daniel k tarullo : in the wake of the crisis speech by mr daniel k tarullo, member of the board of governors of the us federal reserve system, at the phoenix metropolitan area community leaders'luncheon, phoenix, arizona, 8 october 2009. * * * i am pleased to be here in phoenix at the invitation of president yellen. having come across the country to speak to you today, i thought i would not confine myself to a single subject, but would instead address a number of areas about which i have been thinking. lest you fear that means a potpourri of unrelated observations, let me assure you that there is at least some thematic unity in my remarks – namely, the challenges we face in the wake of the financial crisis. so, with your indulgence, let me strike that rather grand theme by covering the current state of the economy, the task of financial regulatory reform, and some broader comments on credit markets. 1 the economic outlook turning first to the economic outlook, let me begin by stating the obvious : after a period in which there seemed to be only two plausible scenarios – very bad and even worse – financial and economic conditions have steadied. a year ago the world financial system was profoundly shaken by the failures of large financial institutions here and abroad. significant liquidity problems that had been building since early 2007 turned into a full - blown liquidity crisis. the economy deteriorated at a pace that was both rapid and sustained. the period ending in the second quarter of this year was the first time the united states had suffered negative gdp growth in four consecutive quarters since the great depression. 2 as we closed out the third quarter last week, it was apparent that economic growth was back in positive territory. financial markets continued to stabilize and, in some respects, improved. consumer spending was showing signs of firming. housing - related economic indicators have turned positive. industrial production rose significantly in the summer, and not just for the auto industry, which was effectively restarting after the disruption caused by the bankruptcies of general motors and chrysler. growth in foreign markets, particularly emerging asia, has been encouraging. this turnaround is certainly welcome, but it should not be overstated. although we can expect positive growth to continue beyond the third quarter, economic activity remains relatively weak. the upturns in industrial production and residential investment, for example, follow startling declines in the first half of the year. improvement is gradual and beginning from very low levels. the employment

the stability of the firm. in addition to changing the regulations under which banking organizations function, the federal reserve is adapting the methods by which we supervise those organizations. for the largest and most complex firms, we are implementing closer coordination among our onsite examiners of those firms and with federal reserve board staff in washington. we will expand our use of so - called horizontal reviews of these large firms, a process involving cross - firm analysis of key practices and circumstances that gives all supervisory participants a broader perspective on the state of the financial industry. we are also creating a quantitative surveillance mechanism that will use supervisory information, firm - specific data analysis, and market - based indicators to identify developing strains and imbalance that may affect multiple institutions. this program will be distinct from the activities of supervisors, so as to provide an independent assessment of the conditions in major firms, as well as to provide additional information to on - site examination teams. it will also provide a good starting point for the macroprudential regulatory perspective i mentioned earlier. there is, then, much to be done under existing supervisory authority. but there are limits. for example, under present law, our capital and other regulatory requirements apply only to firms that own a commercial bank. and yet, as became evident last year, systemic problems can arise from the activities of non - banking firms as well. indeed, there is an incentive to shift riskier activities to such firms. for this reason, the federal reserve supports proposals that congress extend the reach of the regulatory system so that every systemically important firm is subject to consolidated supervision. a second important legislative initiative would be creation of a special resolution process for systemically important financial firms. at present we have such a process for banks, but not for the holding companies of which they are part or for other financial firms. a regime that raised the real prospect of losses for shareholders and creditors would add a third alternative to the unattractive existing options of bailout or disorderly bankruptcy. the consequent increase in market discipline before severe financial distress arises could provide another way to help contain the too - big - to - fail problem. a third relevant proposal for congressional action is creation of an oversight council composed of the financial regulatory agencies. this council, which should be given access to a wide range of information from regulators and market actors, would be charged with identifying emerging risks to stability and regulatory gaps across the entire financial system, and coordinating agency responses to potential systemic risk. it could also play a useful