key failed institutions in the recent financial crisis – bear - stearns and lehman brothers – were not banks. it is hard to see why this fact suggests that permitting commercial banks to combine their activities with those of investment banks would be a stabilizing factor for the banking system. bis central bankers ’ speeches g - sifis. in the united states, the dodd - frank act has provided the fdic with the orderly liquidation authority ( ola ) – a regime to conduct an orderly resolution of a financial firm if the bankruptcy of the firm would threaten financial stability. and the fdic ’ s single - point - ofentry approach for effecting a resolution under the new regime is a sensible proposed implementation path for the ola. closely associated with the work on resolution mechanisms is the living will exercise for sifis. in addition, there are the proposed g - sib capital surcharges and macro stress tests applied to the largest bhcs ( $ 50 billion or more ). countercyclical capital requirements are also likely to be applied primarily to large banks. similarly the volcker rule, or the vickers rules in the united kingdom or the liikanen rules in the euro zone, which seek to limit the scope of a bank ’ s activities, are directed at tbtf, and i believe appropriately so. what about simply breaking up the largest financial institutions? well, there is no “ simply ” in this area. at the analytical level, there is the question of what the optimal structure of the financial sector should be. would a financial system that consisted of a large number of medium - sized and small firms be more stable and more efficient than one with a smaller number of very large firms? that depends on whether there are economies of scale in the financial sector and up to what size of firm they apply – that is to say it depends in part on why there is a financing premium for large firms. if it is economies of scale, the market premium for large firms may be sending the right signals with respect to size. if it is the existence of tbtf, that is not an optimal market incentive, but rather a distortion. what would happen if it was possible precisely to calculate the extent of the subsidy or distortion and require the bank to pay the social cost of the expansion of its activity? 35 this could be done either by varying the deposit insurance rate for the bank or by varying the required capital ratios for sifis to fit each bank ’ s risk profile and

should be involved in what activities, and who should supervise the resultant organization and its component parts are genuine and important policy issues that should be debated and decided by the congress. to simply dismiss them as turf issues misses the point, i think, and chokes off that debate. conclusion in conclusion, i hope that my remarks have helped you to better understand the forces affecting our banking and financial system. equally important, i hope that i have given you a good feel for the challenges these forces have created for bank supervision, how we are meeting these challenges today, and how we may deal with them in the future. even more importantly, i hope that i have convinced you to support enthusiastically h. r. 10! in all seriousness, it really is time that we modernized our financial system and got on with the business of serving consumers and maintaining a healthy, stable, and competitive banking system.