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

over the past five years, bank supervisors in the united states and other nations have devoted a truly impressive amount of resources to developing a new set of international capital standards. indeed, in early august of this year the federal reserve and the other u. s. bank regulators released some very specific proposals for public comment. the comment period ends in early november. after assessing these comments together with those already received by the basel committee, the u. s. banking agencies will seek appropriate changes in the proposals. the need for basel ii, as the proposed revised accord is called, arises because modern risk measurement and management practices, including the increasing ability to securitize assets, have made basel i increasingly out - of - date, or should i just say, increasingly irrelevant, for our largest and most complex banking organizations. for example, the basel i capital standards have only four risk categories, and most loans receive the same regulatory capital charge even though loans made by banks encompass a wide spectrum of credit quality. the highly limited differentiation among risks means that regulatory capital ratios are too often uninformative and might well provide misleading information regarding banks with risky or problem credits or, for that matter, with portfolios dominated by very safe loans. importantly, banks own internal capital models increasingly differentiate risks much more finely than do regulatory capital standards. another problem with basel i is that its overly simplistic risk measures, when combined with advances in financial engineering technologies and improved risk measurement and management practices, have given banks the incentive and the means to game the system through so - called regulatory capital arbitrage. regulatory capital arbitrage is the avoidance of regulatory capital charges through the sale or securitization of bank assets for which the capital requirement that the market would impose is less than the current regulatory capital charge. for example, low - risk residential mortgages are often securitized rather than held on a bank ’ s books in part because the market requires less capital than does basel i. this behavior is perfectly understandable, even desirable, in terms of improving economic efficiency. but it means that banks engaging in such arbitrage retain the higher - risk assets for which the regulatory capital charge, calibrated to assets of average quality, is on average too low. the basel ii capital standards seek to improve regulatory capital standards via three broad and interrelated strategies, or “ pillars. ” the most important pillar, pillar 1, consists of minimum capital requirements. these requirements are rules by which a bank calculates