use horizontal, or cross - firm, reviews to monitor industry practices, common investment or funding strategies, changes in the degree or form of financial interconnectedness, or other developments with implications for systemic risk. supplementing its individual and horizontal reviews, the liscc has also made increasing use of improved quantitative methods for evaluating the health and performance of supervised firms as well as the risks they may pose to the broader financial system. a similar committee structure within the federal reserve is being developed to help us meet our obligations to supervise systemically important financial market utilities. to improve our monitoring of the financial system and to coordinate work bearing on financial stability, we have also created a new office within the board, called the office of financial stability policy and research. this office brings together staff with a range of backgrounds and skills and works closely with other groups at the federal reserve. the office helps monitor global financial risks and analyze the implications of those risks for financial stability ; works with our bank supervisory committees, for example, on the development of quantitative loss models and alternative scenarios to serve as the basis for stress tests ; serves as a liaison to the financial stability oversight council and its various working groups ; and helps develop and evaluate alternative approaches to implementing macroprudential regulations. the recent comprehensive capital analysis and review, in which the federal reserve evaluated the internal capital planning processes and shareholder distribution requests of the 19 largest bank holding companies, is an example of a horizontal assessment with a macroprudential approach. in the wake of the crisis, banks ’ capital payouts had been kept to a minimum. as banks ’ earnings and capital positions continued to improve in 2010, however, some firms sought approval to increase dividends or restart share repurchase programs. the simultaneous assessment of the payout requests in the capital review allowed the federal reserve, working through the liscc, to evaluate not only the conditions of individual banks but also the potential implications of capital payouts for aggregate credit extension and the sustainability of the economic recovery. thus, the program had both microprudential and macroprudential goals. from a traditional safety - and - soundness perspective, we wanted each firm to demonstrate that it had robust risk - management systems as well as a capital plan that would allow it to manage potential losses in stress scenarios while comfortably meeting basel iii capital requirements as they are phased in. but, with the help of macroeconomic and capital market analysts, we also considered the implications of the requests for the capital available to the banking

ben s bernanke : implementing a macroprudential approach to supervision and regulation speech by mr ben s bernanke, chairman of the board of governors of the federal reserve system, at the 47th annual conference on bank structure and competition, chicago, illinois, 5 may 2011. * * * the recent financial crisis revealed critical gaps and weaknesses in the u. s. financial system and the financial regulatory framework. the congress and the administration last year provided a roadmap for addressing many of these problems, in the form of the dodd - frank wall street reform and consumer protection act ( dodd - frank act ) – the topic of this year ’ s conference. legislative reforms in any complex area always face the risk of fighting the last war, responding to the causes of the last crisis without sufficient attention to where new problems may arise. to their credit, the authors of the dodd - frank act attempted to reduce this risk by building in a number of features aimed at helping our system of financial oversight adapt over time to changes in the financial environment. notably, a central element of the legislation is the requirement that the federal reserve and other financial regulatory agencies adopt a socalled macroprudential approach – that is, an approach that supplements traditional supervision and regulation of individual firms or markets with explicit consideration of threats to the stability of the financial system as a whole. the act also created a new financial stability oversight council, whose membership comprises a diverse group of federal and state financial regulators, to coordinate the government ’ s efforts to identify and respond to systemic risks. the explicit incorporation of macroprudential considerations in the nation ’ s framework for financial oversight represents a major innovation in our thinking about financial regulation, one that is taking hold abroad as well as in the united states. this new direction is constructive and necessary, i believe, but it also poses considerable conceptual and operational challenges in its implementation. in my remarks today i will briefly discuss the rationale for macroprudential supervision and regulation, describe the new structure of macroprudential supervision and regulation in the united states, and explain how we at the fed are doing our part to implement the macroprudential approach to financial oversight. macroprudential supervision and regulation ultimately, the goal of macroprudential supervision and regulation is to minimize the risk of financial disruptions that are sufficiently severe to inflict significant damage on the broader economy. the systemic orientation of the macroprudential approach may be contrasted with that of the traditional, or