by addressing over - calibrated leverage ratio requirements and moderating capital increases for the basel iii proposal. see financial stability report, 9 – 10. - 10 unintended