resilience of the see fdic ( 1997 ), “ bank of new england corp. ( pdf ), ” in managing the crisis : the fdic and rtc experience, part ii. alice schroeder ( 2008 ), the snowball : warren buffett and the business of life ( new york : bantam books ). bis central bankers ’ speeches financial system. the federal reserve and the rest of the regulatory community are working diligently to implement that agenda. today, risk - based capital and leverage ratios for banks of all sizes have improved materially since 2009 and are significantly above their levels in the years preceding the crisis. the banking sector overall also has substantially improved its liquidity position over the past few years. the system is undeniably stronger than before the crisis. 6 reducing the systemwide loss given default of systemic financial firms it is neither possible nor desirable to regulate large financial institutions so that they literally cannot fail. but regulation can limit the systemwide impact of such a failure. let ’ s review what has been done since the crisis to reduce the damage to the system from the failure of one of the very largest firms. under dodd - frank, nearly all financial institution failures, including those of large, complex institutions, will continue to be addressed as they were before passage of the new law. the holding company will be resolved in bankruptcy. operating subsidiary failures will continue to be treated either under bankruptcy or, where applicable, under specialized resolution schemes, including the federal deposit insurance act for banks and the securities investor protection act for securities firms. dodd - frank eliminated the authority used by the federal reserve and other regulators to bail out individual institutions during the crisis, including bear stearns, citicorp, bank of america and aig. but congress also recognized that there may be rare instances in which the failure of a large financial firm could threaten the financial stability of the united states. to empower regulators to handle such a failure without destabilizing the financial system or exposing taxpayers to loss, dodd - frank created two important new regulatory tools. first, the act requires large bank holding companies and nonbank financial firms designated by the financial stability oversight council to submit a resolution plan or “ living will ” for their rapid and orderly resolution under the bankruptcy code. second, the act created a new orderly liquidation authority ( ola ) as a backup to resolution in an ordinary bankruptcy. the largest bank holding companies submitted their first annual “ living wills ” to the federal reserve

financial markets, i believe it may be useful to compare the crisis at amaranth, which i described in the beginning, with the crisis at ltcm. the effects on the financial markets were very different. despite the fact that amaranth ’ s losses were much greater than those of ltcm, no authority needed to intervene ; amaranth was able to close its positions of its own accord and in a smooth manner. the large positions were sold ( at a substantial discount, one assumes ) to jp morgan and citadel, another large hedge fund. the situation with ltcm was quite different. a number of events during 1998 ( including the russian debt crisis ) had created considerable unease in the financial markets and ltcm had entirely the wrong positions for such a development. when the investors ’ assets had fallen from usd 5 billion to usd 1. 5 billion in the space of six months, the us central bank intervened. the size of the fund, combined with the fact that so many financial agents were involved, meant that the federal reserve saw a threat to financial stability. to avoid an uncontrolled collapse, the fed called together a group of ltcm ’ s largest creditors, who took over the fund ’ s positions. one important difference between the two hedge funds was how much they had borrowed in relation to their capital. the debt / equity ratio at ltcm was between 25 and 30, while that at amaranth was around 5. a further problem for ltcm was that the fund was partly involved in very complex positions on the derivatives market that were difficult to close. many other funds and banks held the same types of positions. amaranth, on the other hand, was largely alone in its part of the market – most others had no positions, or contrary positions, in energy derivatives. this made settlement easier, if not cheaper. a further explanation is probably that amaranth ’ s losses occurred under very favourable economic and financial circumstances, where the market had good access to capital. this was far from the case when ltcm tried to settle its positions in the midst of the russia crisis. under more strained conditions, perhaps the sequence of events for amaranth would have been entirely different and the risks to the financial system much greater. however, the fact that the financial system could manage the problems in amaranth may also imply that it has become more resilient. the markets have demonstrated that they can manage a number of major strains in recent years, both macroeconomic