several simplifying changes to the regulatory framework. for instance, the definition of capital now focuses on tangible common equity, the truest form of loss - absorbing capital. moreover, all components of the capital base and associated deductions such as goodwill or deferred tax assets must be disclosed in a fully comparable manner. by standardising and simplifying the measure of capital, basel iii makes the regulatory framework easier to understand, and will enable market discipline to work better. another important step has been the introduction of a non - risk based leverage ratio as a supplement to the risk - based requirement. this is a “ belt and suspenders ” approach to capital regulation. the leverage ratio will help contain the buildup of excessive leverage in the system, serving as a backstop to the risk - based regime and safeguarding against banks ’ attempts to “ game ” the risk - based requirements. equally critically, the risk - based framework helps ensure that banks do not game the leverage ratio. let ’ s not forget that simple measures like a leverage ratio have been in place in the past and did not alone prevent banking failures. bis central bankers ’ speeches risk - weighting is difficult but vitally important. therefore the basel committee is in the process of reviewing the risk - weighting regime of the capital framework to ensure that it is as simple and comparable as can be while still capturing the risk profile of banks ’ varied asset portfolios. complexity is a byproduct of the desire, among regulators and banks, for risk sensitivity. risk measurement will never be perfect. simplicity, however, can sometimes come at a cost. ignoring risk does not make it disappear. without measuring risk properly, we may allow it to build up undetected. operating only with a non - risk - based leverage ratio creates incentives to shed safe assets and to increase the riskiness of asset portfolios ; to forgo risk - reducing hedging strategies because they could result in higher capital requirements ; and to engage in off - balance sheet activities and other sophisticated structures that expose a bank to contingent risks. this is likely to increase the aggregate risk in the economy and thereby create global financial stability concerns. the lesson, therefore, is not to rely on either risk - based or non - risk - based measures alone, but to have each reinforcing the other. a combined approach, as basel iii introduces, is better than any single approach. i believe basel iii strikes a reasonable balance by strengthening overall bank - capital requirements

we have also taken steps to ensure transparency and accountability. last year, i was pleased that the board accepted my recommendation to publish a public financial stability report twice a year. 2 the report provides an account of our assessment of vulnerabilities as well as a summary of market participants ’ views on potential risks to the financial system. through this public communication, we hope to gain feedback from the broader financial stability community and the public on threats to the financial system. how the federal reserve approaches financial stability our approach to financial stability recognizes that the financial system and the broader economy are intertwined. the buildup of financial imbalances in good economic times has the potential to amplify shocks in a downturn and push the economy away from full employment and price stability. when financial vulnerabilities build, adverse developments can lead to disruptions in 1 / 4 bis central bankers'speeches credit and other financial services, potentially amplifying declines in employment and economic activity. our goal is to promote a resilient financial system that is able to continue meeting the demands of households and businesses for financial services when faced with adverse events. accordingly, we have developed a systematic forward - looking approach to assessing financial vulnerabilities that could amplify negative shocks, transmitting damage more broadly. the historical record here and abroad points to several key areas of vulnerability. vulnerabilities can build when there is excessive or poorly underwritten borrowing across many households, such that incomes are not keeping up with debt payments. similarly, elevated levels of corporate debt can create problems not only for the borrowers, but also for lenders, when the business cycle turns, and debt servicing obligations or refinancing prove challenging, leading businesses to pull back on investment and employment. vulnerabilities historically have often been associated with conditions where asset prices are higher than what economic fundamentals support, often because of elevated risk appetite, potentially leading to much larger - than - expected losses should a sharp correction occur. separately, we track leverage in the financial system for signs that banks and other financial intermediaries potentially have inadequate buffers of capital to absorb adverse shocks, increasing the risk of their distress and possible spillovers to the financial system. we also monitor funding risk in the financial system. where banks or nonbank financial intermediaries fund long - term lending through potentially flighty short - term borrowing, it may pose the risk of a loss of confidence, precipitating a withdrawal of short - term funding and