which had separated investment banking from commercial banking, meant that only commercial banks were subject to the prudential regulation of the federal banking agencies. in europe, the dominance of universal banking, or variants thereon, led more naturally to application of capital and other prudential standards to all forms of banking activity. even after the gramm - leach - bliley act removed the remaining barriers to affiliation between investment banks and commercial banks in the united states, basel capital requirements applied at a consolidated level to the activities of an investment bank or brokerdealer only if it did affiliate with a commercial bank. thus, the five large “ free - standing ” u. s. investment banks were generally not subject to full application of basel capital standards. during the crisis, the ill - advised nature of this regulatory state of affairs became apparent. the decline in value of many mortgage - backed securities and the consequent market uncertainty as to the true value of that entire class of securities raised questions about the solvency of major broker - dealers. because the dealers were so highly leveraged and dependent on short - term financing, the uncertainty also led to serious liquidity strains, first at bear stearns and lehman brothers and eventually at most dealers – domestic and foreign owned. bear stearns and merrill lynch were acquired by existing bank holding companies after coming close to failure. lehman brothers went bankrupt. goldman sachs and morgan stanley became bank holding companies. through its primary dealer credit facility, the federal reserve provided substantial liquidity to the broker - dealer affiliates of the bank holding companies, as well as to the primary dealer staff estimates, using data from the federal reserve and the bank of england. the u. k. data include only u. k. resident banking entities of each banking group. the u. s. data include all entities of each banking group. both u. k. and u. s. assets include intragroup claims on related affiliates. worldwide assets are calculated using the accounting standards of home country jurisdictions. the list of g - sibs is available at www. financialstabilityboard. org / publications / r _ 131111. pdf. bis central bankers ’ speeches subsidiaries of foreign banks. at the same time, the shift in strategy of many foreign banks toward using their u. s. branches to raise dollars in short - term markets for lending around the world created another set of vulnerabilities that resulted in substantial and, relative to total assets, disproportionate use of

donald l kohn : globalisation, inflation and monetary policy remarks by mr donald l kohn, member of the board of governors of the us federal reserve system, at the james r wilson lecture series, the college of wooster, wooster, ohio, 11 october 2005. * * * thank you for the opportunity to return to wooster. in one sense, much has changed since my time here in the early 1960s, when my intellectual energy was too often focused on such pursuits as evading compulsory chapel in favor of coffee and a cigarette at the shack. but in a much more important sense, the essence of the wooster educational experience remains unchanged. i know from conversations, reading, and my occasional forays back to campus that wooster continues to be a place where close, continuing contact with knowledgeable and enthusiastic scholars can open new horizons to students, shaping their subsequent intellectual lives and careers. i know that is what happened to me here. another strong thread in the wooster tradition has been putting the knowledge acquired here to work for the common good as well as for individual gain. in that tradition, i suggest to the students in the audience that you consider government service at some point in your careers. governments at all levels have the power to help or harm. to increase the odds on the former, we need to apply the kinds of knowledge and analytic skills you are obtaining here. i can tell you from personal experience that going to work each morning knowing that how well you do your job could affect the welfare of your fellow citizens can be a little scary, but it is also tremendously challenging and rewarding. in keeping with the habits of mind i developed here, i approached this talk as a term paper project. i picked a topic that i wanted to think through, one that would not require any truly original research and could be done in a limited amount of time. well, my wooster experience has been replicated : the topic has turned out to be larger and more complex than i anticipated, i have been working and revising up to the last minute, and i have yet to arrive at very settled conclusions. 1 still, wooster is an especially fitting venue for this assignment. i intend to spend much of the remaining time discussing the evolving linkages between globalization and monetary policy. and here, much is different from my undergraduate days, importantly because of the shift to flexible exchange rates in the early 1970s. if memory serves, this change was one i advocated in my senior independent