, the fed and other regulators can also improve market functioning by clarifying property rights of various kinds - for example, by making rules about the use of personal information collected in the course of financial relationships. of course, to achieve its social objectives as efficiently as possible, a regulator needs to gather as much information as it can from market participants. the fed never imposes a substantive regulation without extensive consultation with those who will be affected - in this case, both financial institutions and consumers - through formal comment periods, policy advisory groups, and a variety of more - informal contacts. bank supervision and regulation, also a major responsibility of the fed, provides another example of how conceptual frameworks developed by researchers inform the policy process. many economists ( myself included ) have studied the special features of the banking industry, documenting its important role in the economy but also noting the potential instability of institutions that finance long - term, illiquid investments with short - term, liquid deposits. deposit insurance and other government protections reduce the risk of banking instability but create the potential for moral hazard and other problems. the challenge for bank supervisors is to ensure the safety and soundness of banking institutions - that is, to minimize moral hazard and to protect the deposit insurance fund - without inhibiting economically valuable activities or technological innovation by banks. designing regulations to accomplish these objectives has become markedly more difficult as banking organizations have become larger and more complex. the new basel ii international capital accord, which the fed helped to design in collaboration with other banking regulators from the united states and around the globe, may well be the most economically sophisticated regulation scheme ever devised. 1 the new system is designed to use information provided by the banks themselves about their loss experience, together with algorithms that mimic the most up - to - date risk - management techniques, to establish minimum capital standards for banks that approximate the appropriate level of economic capital. in addition, basel ii provides for enhanced supervisory oversight and public disclosure of financial information by banks. as many economists have noted, greater transparency on the part of financial institutions improves the efficiency with which financial markets price financial claims on banks, including equity and subordinated debt. by aggregating private - sector information about banks ’ financial condition, prices and yields determined in financial markets may in turn provide important information to regulators. difficult challenges lie ahead in implementing the new capital accord, and i do not want to enter into a full discussion of the many issues raised by basel ii today. my point here is only that basel ii is not your grandfather

current job is that i have to wear a suit to work. wearing uncomfortable clothes on purpose is an example of what former princeton hockey player and nobel prize winner michael spence taught economists to call “ signaling. ” you have to do it to show that you take your official responsibilities seriously. my proposal that fed governors should signal their commitment to public service by wearing hawaiian shirts and bermuda shorts has so far gone unheeded. although the dress code continues to be a drawback, i am pleased to be able to report that the intellectual challenges of my new job have been as rewarding as those i encountered as an academic. the federal reserve ’ s responsibilities are quite broad, including not only monetary policy but the regulation and supervision of banks, oversight of the payments system, the making and enforcement of various regulations to protect consumers in their financial dealings, and the promotion of financial stability generally, among others. getting up to speed on these diverse topics required some concentrated effort on my part. much of what i had to absorb was institutional detail - some interesting, some less so - but i have also come to appreciate that the dictum that “ the devil is in the details ” applies with great force to all serious policy work. my academic training has helped considerably by leading me always to focus on the underlying conceptual framework on which the legal, procedural, and institutional details depend. with an underlying framework in mind, seeing what is at stake and making a reasonable and coherent decision on a policy issue becomes easier, though rarely easy. the development and implementation of consumer protection regulation provide one example. as economists, we have a predisposition in favor of free markets, but we also understand that missing or asymmetric information can undermine the efficiency and fairness of market - determined allocations. financial contracts are inherently complex and consequently difficult for consumers to understand fully, even if the other party to the contract has no intention to mislead or deceive. from an economist ’ s perspective, the proper objective of consumer protection regulation is not to prohibit voluntary financial transactions but to ensure that consumers receive the information they need to make rational decisions at the lowest possible social cost. setting industry standards for what information must be disclosed to consumers and, perhaps, for the format of the disclosure is one means by which a regulator can achieve this objective. ideally, a regulator like the federal reserve serves as a coordinating device to help financial institutions as well as consumers minimize informational problems and transaction costs in the financial marketplace. following guidelines established by the congress