creditors. in the interests of brevity, i won ’ t go into a lot of detail about ola. but my board colleague jay powell talked in depth about this topic in a speech last month, and i would just register my broad agreement with his conclusion – namely that the federal deposit insurance corporation ’ s ( fdic ’ s ) so - called “ single point of entry ” approach to resolution is a promising one. 2 the federal reserve continues to work with the fdic on the many difficult implementation challenges that remain, but i believe this approach gets the first - order economics right and ultimately has a good chance to be effective. perhaps more to the point for tbtf, if a sifi does fail i have little doubt that private investors will in fact bear the losses – even if this leads to an outcome that is messier and more costly to society than we would ideally like. dodd - frank is very clear in saying that the federal reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. and as a member of the board, i am committed to following both the letter and the spirit of the law. the thoughts that follow are my own, and are not necessarily shared by my colleagues on the federal reserve board. i am grateful to members of the board staff – michael gibson, michael hsu, nellie liang, and mark van der weide – for their advice. see powell ( 2013 ). bis central bankers ’ speeches still, we are quite a way from having fully solved the policy problems associated with sifis. for one thing, the market still appears to attach some probability to the government bailing out the creditors of a sifi ; this can be seen in the ratings uplift granted to large banks based on the ratings agencies ’ assessment of the probability of government support. while this uplift seems to have shrunk to some degree since the passage of dodd - frank, it is still significant. 3 all else equal, this uplift confers a funding subsidy to the largest financial firms. moreover, as i noted earlier, even if bailouts were commonly understood to be a zeroprobability event, the problem of spillovers remains. it is one thing to believe that a sifi will be allowed to fail without government support ; it is another to believe that such failure will not inflict significant damage on other parts of the financial system. in the presence of such externalities, financial firms may still have excessive private incentives to remain

data and adjust over time, particularly since the recent changes to capital regulation already on the books may represent an informative experiment. in my view, this observation about the potential for learning tips the balance in favor of capital surcharges. for example, the capital - surcharge schedule proposed by the basel committee for globally important systemic banks may be a reasonable starting point. however, if after some time it has not delivered much of a change in the size and complexity of the largest of banks, one might conclude that the implicit tax was too small, and should be ratcheted up. 10 in principle, this turning - up - the - dials approach feels to me like the right way to go : it retains the flexibility that makes price - based regulation attractive, while mitigating the risk that the implicit tax rate will be set too low. of course, i recognize that its gradualist nature presents practical challenges, not least of which is sustaining a level of regulatory commitment and resolve sufficient to keep the dials turning so long as this is the right thing to do. before wrapping up, let me briefly mention another piece of the puzzle that i think is sometimes overlooked, but strikes me as having the potential to play an important complementary role in efforts to address the tbtf problem – namely, corporate governance. suppose we do everything right with respect to capital regulation, and set up a system of capital surcharges that imposes a strong incentive to shrink on those institutions that don ’ t create large synergies. how would the adjustment process actually play out? the first step would be for shareholders, seeing an inadequate return on capital, to sell their shares, driving the bank ’ s stock price down. and the second step would be for management, seeking to restore shareholder value, to respond by selectively shedding assets. but as decades of research in corporate finance have taught us, we shouldn ’ t take the second step for granted. numerous studies across a wide range of industries have documented how difficult it is for managers to voluntarily downsize their firms, even when the stock market is sending a clear signal that downsizing would be in the interests of outside shareholders. often, change of this sort requires the application of some external force, be it from the market for corporate control, an activist investor, or a strong and independent for different estimates of the costs of capital requirements to banks, see baker and wurgler ( 2013 ), admati and others ( 2011 ),