and portfolios. it is commonly observed that hedge funds are " opaque " - - that is, information about their portfolios is typically limited and infrequently provided. it would be more accurate to say that the opacity of hedge funds is in the eye of the beholder ; the information a fund provides may vary considerably depending on whether the recipient of the information is an investor, a counterparty, a regulatory authority, or a general market participant. from a policy perspective, transparency to investors is largely an issue of investor protection. the need for counterparties to have adequate information is a risk - management issue, as i have already discussed. much of the recent debate, however, has focused on the opacity of hedge funds to regulatory authorities and to the markets generally, which is viewed by some as an important source of liquidity risk. liquidity in a particular market segment might well decline sharply and unexpectedly if hedge funds chose or were forced to reduce a large exposure in that segment. concerns about hedge fund opacity and possible liquidity risk have motivated a range of proposals for regulatory authorities to create and maintain a database of hedge fund positions. such a database, it is argued, would allow authorities to monitor this possible source of systemic risk and to address the buildup of risk as it occurs. various alternatives that have been discussed include a database maintained by regulators on a confidential basis, a system in which hedge funds submit position information to an authority that aggregates that information and reveals it to the market, and a public database with nonconfidential information on hedge funds. i understand the concerns that motivate these proposals but, at this point, remain skeptical about their utility in practice. to measure liquidity risks accurately, the authorities would need data from all major financial market participants, not just hedge funds. as a practical matter, could the authorities collect such an enormous quantity of highly sensitive information in sufficient detail and with sufficient frequency ( daily, at least ) to be effectively informed about liquidity risk in particular market segments? how would the authorities use the information? would they have the authority to direct hedge funds or other large financial institutions to reduce positions? if several funds had similar positions, how would authorities avoid giving a competitive advantage to one fund over another in using the information from the database? perhaps most important, would counterparties relax their vigilance if they thought the authorities were monitoring and constraining hedge funds'risk - taking? a risk of any pre

needed that would subject all systemically important financial institutions to the same framework for consolidated prudential supervision that currently applies to bank holding companies. such action would prevent financial firms that do not own a bank, but that nonetheless pose risks to the overall financial system because of the size, risks, or interconnectedness of their financial activities, from avoiding comprehensive supervisory oversight. besides being supervised on a consolidated basis, systemically important financial institutions should also be subject to enhanced regulation and supervision, including capital, liquidity, and risk - management requirements that reflect those institutions'important roles in the financial sector. enhanced requirements are needed not only to protect the stability of individual institutions and the financial system as a whole, but also to reduce the incentives for financial firms to become very large in order to be perceived as too big to fail. this perception materially weakens the incentive of creditors of the firm to restrain the firm's risktaking, and it creates a playing field that is tilted against smaller firms not perceived as having the same degree of government support. creation of a mechanism for the orderly resolution of systemically important nonbank financial firms, which i will discuss later, is an important additional tool for addressing the too - big - to - fail problem. the federal reserve is already the consolidated supervisor of some of the largest and most complex institutions in the world. i believe that the expertise we have developed in supervising large, diversified, and interconnected banking organizations, together with our broad knowledge of the financial markets in which these organizations operate, makes the federal reserve well suited to serve as the consolidated supervisor for those systemically important financial institutions that may not already be subject to the bank holding company act. in addition, our involvement in supervision is critical for ensuring that we have the necessary expertise, information, and authorities to carry out our essential functions as a central bank of promoting financial stability and making effective monetary policy. the federal reserve has already taken a number of important steps to improve its regulation and supervision of large financial groups, building on lessons from the current crisis. on the regulatory side, we played a key role in developing the recently announced, internationallyagreed improvements to the capital requirements for trading activities and securitization exposures, and we continue to work with other regulators to strengthen the capital requirements for other types of on - and off - balance - sheet exposures. 1 in addition, we are working with our fellow regulatory agencies toward the development of capital standards and other supervisory tools that would be calib