christine m cumming : early intervention and resolution remarks by ms christine m cumming, first vice president of the federal reserve bank of new york, on early intervention and resolution, at the transatlantic corporate governance dialogue, brussels, 25 october 2010. * * * let me thank the organizers for the opportunity to speak today about the supervision and resolution of financial institutions in danger of failing. let me begin by noting that the views i'll express in these remarks represent my own views and not those of the federal reserve bank of new york or the federal reserve system. in any industry, it is important that unsuccessful firms fail. business strategies fall short, franchises depreciate, management loses focus. large or small, unsuccessful firms need to be cleared from the scene through merger, restructuring or liquidation. this is no less true for the financial industry than for any other. and for all firms, society has an interest in ensuring that the process of failure does not destroy more value than necessary. as an economist, i see much innovation in national insolvency practices over time as designed to reduce the cost of insolvency and increase the value preserved in the insolvency process. one of the vexing problems during the recent financial crisis was concern about the adequacy of means to resolve large financial firms and uncertainty about the externalities of placing a large financial firm into insolvency. the lehman bankruptcy no doubt validated those apprehensions for many. some of the issues in resolving large, internationally active financial firms have been recognized for some time – the multiplicity of jurisdictions, differences in insolvency regimes across countries, complexities in unwinding certain books and the largely untested nature of national, much less international, resolution processes for such very large financial firms. over the last 20 years, the international legal and supervisory communities have undertaken several efforts to address these issues. in the wake of the financial crisis, the basel committee on banking supervision formed a cross - border bank resolution group to identify what improvements could be made to the international resolution process and recommend actions to be taken. it published its recommendations in march 2010. the cbrg ’ s report is admirable in its clear description of the problems encountered in the fall of 2008 and the concrete nature of its recommendations. i will be referring to them throughout my remarks. as the cbrg was completing its draft report, the financial stability board asked a working group, the cross border crisis management group, to advance the

likewise. he was right. our equation once again distinguished itself. over the last couple of years, however, estimated phillips curves have generally been subject to systematic over - prediction errors ; that is, the inflation rate is lower than would have been expected based on the historical relationship and given the prevailing unemployment rate. one possibility is that the equilibrium unemployment rate, or nairu, has declined. the estimated value of nairu is generally determined in the process of estimating the phillips curve ; it is the value of the unemployment rate consistent with equality between actual and expected inflation where expected inflation is typically proxied by lagged inflation. historically, nairu has been estimated as a constant, or as a time - varying series that changes over time only due to demographic changes in the labor force. recently, several studies have used time - varying parameter estimation techniques to look for evidence of a recent decline in nairu. bob gordon, for example, finds that, based on time - varying parameter estimates, nairu has declined from a relatively constant value of 6 % over the previous decade to near 5 ½ % recently. if the claim that nairu has declined recently is correct, it would obviously help explain why we were able to achieve simultaneously low rates of inflation and unemployment in 1996. but, to build confidence in this result, we would like to be able to tell a qualitative story that explains why nairu may have declined and find evidence in labor markets, beyond the time varying parameter estimates of nairu, that is consistent with it. the source of the decline in nairu will, hopefully, help us to answer a very important related question. to the extent that there has been a decline in nairu, is it likely to be permanent or transitory? this may have important implications for the inflation forecast over the coming year. i am going to develop two sets of explanations for the surprisingly good performance of inflation relative to unemployment. the first is that there have been a series of favorable supply shocks that have temporarily lowered inflation, for a given unemployment rate, resulting in the appearance of a decline in nairu. in this case, absent further favorable supply shocks, inflation performance will not be as favorable for any given unemployment rate as we return to the historical relationship between inflation and unemployment. second, there may have been a longer - lasting change in the bargaining power of workers relative to firms and / or in the competitive pressure on firms that has resulted in unusual restraint in wage gains and price increases. one explanation