that may be worth reassessing. one place to start is with regulations pertaining to smaller banks. people of all political stripes tend to agree that congress and regulators should reassess the effect that regulations have had on these firms and whether such regulations are commensurate with their level of risk. for these smaller banks, whose failure will not directly inflict large costs or stress on the broader financial system, the regulatory and compliance requirements should be reconsidered. indeed, banking agencies have announced many proposals for small banks, 11 including one that would simplify the capital rules for such banks consistent with their risk. 12 with respect to systemically important firms, i think it would be terribly myopic to forget the crisis. there have been a number of different types of changes proposed with respect to these firms. today, i ’ d like to focus on the proposals relating to resolution regimes. congress established ola when memories of lehman brothers ’ failure were fresh. it bears repeating that congress did so after facing the terrifying realization that the lack of a credible 4 / 6 bis central bankers'speeches resolution mechanism for dealing with failing systemic firms left only bad choices, such as lending into a run, bailout, or the collapse of the financial system. over the past several years, there have been efforts in congress to repeal ola and create a new, bespoke process for systemically important firms under the bankruptcy code. that process would largely mimic many of the features of the fdic ’ s single point of entry strategy intended for use in an ola proceeding. those efforts have picked up steam this year with the passing of two different bills in the house of representatives. 13 from my perspective, there are attractive aspects to both ola and the bankruptcy code. ola is largely an administrative process that has the benefit of agility. it is administered by the fdic, which will already have insight into the institution though the living will process. the fdic also communicates with foreign regulators regarding systemically important firms. ola has particular advantages in the context of a cross - border resolution, which means in this day and age the resolution of pretty much any systemically important institution. us regulators have established relationships with their foreign counterparts, and resolution processes similar to ola now exist in many globally important financial centers. this familiarity can facilitate crossborder cooperation and coordination in the event of a failure of a systemically important institution, and stem competing insolvency proceedings in multiple jurisdictions and

the start, a broad range of recent financial shocks do not seem to have adversely impacted the real economy. the international financial crisis that began in 1997 did not spillover to the nonfinancial sector in the united states. the equity price collapse and deterioration in credit in 2000 did not cause significant damage to the core institutions in the u. s. market. the relatively limited damage caused by operations failures of the 9 / 11 attacks reflected the strength of the capital position of major intermediaries, as well as the policy actions by the federal reserve to provide liquidity to the markets. more recently, the series of smaller financial shocks experienced since 2001, including the corporate bond defaults after 2001, the corporate accounting scandals in 2002, credit downgrades in the u. s. automobile industry in 2005, the failure of refco, the sharp declines in mid - 2006 in equity, commodity and emerging markets debt prices caused little contagion to other markets and limited strain on financial institutions. challenges the favorable balance between efficiency and resilience in the financial system we have observed recently does not of course guarantee we will achieve as favorable a balance in the future. the prospects for future stability will depend in part on how effective supervisors are in adapting policies in response to the ongoing evolution in markets. financial institutions face strong incentives to monitor and limit their risk profile and the risk - taking of their leveraged counterparties to some efficient level where benefits balance costs at the margin. this is good for the firm and also good from society ’ s perspective. private pools of capital have the capacity to use extensive leverage to amplify returns. this leverage can be acquired in a variety of ways : through repurchase agreements and reverse repos, through secured financing and securities lending and through derivatives and structured financial products. the ability of funds to take on risk and leverage is constrained by two external sources of discipline the returns required by their investors, and the terms on which their dealers / financers are willing to extend credit. in other words, the fund is constrained by the willingness of outsiders, collectively, to take exposure to the fund. the willingness of banks and investment banks to take on exposure to hedge funds is in turn influenced by the capital and supervisory framework that applies to those institutions and the discipline imposed on them by the market. the effectiveness of market discipline in constraining the risk - taking behavior of financial firms, however, may be compromised by the presence of market failures of the type mentioned above. while