daniel k tarullo : dodd - frank act speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, before the committee on banking, housing, and urban affairs, us senate, washington dc, 14 february 2013. * * * chairman johnson, ranking member crapo, and other members of the committee, thank you for the opportunity to testify on implementation of the dodd - frank wall street reform and consumer protection act of 2010 ( dodd - frank act ). in today ’ s testimony, i will provide an update on the federal reserve ’ s recent activities pertinent to the dodd - frank act and describe our regulatory and supervisory priorities for 2013. the federal reserve, in many cases jointly with other regulatory agencies, has made steady and considerable progress in implementing the congressional mandates in the dodd - frank act, though obviously some work remains. throughout this effort, the federal reserve has maintained a focus on financial stability. in the process of rule development, we have placed particular emphasis on mitigating systemic risks. thus, among other things, we have proposed varying the application of the dodd - frank act ’ s special prudential rules based on the relative size and complexity of regulated financial firms. this focus on systemic risk is also reflected in our increasingly systematic supervision of the largest banking firms. recent regulatory reform milestones strong bank capital requirements, while not alone sufficient to guarantee the safety and soundness of our banking system, are central to promoting the resiliency of banking firms and the financial sector as a whole. capital provides a cushion to absorb a firm ’ s expected and unexpected losses, helping to ensure that those losses are borne by shareholders rather than taxpayers. the financial crisis revealed, however, that the regulatory capital requirements for banking firms were not sufficiently robust. it also confirmed that no single capital measure adequately captures a banking firm ’ s risks of credit and trading losses. a good bit of progress has now been made in strengthening and updating traditional capital requirements, as well as devising some complementary measures for larger firms. as you know, in december 2010 the basel committee on banking supervision ( basel committee ) issued the basel iii package of reforms to its framework for minimum capital requirements, supplementing an earlier set of changes that increased requirements for important classes of traded assets. last summer, the federal reserve, the office of the comptroller of the currency ( occ ), and the federal deposit insurance corporation ( fdic ) issued for comment a set of proposals

have generally put the united states ahead of its global peers on the resolution front. since the passage of the dodd - frank act, the fdic has been developing a single - point - ofentry strategy for resolving systemic financial firms under the ola. as explained by the fdic, this strategy is intended to effect a creditor - funded holding company recapitalization of the failed financial firm, in which the critical operations of the firm continue, but shareholders for more information, see www. federalreserve. gov / bankinforeg / ccar. htm. bis central bankers ’ speeches and unsecured creditors absorb the losses, culpable management is removed, and taxpayers are protected. key to the ability of the fdic to execute this approach is the availability of sufficient amounts of unsecured long - term debt to supplement equity in providing loss absorption in a failed firm. in consultation with the fdic, the federal reserve is considering the merits of a regulatory requirement that the largest, most complex u. s. banking firms maintain a minimum amount of long - term unsecured debt. a minimum long - term debt requirement could lend greater confidence that the combination of equity owners and long - term debt holders would be sufficient to bear all losses at the consolidated firm, thereby counteracting the moral hazard associated with taxpayer bailouts while avoiding disorderly failures. reducing systemic risk in the shadow banking system most of the reforms i have discussed are aimed at addressing systemic risk posed by regulated banking organizations, and all involve action the federal reserve can take under its current authorities. important as these measures are, however, it is worth recalling that the trigger for the acute phase of the financial crisis was the rapid unwinding of large amounts of short - term funding that had been made available to firms not subject to consolidated prudential supervision. today, although some of the most fragile investment vehicles and instruments that were involved in the pre - crisis shadow banking system have disappeared, non - deposit short - term funding remains significant. in some instances it involves prudentially regulated firms, directly or indirectly. in others it does not. the key condition of the so - called “ shadow banking system ” that makes it of systemic concern is its susceptibility to destabilizing funding runs, something that is more likely when the recipients of the short - term funding are highly leveraged, engage in substantial maturity transformation, or both. many of the key issues related to shadow banking