that cannot be recouped from the failing firm itself. to avoid pro - cyclical effects, such assessments should be collected over time. establishing a resolution regime with these characteristics is, i would suggest, one of the most important financial regulatory reforms for every country that does not already have such a mechanism in place. it would lend substance to the idea that market discipline can be a solid third pillar of financial regulation, along with stronger prudential requirements and improved supervisory oversight. still, as is implicit in the foregoing discussion, an untested regime will probably not acquire complete credibility until it is actually applied successfully. for this reason, among others, it is important to ensure that other regulatory tools will help compensate for the uncertainties associated with an essentially untested mechanism. international efforts on resolution issues the looming or actual failure of a large, internationally active financial firm inevitably complicates the already challenging process of resolution. mismatches in the amounts and maturities of assets and liabilities held by the firm in the various countries in which it operates can lead host governments to take special action to protect the interests of depositors and creditors. and different insolvency regimes apply to separately incorporated subsidiaries across the world. some of those regimes may be substantively inconsistent with one another, or may not account for the special characteristics of a large international firm. a natural response, which one can find peppered through various law journals over the years, is to propose an international treaty that would establish and harmonize appropriate insolvency regimes throughout the world. just to state the proposition is to see the enormous hurdles to its realization. the task of harmonizing divergent legal regimes, and reconciling the principles underlying many of these regimes, would be challenge enough. but an effective international regime would also likely require agreement on how to share the losses and possible special assistance associated with a global firm ’ s insolvency. despite the good and thorough work being undertaken in both the basel committee on banking supervision ( basel committee ) and the financial stability board, we must acknowledge that satisfyingly clean and comprehensive solutions to the international difficulties occasioned by such insolvencies are not within sight. 2 it would certainly be useful if jurisdictions could at least broadly synchronize both standard bankruptcy and any special resolution procedures applicable to a failing financial firm. but even this significant advance would not settle many of the nettlesome problems raised by a cross - border insolvency. it thus

daniel k tarullo : toward an effective resolution regime for large financial institutions speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the symposium on building the financial system of the 21st century, armonk, new york, 18 march 2010. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * two years ago this week, bear stearns succumbed to severe liquidity stress. it was rescued, and eventually absorbed by jpmorgan chase, with financing assistance provided by the federal reserve. although it would take another six months before the accumulating stress and uncertainty posed an immediate threat to nearly all of our major financial institutions, it is clear in retrospect that this arranged marriage, and its accompanying dowry of government financing, set off an expansion of the universe of firms perceived as too big to fail. during the financial crisis, government authorities in the united states and elsewhere believed they had only two realistic options in the face of serious distress at a large financial firm. first, they could try to contain systemic risk by stabilizing the firm through capital injections, extraordinary liquidity assistance, a subsidized acquisition by a less vulnerable firm, or some combination of these supports. second, they could allow the firm to fail and enter generally applicable bankruptcy processes, risking in those times of fear and uncertainty a run on similarly situated firms. the bear stearns deal was an example of the first policy option. lehman brothers was an example of the second. when its bankruptcy set off a firestorm in the exceedingly dry tinder of financial markets in the fall of 2008, the u. s. government decided that further failures of large, interconnected financial institutions risked bringing down the entire financial system. it responded to the situation with the troubled asset relief program to provide capital, and the temporary liquidity guarantee program to extend debt guarantees, to large financial firms. indeed, faced with the possibility of a cascading financial crisis, most governments around the world selected the bailout option in most cases. but if the costs of this approach are less dramatic during a crisis, they are no less significant afterward. entrenching too - big - to - fail status obviously risks imposing significant costs on the taxpayer. it undermines market discipline, competitive equality among financial institutions of different sizes, and normal regulatory and supervisory expectations. the desirability of a