and assets. the immediate effect of the completion of the assessment phase of scap was to provide important information about the condition of the 19 institutions at a time of substantial stress and uncertainty in financial markets. the scap clearly helped to restore public confidence in the banking system. through its demonstration of the importance of individual assessments of firms'capital needs, improved management information systems in complex firms, and horizontal reviews of large institutions, scap will also have longer - lasting effects on the supervision of large institutions. one particularly important byproduct of the scap was a renewed supervisory focus on institutions'ability to assess their own capital adequacy – specifically their ability to estimate capital needs and identify available capital resources during very stressful periods. the uncertainty associated with capital needs in such periods is one among numerous reasons for firms to maintain substantial capital buffers. however, to the degree that firms cannot demonstrate their capacity to conduct rigorous internal capital assessments, supervisors will demand even higher capital cushions. scap revealed significant deficiencies in the information and quantitative risk assessment capabilities of some firms. currently, we are conducting a horizontal assessment of internal processes that evaluate capital adequacy at the largest u. s. banking organizations, focusing in particular on how shortcomings in fundamental risk management and governance impair firms'abilities to estimate capital needs for their specific exposures and activities. the federal reserve is also putting in place a permanent quantitative surveillance mechanism for the large, complex financial organizations we supervise. this mechanism will incorporate supervisory information, firm - specific data analysis, and market - based indicators to identify developing strains and imbalances that may affect multiple institutions, as well as emerging risks to specific firms. the work will be performed by a multidisciplinary group composed of economic and market researchers, supervisors, market operations specialists, and accounting and legal experts. periodic scenario analyses will be used to evaluate the potential impact of adverse changes in the operating environment on individual firms and on the system as a whole. this program will be distinct from the activities of on - site examination teams, so as to provide an independent supervisory perspective, as well as to complement the work of those teams. it will provide both improved microprudential supervision of the largest institutions and a foundation for a macroprudential dimension in our supervisory activities. supplementing the reform agenda the administrative and proposed legislative measures i have discussed present a strong set of reforms around which a consensus seems to be developing, at least in general terms. but many

own riskmanagement systems. supervisors counted on capital and risk management to be supple tools that could ensure stability even as financial activities changed rapidly. truthfully, though, there was no wholesale transformation of financial regulation to match the dramatic changes in the structure and activities of the financial industry. in particular, the regulatory system did not come close to adequately accounting for the impact of trading, securitization, and some other capital market activities on both traditional banking and systemic risk. the consequences of this neglect were dramatic. when questions arose about the quality of the assets on which the shadow banking system was based – notably poorly underwritten subprime mortgages – a classic adverse feedback loop ensued. with lenders increasingly unwilling to extend credit against these assets, liquidity - strained institutions made increasingly distressed asset sales, which placed additional downward pressure on asset prices, thereby accelerating margin calls for leveraged actors and amplifying mark - to - market losses for all holders of the assets. the margin calls and booked losses would start another round in the adverse feedback loop. meanwhile, as shown by the intervention of the government when bear stearns and aig were failing, and by the repercussions from the failure of lehman brothers, the universe of financial firms that appeared too - big - to - fail during periods of stress included more than insured depository institutions and extended beyond the perimeter of traditional safety and soundness regulation. the extension of funds by the treasury department from the troubled asset relief program ( tarp ) and guarantees by the fdic from the temporary liquidity guarantee program to each of the nation's largest institutions in the fall of 2008 revealed the government's view that a very real threat to the nation's entire financial system was best addressed by shoring up the nation's largest financial firms. the agenda for reform the need for a thorough overhaul of the financial regulatory system is thus borne out not only by our frighteningly close brush with financial collapse in the fall of 2008, but also by the degree to which too - big - to - fail perceptions and capital - market sources of systemic risk had been permitted – if not encouraged – by regulatory developments in the preceding decades. a post - crisis reform program will ultimately be judged adequate only if it addresses these problems head - on. a reform agenda aimed at these problems has, in fact, taken shape this year, although important components remain the subject of active debate. let me take a few minutes to set forth the outlines of that