charles i plosser : simplicity, transparency, and market discipline in regulatory reform remarks by mr charles i plosser, president and chief executive officer of the federal reserve bank of philadelphia, at the conference on “ enhancing prudential standards in financial regulations ”, cohosted by the federal reserve bank of philadelphia, the wharton financial institutions center, and the journal of financial services research, philadelphia, pennsylvania, 8 april 2014. * * * the views expressed are my own and not necessarily those of the federal reserve system or the fomc. highlights • president plosser believes simple regulations are easier for financial firms to follow, increase the likelihood that supervisors will consistently enforce them, and are more likely to foster financial stability. • president plosser argues that revealing more information about an individual firm ’ s risk will reduce the likelihood of contagion and runs because such events are generally a result of a lack of information, rather than too much information. • president plosser continues to advocate for a new bankruptcy mechanism suitable for all financial firms, whether systemically important or not, because it would restore the incentives of market participants and creditors, in particular, to monitor risk taking by these institutions. introduction i am delighted to welcome you to the federal reserve bank of philadelphia. we are very pleased to partner with the wharton school and the journal of financial services research in this joint conference on “ enhancing prudential standards in financial regulations ”. i want to acknowledge and thank the organizers for assembling such a distinguished group of academics and practitioners to discuss the ongoing efforts to improve our financial system. i am going to take advantage of my role as host to offer some of my own thoughts on financial regulations and financial stability. i will present a high - level perspective of the subject. i don ’ t plan to let the messy details get in the way of lofty thoughts. instead, i believe it is helpful to step back from the complicated details of financial regulation to think more broadly about the goals and objectives of reform and the strategies that might best get us there. of course, these views are my own and should not be interpreted as representing the federal reserve system. i think we all agree that financial markets and intermediaries play an important economic role by pooling funds from savers and investors and allocating these resources to their most productive uses. such allocations require financial intermediaries to assess and price various risky claims. they then can sell some of the risks, either duration or credit

risk, to investors and others who are willing to bear that risk. thus, intermediaries help allocate resources and risks throughout the economy, thereby improving efficiency and productivity. at times, however, financial intermediation can result in risks becoming concentrated in ways that increase rather than reduce the fragility of the financial system more broadly. this is what many people mean when they refer to systemic risk. while today i will use the term in this fashion, i would note that the concept is quite vague. one of the major difficulties we face in managing systemic risk is defining what it is and how to measure it. ideally, one important goal of financial supervision and regulation is to monitor risk in the financial system bis central bankers ’ speeches and reduce the chances that it inadvertently leads to financial fragility or instability. regulation, however, should seek to do so without impeding the healthy functioning of financial markets and institutions. in response to the financial crisis, congress passed the dodd - frank wall street reform and consumer protection act in 2010, which included enhanced capital and liquidity standards and risk - management requirements for large financial institutions thought to be systemically important. in addition to new regulations, the crisis brought about important changes in supervision. supervisors are taking a macroprudential approach to their responsibilities. rather than focusing on the risk in a single institution, supervisors are spending more time analyzing risks across firms. large financial firms are now required to have stronger data and information systems so they can better monitor and manage their own risks. and these firms are required to report higher quality data to supervisors. the federal reserve now utilizes these data as well as other information it receives to conduct more in - depth and timely assessments of emerging risks. access to better data has also enabled supervisors to conduct the supervisory stress tests required by dodd - frank, which assess the ability of these large institutions to withstand a severe economic downturn. this conference will address the efficacy of many of these individual elements of dodd - frank and of supervisory reforms, which are still evolving nearly four years after the legislation was first enacted. for the remainder of my remarks, i wish to explore three broad principles that i believe we need to consider as we search for ways to improve the stability of our financial system. the first is simplicity. our regulatory framework is becoming increasingly complex, which has led to rising compliance costs as well as enforcement costs. the second principle is transparency. financial markets and instruments have also become increasingly complex and in some cases occasionally opaque. ensuring