##ocation. similarly, dealers apparently are unwilling to provide the funding and the balance sheet capacity necessary for their leveraged clients to arbitrage away this dislocation. the degree to which this shift in the yield spread between treasury and interest rate swap yields is due to the differential capital requirements imposed on cash versus derivative instruments warrants more investigation. just as market and funding liquidity are interlinked, so are funding liquidity and capital requirements. all else equal, stronger capital requirements reduce firms ’ vulnerability to runs. this suggests that funding liquidity risk can be addressed in many different ways. first, capital requirements can be bolstered to reduce the risk that a firm will become insolvent in particularly bad states of the world. second, improved reporting and transparency can reduce the degree of uncertainty about whether a firm is solvent, thus reducing the risk that brunnermeier and pedersen ( 2009 ) “ market liquidity and funding liquidity ” review of financial studies 22 pp. 2201 – 2238 provide a theory that features strong correlation between market and funding liquidity during crises. hu, pan, wang ( 2013 ) “ noise as information for illiquidity ” journal of finance 68 ( 6 ), pp. 2341 – 2382 provide further evidence on the relationship between yield curve fitting errors and alternative funding liquidity metrics. bis central bankers ’ speeches investors might wrongly perceive that a firm is insolvent, when, in fact, it still has adequate capital. third, liquidity requirements can be increased to reduce the risk that the firm will have to engage in a fire sale of assets that might deplete its capital. also, a liquidity buffer gives the firm ’ s management time to respond to bad events without having to resort immediately to selling assets. fourth, a lender - of - last - resort can provide a liquidity backstop that makes funding liquidity more resilient. consider the case when a counterparty is uncertain about how other potential lenders view a firm ’ s solvency. if there is no lender - oflast - resort backstop, this may cause firms to be unwilling to lend, not because they perceive the counterparty as insolvent, but, instead, because they are worried about what others think. that is, i may be unwilling to lend to you, not because i perceive you as insolvent, but because i am uncertain about how others view your solvency. if i do lend and others

month an advance notice of proposed rulemaking for a simplified capital framework that would apply to banks with less complex risk structures. the notice sets forth very broad options for a less burdensome standard, including the use of a simplified risk - based ratio, a stand - alone leverage ratio, or a leverage ratio modified to capture off - balance - sheet exposures. there are many pros and cons to each of these alternatives, and the banking agencies are eager to receive your views as well as your ideas for other alternatives. we are hopeful that this dialog will lead to a less burdensome, yet prudent rule for noncomplex institutions. in closing, the transition of the us economy to a more sustainable supply - demand relationship is posing challenges for businesses, banks, and monetary policymakers. how well banks perform under these conditions will depend on their ability to continuously reevaluate previously held assumptions and adapt to change. fortunately, us banking organizations of all sizes have the right tools to thrive in this environment, in the form of improved risk management techniques, more diverse earnings, and strong capital bases. i am confident that banking organizations will continue to monitor and respond to risks while meeting customer demands in a way that strengthens our underlying financial structure in the years to come.