trade - offs, february 23, 2017. see also anjan v. thakor, “ bank capital and financial stability : an economic trade - off or a faustian bargain?, ” annual review of financial economics, 2014, 6 : 185 – 223 for a review of theoretical and empirical findings. 4 in the early 1980s, for example, there is some evidence that a shorter exam cycle contributed to an increase in the number of bank failures in fdic, history of the eighties – lessons for the future, 1997. see bank for international settlement, 2010 on costs and benefits of higher capital requirements. 5 kevin j. stiroh, a perspective on supervisory objectives, and trade - offs, february 23, 2017. 6 for example, thakor, 2014, reports that higher capital levels are associated with higher lending, higher liquidity creation, higher bank values, and higher probabilities of surviving crises and beverly hirtle, anna kovner, and matthew plosser, the impact of supervision on bank performance, federal reserve bank of new york, staff report no. 768, september 2018, find that increased supervisory attention results in lower risk without significantly reduced performance. 7 there may be certain states of the world where the frontier is not upward - sloping, e. g., in a downturn or crisis period, restricting intermediation might increase financial stability risk. 8 board of governors of the federal reserve system, supervision and regulation report, november 2018 ; vice chair randall quarles, semiannual supervision and regulation testimony, april 17, 2018 ; and vice chair randall quarles, supervision and regulation report, november 14, 2018. 9 board of governors of the federal reserve system, federal reserve board invites public comment on the framework that would more closely match regulations for large banking organizations with their risk profiles, october 31, 2018. 10 basel committee on banking supervision, 2010. 11 this assumes the official sector preferences reflect society as a whole and does not consider potential gaps due to issues such as principal agent problems within the official sector or regulatory capture. 12 consolidated supervision framework for large financial institutions, sr 12 – 17, december 17, 2012. 13 federal reserve board, federal reserve board seeks comment on proposal to simplify its capital rules for large banks while preserving strong capital levels that would maintain their ability to lend under stressful conditions, april 10, 2018. 14 for a discussion of how rationalization of excessively complicated regulations could “ morph ” into a more dereg

this framework is agnostic to the merits of one policy choice or another. that is, it is a positive framework and not a normative one, and i won ’ t look at this from a normative perspective. policy preferences can vary and they are set by policymakers. i believe this simple framework is useful when assessing and discussing changes to supervisory or regulatory policy that can be designed with different purposes in mind. for example, a policy change could be designed to increase efficiency and move toward the frontier. this could entail changing rules, regulations, or supervisory practices in order to promote more financial intermediation without increasing risk. obvious examples could be eliminating a complex compliance regime for an activity that banks no longer perform or reducing redundancy in data reporting. it seems like a good idea to always pursue these types of efficiency gains. 1 / 7 bis central bankers'speeches alternatively, a policy change could be designed to achieve a different risk and return profile. this could be a shift from a mix of policies designed to achieve a low - intermediation and low - risk outcome to a mix of policies designed to support higher intermediation while accepting greater risk. either of these regimes can be efficient and consistent with policymakers ’ preferences, but the expected outcomes would be quite different. from a public policy perspective, in my view, it is important to be clear and distinguish between these two types of policy change. for example, one might expect a greater number of bank failures during stress if there were less effective supervisory oversight or higher borrowing costs in a world with higher capital requirements. 4 those may not be desired outcomes, but they would be predictable ones. from a risk management perspective, this might be viewed as an accepted risk of a particular policy choice. by contrast, a policy change designed to increase efficiency might not come with those undesirable outcomes. in practice, however, it can be difficult to differentiate among drivers of policy change due to measurement and assessment challenges, the potentially long impact horizon, and different views from a social and private perspective. i ’ ll turn now to describe this efficiency framework and then discuss some of the practical issues. policy efficiency as a point of departure, i ’ ll begin with an idea that i expect is familiar to most of you. standard finance theory suggests that investors face a trade - off between risk and return that outlines the set of feasible options across portfolios. an investor can choose a portfolio with higher expected returns and higher risk, or a portfolio with lower