donald l kohn : globalisation, inflation and monetary policy remarks by mr donald l kohn, member of the board of governors of the us federal reserve system, at the james r wilson lecture series, the college of wooster, wooster, ohio, 11 october 2005. * * * thank you for the opportunity to return to wooster. in one sense, much has changed since my time here in the early 1960s, when my intellectual energy was too often focused on such pursuits as evading compulsory chapel in favor of coffee and a cigarette at the shack. but in a much more important sense, the essence of the wooster educational experience remains unchanged. i know from conversations, reading, and my occasional forays back to campus that wooster continues to be a place where close, continuing contact with knowledgeable and enthusiastic scholars can open new horizons to students, shaping their subsequent intellectual lives and careers. i know that is what happened to me here. another strong thread in the wooster tradition has been putting the knowledge acquired here to work for the common good as well as for individual gain. in that tradition, i suggest to the students in the audience that you consider government service at some point in your careers. governments at all levels have the power to help or harm. to increase the odds on the former, we need to apply the kinds of knowledge and analytic skills you are obtaining here. i can tell you from personal experience that going to work each morning knowing that how well you do your job could affect the welfare of your fellow citizens can be a little scary, but it is also tremendously challenging and rewarding. in keeping with the habits of mind i developed here, i approached this talk as a term paper project. i picked a topic that i wanted to think through, one that would not require any truly original research and could be done in a limited amount of time. well, my wooster experience has been replicated : the topic has turned out to be larger and more complex than i anticipated, i have been working and revising up to the last minute, and i have yet to arrive at very settled conclusions. 1 still, wooster is an especially fitting venue for this assignment. i intend to spend much of the remaining time discussing the evolving linkages between globalization and monetary policy. and here, much is different from my undergraduate days, importantly because of the shift to flexible exchange rates in the early 1970s. if memory serves, this change was one i advocated in my senior independent

decade ago, were the result of a defensible but not ineluctable analysis, and have not been refined since then. we should explore ways to bring these criteria into better alignment with our objectives. a third area in which i will be working with my board colleagues is a meaningful simplification of our framework of loss absorbency requirements. there are different ways to count the number of loss absorbency constraints that our large banking firms face — which is perhaps in itself an indication of a surfeit of complexity if we can ’ t be perfectly sure of how to count them — but the number i come up with is 24 total requirements in the framework. while i do not know precisely the socially optimal number of loss absorbency requirements for large banking firms, i am reasonably certain that 24 is too many. candidates for simplification include : elimination of the advanced approaches risk - based capital requirements ; one or more ratios in stress testing ; and some simplification of our tlac rule. i am not the first federal reserve governor to mention some of these possibilities, and we should put them back on the table in the context of a more holistic discussion of streamlining these requirements. let me be clear, however, that while i am advocating a simplification of large bank loss absorbency requirements, i am not advocating an enervation of the regulatory capital regime applicable to large banking firms. although not a post - crisis regulation, the board ’ s complex and occasionally opaque framework for making determinations of control under the bank holding company act ( bhc act ) is another area that is ripe for re - examination through the lenses of efficiency, transparency, and simplicity. as you know, a determination of control under the bhc act is significant because even remote entities in a controlled group can be subject to the bhc act ’ s restrictions on activities and a host of other regulatory requirements. under the board ’ s control framework — built up piecemeal over many decades — the practical determinants of when one company is deemed to control another are now quite a bit more ornate than the basic standards set forth in the statute and in some cases cannot be discovered except through supplication to someone who has spent a long apprenticeship in the art of fed interpretation. the process can be burdensome and timeconsuming both for the requester and federal reserve staff. we are taking a serious look at rationalizing and recalibrating this framework. finally, as i mentioned earlier