system connected to monetary policy? to put it in the simplest fashion, to the extent that the efficiency of the financial system is improved, it will improve the transmission of monetary policy to the real economy. improving efficiency of the financial system is not an isolated goal. the task is to enhance efficiency while maintaining the system ’ s resiliency. take, for example, the board ’ s two most recent and material proposals, the stress capital buffer and the enhanced supplementary leverage ratio ( eslr ). the proposal to modify the eslr, in particular, initially raised questions in the minds of some as to whether it would reduce the ability of the banking system to weather shocks. a closer look at the proposal shows that the opposite is true. the proposed change simply restores the original intent of leverage requirements as a backstop measure to risk - based capital requirements. as we have seen, a leverage requirement that is too high favors high - risk activities and disincentivizes low - risk activities. we had initially calibrated the leverage ratio at a level that caused it to be the binding constraint for a number of our largest banks. as a result, those banks had an incentive to add risk rather than reduce risk in their portfolios because the capital cost of each additional asset was the same whether it was risky or safe, and the riskier assets would produce the higher return. the proposed recalibration eliminates this incentive by returning this leverage ratio to a level that is a 1 / 10 bis central bankers'speeches backstop rather than the driver of decisions at the margin. yet, because of the complex way our capital regulations work together — with risk - based constraints and stress tests regulating capital at both the operating and holding company levels — this improvement in incentives is obtained with virtually no change in the overall capital requirements of the affected firms. federal reserve staff estimate the proposal would potentially reduce capital requirements across the eight large banks subject to the proposal by $ 400 million, or 0. 04 percent of the $ 955 billion in capital these banks held as of september 2017. 2 so this recalibration is a win - win : a material realignment of incentives to reduce a regulatory encouragement to take on risk at a time when we want to encourage prudent behavior without any material capital reduction or cost to the system ’ s resiliency. taken together, i believe these new rules will maintain the resiliency of the financial system and make our regulation simpler and more risk sensitive. liquid

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