daniel k tarullo : regulating large foreign banking organizations speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the harvard law school symposium on “ building the financial system of the twenty - first century : an agenda for europe and the united states ”, armonk, new york, 27 march 2014. * * * the financial crisis exposed, in painful and dramatic fashion, the shortcomings of existing regulatory and supervisory regimes. in both the united states and the european union ( eu ), the crisis also revealed some particular vulnerabilities created by foreign banking operations. this evening i would like to focus on these vulnerabilities and on how best we should address them. let me note at the outset the now commonplace observation that we have a quite integrated international financial system, with many large, globally active firms operating within a system of national government and regulation or, in the case of the eu, a hybrid of regional and national regulation. i add the equally commonplace observation that there is no realistic prospect for having a global banking regulator and, consequently, the responsibility and authority for financial stability will continue to rest with national or regional authorities. 1 the question, then, is how responsibility for oversight of these large firms can be most effectively shared among regulators. this, of course, is the important issue underlying the perennial challenge of home - host supervisory relations. another introductory observation is that – at least in a world of nations with substantially different economic circumstances, different currencies, and banking and capital markets of quite different levels of depth and development – there will be good reason to vary at least some forms of regulation across countries. presumptively, at least, nations should be able to adjust their regulatory systems based on local circumstances and their relative level of risk aversion as it pertains to the potential for financial instability. although the financial systems and economies of the united states and the eu are more similar to one another than they are to those of many other jurisdictions, they are hardly identical. even between these two, for example, there may be legitimate differences within the broader convergence around minimum regulatory and supervisory standards developed at the basel committee, the international organization of securities commissions, the financial stability board, and other forums. these opening observations are important in responding to the curious charge of “ balkanization ” that has been levelled at the united states and, to a lesser extent, some other jurisdictions, as a result of actions taken

and disclosure, responsible sales and marketing practices as well as investment in financial education have served to better align the interests of financial institutions and consumers, thus reducing the potential for harmful practices. asian economies have also taken steps to strengthen the financial safety net including deposit insurance, while putting in place institutional arrangements for debt counselling and restructuring. these measures can contribute towards pre - empting widespread defaults particularly during periods of stress. second is the continued commitment and sustained progress in the development of strong regulatory and supervisory systems for the financial sector. significant progress has been achieved in asia in this recent decade to strengthen the institutional arrangements and the capacity to safeguard financial stability. this includes putting in place more comprehensive regulatory frameworks, improving supervisory approaches and having clear mandates for central banks and supervisory authorities to deal with system - wide risks. while these measures have yielded tremendous pay offs, efforts have continued to be made to strengthen further the resilience of the financial system. new initiatives are being pursued to enhance surveillance and crisis management tools to enable swift responses to emerging risks and vulnerabilities in the financial system, including those within the traditionally unregulated segments of the financial system. authorities in asia are also continuing to refine and sharpen the efficacy of “ macroprudential ” instruments to manage excesses and imbalances in the financial system. asia already has considerable experience with these instruments during periods of escalating asset prices and excessive financial market volatility. they therefore already represent an important part of the broader toolkit for managing risks to financial stability. the effort to implement global regulatory reforms is also now underway in asia, with many jurisdictions making significant progress in detailing out rules to implement the basel iii standards. the international reform package aims to significantly raise the resilience of the global banking system and to promote sound risk - taking. the standards will see banks holding larger amounts of capital, including buffers which can be drawn down as losses occur, thus ensuring their continued ability to support lending to the economy even during times of crisis. at the same time, the standards will also require banks to significantly strengthen their liquidity and funding positions in order to support orderly credit intermediation processes. concerns have however been raised about the unintended consequences that may arise from the implementation of these standards – including potential ramifications on the real economy – and therefore the need for the reforms to be bis central bankers ’ speeches implemented cautiously. this underscores the importance of conducting impact and behavioural studies during