##s. third, the u. s. has an independent central bank – the federal reserve – which has been successful in keeping inflation low and stable. as a result, the dollar has been a reliable store of value in recent years. another point in the united states ’ favor is the considerable steps taken to shore up areas of weakness revealed by the financial crisis. in particular, the safety and soundness of our financial system has been enhanced. capital and liquidity requirements for u. s. banks have been raised significantly. stress tests have been imposed to enhance the viability of large systemic institutions even in very adverse economic and financial environments. reforms have been enacted to facilitate the recovery and resolution of troubled institutions. this bis central bankers ’ speeches includes living will requirements for the major systemically - important financial institutions, and the development of an improved resolution regime to ensure that institutions that do get into difficulty can be resolved without disrupting the stability of the financial system. in conclusion, i welcome other countries ’ progress toward achieving the preconditions necessary for their currencies to attain the stature of a reserve currency. however, we should not act as if this is sufficient to achieve a well - functioning global financial system. in particular, the current regime is inefficient in a number of important ways. countries have found it necessary to self - insure against the risk of large capital flow reversals. this has led to a very sharp rise in aggregate foreign exchange reserve holdings. this form of selfinsurance is very expensive – especially when the return on the foreign exchange reserve portfolio is less than the cost of the domestic liabilities that fund these holdings. as i have said in the past, i encourage more work to examine whether there are other more efficient regimes that, for example, would economize on required foreign exchange reserve buffers. in this regard, i think expanding the capacity of the imf ’ s resources and working to further destigmatize drawing on the imf ’ s liquidity facilities could be worthwhile steps in this direction. thank you for your kind attention. bis central bankers ’ speeches

having a reserve currency may also be desirable for other reasons. first, with more reserve currencies available, portfolio diversification opportunities are enhanced. this is desirable because, all else equal, it would allow investors to move further out on the risk / return frontier. second, more currencies are likely to be close substitutes, which could dampen currency volatility. with many viable reserve currencies available, no particular one would necessarily have to bear the bulk of any adjustment. the dollar ’ s dominant reserve currency status has sometimes been referred to as the united states ’ “ exorbitant privilege, ” implying that the u. s. benefits extraordinarily from this privileged status. i ’ d argue that the situation is much more nuanced. yes, this status does allow the u. s. to benefit from seigniorage. more than half of all u. s. currency outstanding is held abroad. but, there are also costs of being the dominant reserve currency. for example, this can lead to shifts in the valuation of the dollar that are due primarily to developments abroad that affect risk appetites and international capital flows. in such cases, the dollar ’ s valuation can be pushed to levels inconsistent with u. s. economic fundamentals. for the united states, i believe that the most important goal must be to keep our own house in order. if we do this, then i expect that the u. s. dollar will earn the right to remain the most important reserve currency in the world. the united states has a number of advantages in sustaining the dominant reserve currency status of the u. s. dollar. first, there is a first - mover advantage. as the leading reserve currency in the world, there is no strong incentive for countries to move to other currencies as long as the dollar continues to have the attributes i discussed earlier. the history of reserve currency usage is characterized by considerable inertia. the u. s. dollar emerged as the leading reserve currency quite a bit after it became the world ’ s largest economy. typically, the loss of dominant reserve currency status requires either substantial economic decline or political instability that motivates foreign counterparties to shift to a new reserve currency. second, the u. s. has the deepest and most liquid capital markets in the world. this is important in making u. s. treasuries and agency mortgage - backed securities attractive holdings as part of countries ’ foreign exchange reserve portfolio