lean against the wind in an effort to slow or limit the growth of unsustainable asset bubbles ( as through maximum loanto - value ratio requirements ). the crockett speech holds up very well today. with the benefit of the experience gained from the intervening financial crisis, an intense period of analysis from a macroprudential perspective, and a variety of regulatory initiatives, i offer these five propositions both to reinforce and to supplement the views sir andrew expressed 13 years ago. five propositions for a macroprudential approach to regulating financial institutions 1. a macroprudential perspective should dominate the regulation and supervision of large financial institutions. sir andrew entitled his speech “ marrying the micro - and macroprudential dimensions of financial stability, ” suggesting an equal partnership between the two regulatory dimensions, as he called them. my own sense is that we need to concentrate our post - crisis efforts to reshape the regulation and supervision of large financial institutions andrew d. crockett, general manager of the bank for international settlements and chairman of the financial stability forum ( 2000 ), “ marrying the micro - and macro - prudential dimensions of financial stability ( pdf ), ” speech delivered at the eleventh international conference of banking supervisors in basel, switzerland, september 21. reading between the lines, one wonders whether sir andrew anticipated that his call for action might not be taken up by banking regulators. he styled his remarks as “ provocative ” and concluded by suggesting they were but “ a small awareness - raising step in what, if pursued, is likely to be a long road. ” crockett, 2000 speech : “ a review of the instances of financial instability would reveal some shared stylised elements. there is first an over - extension phase during which financial imbalances build up, accompanied by benign economic conditions. in this phase, asset prices are buoyant and their surge tends to feed, and be fed by, rapid credit expansion, domestically or internationally. leverage, in overt or hidden forms, accumulates in balance sheets, masked in part by the favourable asset price developments. the trigger for a reversal is essentially unpredictable. it can originate either in the financial sphere ( e. g., an asset price correction ) or in the real economy ( e. g., a spontaneous unwinding of an investment boom ). the process then moves into reverse. ex post, a financial cycle is evident. ” bis central bankers ’ speeches on measures reflecting the macroprude

and thus susceptible to particularly sharp declines in a serious recession. to the extent that firms learn over time that such assets will be treated that way, there is at least a mild disincentive to hold them. as i will discuss in a moment with respect to countercyclical capital requirements, we should not overstate this lean - against - the - wind effect, but perhaps not dismiss it out of hand either. for example, if the loss to the financial system from the failure of a systemically important firm would be five times that resulting from failure of the non - systemic firm, then the firm would have to hold additional capital sufficient to make the expected probability of failure one - fifth that of the non - systemic institution. among the useful efforts along these lines are a measure of conditional value - at - risk ( covar ) ( see tobias adrian and markus k. brunnermeier ( 2011 ), “ covar ( pdf ), ” federal reserve bank of new york staff reports 348 ( new york : federal reserve bank of new york, september ), and a measure of systemic risk based on each firm ’ s contribution to the expected capital shortfall of the entire financial system in a crisis ( see christian t. brownlees and robert f. engle ( 2011 ), “ volatility, correlation and tails for systemic risk measurement, ” new york university working paper ( new york : new york university, june ). the concept behind the latter measure is also described in viral v. acharya, christian brownlees, farhang farazmand, and matthew richardson ( 2011 ), “ measuring systemic risk, ” in regulating wall street : the dodd - frank act and the new architecture of global finance ( new york : wiley publishers ), pp. 87 – 119. updated systemic risk rankings are maintained by the authors here. a helpful review of the efforts to measure systemic risk is monica billio, mila getmansky, andrew w. lo, and loriana pelizzon ( 2010 ), “ measuring systemic risk in the finance and insurance sectors ( pdf ), ” mit sloan school working paper 4774 – 10 ( cambridge, ma : mit sloan school of management, march ). bis central bankers ’ speeches 3. time - varying measures will play a more limited role. some discussions of macroprudential policy appear to contemplate a somewhat regular adjustment – up and down – of both resiliency and lean -