daniel k tarullo : confronting “ too big to fail ” speech by mr daniel k tarullo, member of the board of governors of the us federal reserve system, at the exchequer club, washington dc, 21 october 2009. * * * the far - reaching financial crisis that has afflicted our country in the past two years has drawn attention to a raft of problems – from the concentration of commercial real estate exposures in some regional and community banks, to the risks associated with some forms of derivatives, to the need for more vigorous financial services consumer protection. proposals for administrative and congressional responses are thus appropriately diverse. i would suggest, however, that the reform process cannot be judged a success unless it substantially reduces systemic risk generally and, in particular, the too - big - to - fail problem. this afternoon i will address my remarks specifically to the task of forging an effective response to this problem. 1 the current form of the too - big - to - fail problem the concern is hardly a new one. in one manifestation, too big to fail was an extension of the classic problem of bank runs and panics. if a large bank failed – whether because it was illiquid after a deposit run or insolvent after severe losses – the entire banking system might be endangered. in cases in which other banks held significant deposits in the distressed institution, the failure of a large bank might lead directly to the illiquidity or insolvency of other banks. the result could be a domino effect in the interbank lending market, with one bank's failure toppling the next. even where direct losses to other banks were thought manageable, the failure of a large bank might strike panic into depositors, especially uninsured depositors, of other large institutions. the result might be a far - reaching run on the entire banking system that could, in a worst case such as occurred in early 1933, freeze the financial system completely. faced with either variant of such a devastating impact on the system, government authorities often believe they have little choice but to intervene. the government may provide funds or guarantees to the bank in order to keep it functioning. alternatively, the government may allow the bank to fail, but shield some or all of its depositors from loss, even those not covered by existing insurance programs. in 1984, for example, the federal deposit insurance corporation protected the uninsured depositors of continental illinois bank, then the nation's seventh largest depository

– what we are doing here – is a vital component. we must develop clear guidelines on green finance. the temptation would be to be loose with definition and regulation, in order to ensure that nairobi is the entrepot in this new, and essential, field of finance. however, the entrepot model can have its drawbacks. we must remember that sometimes these may bring the detritus of trade, much as they could bring in high quality commerce. we cannot accept, or afford, to give cover to those who only wish to burnish their greenwashing credentials. thus, we must look at the highest quality of green bond issuance. the guidelines that we are launching today should be guided by the green bond principles, which outline clearly how projects are selected, and how proceeds are managed and used ; as well as which information is disclosed to investors and how. we must also position nairobi to be a global centre for the green assessment of bonds. issues such as verification, consultant review and ratings can be refined here, and we should develop and attract global experts in these fields. it is my hope that when we look back a decade or two hence, we will recall this morning fondly, saying to each other that'we were there ', when we set nairobi on the path to being a capital of green bonds and green finance. and, incidentally, finding me will be fairly easy. i will be the retired old man reading a book under a tree in uhuru park! thank you for your attention.