daniel k tarullo : regulating systemically important financial firms speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the peter g peterson institute for international economics, washington dc, 3 june 2011. * * * as the one - year anniversary of the dodd - frank act approaches, there will be much discussion about the progress that has been made in reforming financial regulation. today i would like to get a head start on this exercise, concentrating on dodd - frank ’ s requirement that the federal reserve board establish special prudential standards for systemically important financial institutions or, as they are now generally known, “ sifis. ” my focus will be on the requirement for more stringent capital standards, which has generated particular interest. let me begin by placing this regulatory task in context. the financial crisis spawned or strengthened many reform agendas – among them consumer protection, securities and commodities market regulation, and traditional bank regulation. but a focus on systemic risk has been central to reform efforts, and fittingly so. it was, after all, a systemic financial crisis that we experienced and that led to the great recession that affects us still today. regulatory reform in the wake of the crisis cannot be judged a success if it does not reduce the incidence and severity of future crises. the pre - crisis regulatory regime had focused mostly on firm - specific or, in contemporary jargon, “ microprudential ” risks. even on its own terms, that regime was not up to the task of assuring safe and sound financial firms. but it did not even attempt to address the broader systemic risks associated with the integration of capital markets and traditional bank lending, including the emergence of very large, complex financial firms that straddled these two domains, while operating against the backdrop of a rapidly growing shadow banking system. a post - crisis regulatory regime must include a significant “ macroprudential ” component, one that addresses two distinct, but associated, tendencies in modern financial markets : first, the high degree of risk correlation among large numbers of actors in quick - moving markets, particularly where substantial amounts of leverage or maturity transformation are involved. second, the emergence of financial institutions of sufficient combined size, interconnectedness, and leverage that their failures could threaten the entire system. in prior speeches i have discussed the correlated risks present in such areas as money market funds and repo markets. 1 this afternoon i turn to some of the issues surrounding regulation of sifis

house prices : house prices have tended to reach a maximum near business cycle peaks, with real gdp growth slowing during the first year or so after house prices peak. 1 alan g. ahearne, john ammer, brian m. doyle, linda s. kole, and robert f. martin ( 2005 ), " house prices and monetary policy : a cross - country study, " international finance discussion papers 2005 - 841 ( washington : board of governors of the federal reserve system, september ). given the limits of what we know about the future path of housing prices and about the implications of any particular house - price scenario for real activity, the federal reserve will have to continue monitoring this area closely. further increases in energy prices are another risk to the economic outlook. the spot price of west texas intermediate crude oil rose from around $ 30 per barrel in december 2002 to around $ 65 per barrel in mid - august 2005, shortly before hurricanes katrina and rita made landfall. since the storms hit, prices have fluctuated widely in response to developments in both domestic and foreign oil markets and recently stood a bit below pre - katrina levels. over the same time period, prices of fardated futures contracts have also risen a substantial amount. as oil prices have pushed higher since late 2003, prices of natural gas also have trended up sharply. and storm - related disruptions to natural gas production as well as weather patterns this winter have caused considerable volatility in natural gas prices. economic theory suggests that energy price hikes of this magnitude should have an important contractionary effect on the economy by reducing the purchasing power of households and holding down business profits outside the energy sector. persistently higher oil prices also likely reduce labor productivity and potential output over time as firms adjust their production processes to use less energy. as for the reduction in aggregate demand, higher energy prices increase the bill for imported oil and natural gas, which can be viewed as a " tax " on u. s. residents by foreign energy producers, thereby holding down aggregate demand. given the rise in energy prices since 2003, the import " tax " has risen more than $ 150 billion annually. although they are imprecise, simulations from the federal reserve board staff's large - scale econometric model, which account for these effects, suggest that increases in spot and futures prices of energy from late 2003 to the present subtracted a 1 / 2 percentage point from real gdp growth in 2004 and more than 1 percentage point in 2005. the