will leave to others the question of whether every detail of the laws passed in this period was equally effective, in the short or long term, in promoting macroeconomic stability. but we should recognize that rules to promote financial stability and a healthy economy have deep roots in the american legal tradition. the post - crisis international consensus arguably, the history of law and macroeconomics has even deeper roots. prior to the banking act of 1935, congress had passed the national bank act of 1863 in response to the financial crisis that emerged during the early days of the american civil war. its purpose was to create a national banking system and establish a national currency. the following year, congress passed the national bank act of 1864, which established the office of the comptroller of the currency and gave the federal government the authority to supervise commercial banks. some might even characterize the first and second banks of the united states as early efforts at law and macroeconomics. - 4building upon that strong tradition, i would like to focus this morning ’ s remarks on the role that law and macroeconomics has played since the financial crisis in promoting a more stable economy. i am, of course, referring to macroprudential financial regulation. let ’ s rewind the tape. after many decades of remarkable financial stability in the united states since the 1930s, the focus of financial oversight had moved away from systemic risks. prior to the financial crisis, the better part of our regulatory framework was microprudential in nature — individual laws geared toward mitigating the fallout from idiosyncratic shocks to firms. this framework was designed to protect investors and depositors, viewed negative shocks as not originating from the financial system, and did not take into account risks that might be shared by financial firms. 2 this is not to say that regulators did not understand the consequences of an interconnected system and the potential of contagion. for instance, the u. s. government, under the able leadership of treasury secretary nicholas brady, recognized and responded to the financial stability risks of the latin american debt crisis of the 1980s. the united states had interests in stabilizing allies in latin america, but a central part of the motivation was to contain potential risks to the u. s. economy. the events of 2008 – 09 redefined our mission by more explicitly connecting macroeconomic and financial stability, as in the 1930s. congress and the executive branch embraced a sweeping response, designing a system of laws to reflect a recognition that the cumulative

important banks ( g - sibs ), which are subject to stricter capital requirements in the form of a capital surcharge. these banks must meet this higher capital standard based on the judgement that their potential failure would have a larger, systemwide impact on the board of governors of the federal reserve system, 2019 supervisory scenarios for annual stress tests required under the dodd - frank act stress testing rules and the capital plan rule ( washington : board of governors, february 2019 ), https : / / www. federalreserve. gov / newsevents / pressreleases / files / bcreg20190213a1. pdf. - 8economy. the goal, therefore, is to reduce a g - sib ’ s probability of failure so that its expected impact on the economy would be the same as that of a non - g - sib. similarly, to reduce the risks of interconnectedness and contagion, the united states and other jurisdictions have implemented rules that limit the exposure that one bank may have to a single counterparty. finally, research on optimal bank capital levels by staff at regulatory and supervisory bodies around the world have factored in macroeconomic costs and benefits. specifically, these models assume that higher capital requirements would reduce the probability of a financial crisis occurring but would increase the cost of bank lending, thereby lowering gdp growth. not surprisingly, these models have produced a wide range of capital estimates given the wide range of underlying assumptions. combating pro - cyclicality the third paradigm shift at the fed is combatting pro - cyclicality. to be sure, none of the regulatory developments that i have discussed so far screams macroeconomics quite as loudly as a time - varying, discretionary regulatory regime the express goal of which is to fight pro - cyclicality. cyclicality — in this case, fluctuations in the economy based on the business cycle — is a concept that is near and dear to every macroeconomist ’ s heart. in fact, theoretical studies of economic cycles go back to the early 1800s, and the national bureau of economic research ’ s tracker of the u. s. business cycle dates economic contractions and expansions back to the 1850s. quite impressive. there ’ s also more than just a handful of volumes of articles and book chapters written on the business cycle and countercyclical fiscal policy. - 9in the context of macroprudential regulation, pro - cyclicality represents a problem because banks tend to build