institutions. • concentration of risk. because there was no detailed reporting of exposures, market participants did not know much about the concentration of risk. this led to a reluctance to engage with counterparties, which, in turn, pushed up spreads and reduced liquidity further. regulatory reform these four strands – understanding interconnectedness, mitigating pro - cyclical system dynamics, improving incentives and increasing transparency – should be critical areas of focus in our efforts to enhance the resiliency of the banking and financial system. we will do this through several channels, including international regulatory reform, enhanced capital requirements, the introduction of common liquidity standards and clear expectations for compensation practices. today i am going to spend some time talking about how we might take account of these strands to ensure that our regulatory capital regime helps to facilitate a more robust and stable financial system. in my view, the regulatory capital framework would benefit from four changes : • improving the risk capture associated with the capital requirements. • introduction of rules that ensure the conservation of capital during times of economic and financial distress. • imposition of higher capital requirements for systemically important institutions. • development of efficient forms of capital. in particular, contingent capital debt instruments that are convertible into common equity if a bank ’ s share price were to fall precipitously. capital requirements with improved risk capture the recent financial crisis has shown that parts of the regulatory capital framework were not calibrated properly to account for the most complex instruments. our efforts to revise the capital rules should emphasize the need to include these and other risks that were not appropriately captured in recent years. in many circumstances, an emphasis on improved risk - capture may be superior to simply raising the capital requirements across the board. there are two reasons for this. first, it may better tie capital to the risks being undertaken. this, in turn, would create more appropriate incentives for risk - taking. second, it may reduce the risk of regulatory arbitrage. if the risks of some activities are not captured properly, then banks will have incentives to shift their business toward those particular activities. the basel committee has made very good progress in revising the capital treatment of trading book positions and for structured credit products – two areas where the crisis revealed critical weaknesses in the regulatory capital regime. revisions to the capital requirements for over - the - counter ( otc ) derivatives exposures as proposed by the obama administration also strike me as appropriate. not only would this more effectively capture the risks that banks are taking

other issue i get asked about is the normalization of the balance sheet. when we first announced our plans in june 2017, i was poised to expound on them in great detail. 4 but when i raised the topic i was sorely disappointed to be met with glazed eyes and general indifference. sadly, nobody seemed to care! now that ’ s changed, and i ’ m getting more interest on this topic. it ’ s important to remember why the fed took unconventional monetary policy actions in the first place. large - scale asset purchases, forward guidance on the future path of interest rates, and seven years where the federal funds rate hovered close to zero, were all measures necessary for the full recovery from the great recession. 3 / 4 bis central bankers'speeches a decade later and the fomc has slowly but surely been moving monetary policy “ back to normal. ” we ’ ve moved interest rates closer to neutral, scaled back on forward guidance, and are over a year into the process of winding down the balance sheet. 5 our goals throughout the policy normalization process have been twofold. first and foremost, to support a strong, sustainable expansion of the economy. second, to do this in a predictable and transparent way that creates as little disruption as possible. 6 so far, this plan has worked very well, with the economic expansion nearing record duration. but it is important to stress that if circumstances change, i will reassess our choices regarding monetary policy, including the path of balance sheet normalization. data dependence applies to all that we do. and, as always, if the outlook deteriorates in a material way, we stand prepared to deploy all our policy tools as appropriate in support of the economy. conclusion i ’ d like to conclude where i began, with the dual mandate. there ’ s sometimes a view that fed policymakers are fixated on two data points : inflation and employment. and the reason is that ’ s how we ’ re judged by congress at doing our job. but underpinning these is a strong economy, and ultimately that ’ s what we ’ re always using monetary policy to support. so, as the year unfolds i ’ ve got my eyes wide open, looking at the data and listening to experience — whether it ’ s coming from household surveys, market indicators, or from leaders in my district. the economy is strong, the outlook is healthy, and my number one priority is using monetary policy to keep it that way. in short