liquidity - risk management and evaluates institutions ’ practices against these benchmarks. a proposal for a net stable funding ratio would require better liquidity management at horizons beyond that covered by the liquidity coverage ratio. a proposed capital surcharge for the largest firms would discourage overreliance on short - term wholesale funding. also, the securities and exchange commission has adopted changes in regulations that may help avoid future runs on prime money market mutual funds ( that is, money funds that invest primarily in corporate debt securities ). and reforms in the triparty repo market have reduced risks associated with intraday exposures. large, complex institutions and too big to fail in the aftermath of the crisis, the congress tasked the banking regulators with challenging and changing the perception that any financial institution is too big to fail by ensuring that even very large banking organizations can be resolved without harming financial stability. steps are under the notion that “ agency problems ” — that is, conflicts in the interests of managers and various stakeholders in firms — may contribute to excessive debt has a long history, most notably following the notion of “ debt overhangs ” from myers ( 1977 ). hanson, kashyap, and stein ( 2011 ) emphasize the potential importance of this issue for the financial sector. admati and others ( 2013b ) present a related mechanism. the notion that securities issued by financial institutions may provide liquidity services in a manner that potentially contributes to fragility because such securities do not have the safety and liquidity of publicly issued securities is examined in, for example, gorton, lewellen, and metrick ( 2012 ) ; stein ( 2012 ) ; and gorton and ordonez ( 2014 ). bis central bankers ’ speeches way to achieve this objective. in particular, banking organizations are required to prepare “ living wills ” – plans for their rapid and orderly resolution in the event of insolvency. regulators are considering requiring that bank holding companies have sufficient total loss - absorbing capacity, including long - term debt, to enable them to be wound down without government support. 11 in addition, the federal deposit insurance corporation has designed a strategy that it could deploy ( known as single point of entry ) to resolve a systemically important institution in an orderly manner. the crisis also revealed that risk management at large, complex financial institutions was insufficient to handle the risks that some firms had taken. compensation systems all too frequently failed to appropriately account for longer - term risks undertaken by employees. and lax controls

##encies. 3 recent reviews have highlighted potential costs of a distorted financial sector, but such reviews also emphasize the range of both theoretical and empirical work that has documented the many ways in which the financial sector can support economic efficiency ; see, for example, greenwood and scharfstein ( 2013 ) and zingales ( 2015 ). guiso, sapienza, and zingales ( 2004 ) discuss evidence that financial development supports entrepreneurship, and fort and others ( 2013 ) examine the importance of financing for business formation and young firms. greenwood and scharfstein ( 2013 ) discuss how an important fraction of growth in the u. s. financial sector reflects the greater demand of households for asset management services and credit. malkiel ( 2013 ) considers similar issues and reviews how improved access to low - cost investment options has benefited households. krueger and perri ( 2006 ) analyze how an increase in access to credit contributed to households ’ ability to smooth spending despite substantial income volatility. bis central bankers ’ speeches technological innovations have increased the ease and convenience with which individuals make and receive payments. 4 the contribution of the financial sector to household risk management and business investment, as well as the significant contribution of financial - sector development to economic growth, has been documented in many studies. 5 such research shows that, across countries and over time, financial development, up to a point, has disproportionately benefited the poor and served to alleviate economic inequality. 6 distorted incentives in the financial sector despite these benefits, as we have seen, actions by financial institutions have the potential to inflict harm on society. instead of promoting financial security through prudent mortgage underwriting, the financial sector prior to the crisis facilitated a bubble in the housing market and too often encouraged households to take on mortgages they neither understood nor could afford. recent research has raised important questions about the benefits and costs of the rapid growth of the financial services industry in the united states over the past 40 years. 7 a combination of responses to distorted incentives by players throughout the financial system created an environment conducive to a crisis. excessive leverage placed institutions at great risk of insolvency in the event that severe, albeit low - probability, problems materialized. overreliance on fragile short - term funding by many institutions left the system vulnerable to runs. and excessive risk - taking increased the probability that severe problems would, in fact, materialize. moreover, regulators – and the structure of the regulatory system itself