instruments, including derivatives. the risk management principles under examination applied whether or not the institution used derivatives. we addressed structured notes in similar fashion in 1995 with guidance on the risk management of bank investment and end - user activities. more recently, the federal reserve issued examiner guidance on the risks relating to banks ’ management of secondary credit market activities, including securitization activities, the extension of various types of off - balance - sheet credit enhancements, and the use of credit derivatives. the guidance stresses the importance of internal capital allocation schemes and risk management systems that accurately reflect the economic substance of transactions. a second lesson that has been reinforced over the past several years is that risk must be measured and managed comprehensively. that is, the focus should be on the dynamics of the portfolio rather than on specific instruments, which can ignore the interplay among various instruments. although portfolio theory is widely appreciated by bankers and regulators, putting its principles into practice in banking has not been easy. past banking crises have, in part, reflected a failure by some institutions to recognize and limit concentrations of risk within their portfolios. however, technology and financial innovation are enabling banks to put theories and conceptual techniques into practice to manage the market and credit risks involved in trading, investment, and lending activities. most dealer banks now routinely employ value - at - risk ( var ) measures to manage the market risks of their trading portfolios and significant strides are being made in the quantitative measurement and management of credit risk. the move to a portfolio - based approach to managing risk has influenced bank supervisory efforts in several other ways. all three of the u. s. banking agencies now take a more risk - focused approach to supervision. this is simply allocating more supervisory resources to a bank ’ s activities that pose greater risk. for example, bank examiners no longer exhaustively review all of a bank ’ s activities. instead, the examination approach is now to identify and review the sources of risk within a bank ’ s various lines of business. the need to measure risk on a portfolio basis has also begun to be reflected more explicitly in our capital guidelines and our reporting requirements. beginning next year, internationally active banks meeting certain criteria for risk management will calculate the amount of capital necessary to support the market risk of their trading activities using their own internal var measures. this approach allows banks to make use of empirical correlations among risk factors when computing the var. a third lesson that our experience with derivatives and other financial innovations has driven home is the critical importance

. before doing so, it is important to underscore what is at stake here. for all the disagreements among legislators, policy officials, and the public over the right set of financial reform measures, i have noted one point on which there is near unanimity : no one wants another tarp program. not those who thought tarp was the best of a bad set of options in the fall of 2008. certainly not those who opposed it. not the american people, many of whom saw the injection of billions of dollars of government capital into financial firms as more a bail - out of large banks than an imperative to stabilize the financial system. and not even, i suspect, most of the large financial firms that received the government capital. in a period of financial stress, the disorderly failure of one or more sifis carries the potential for a devastating impact on the financial system. the fear elicited by that prospect led the see daniel k. tarullo, regulating systemic risk ( 2011 ), “ regulating systemic risk, ” remarks delivered at the 2011 credit markets symposium, charlotte, north carolina, march ; daniel k. tarullo ( 2010 ), “ comments on ‘ regulating the shadow banking system, ’ ” remarks delivered at the brookings panel on economic activity, washington, september. bis central bankers ’ speeches bush administration to ask for tarp authority. that same fear led many members of congress with no great love for large financial firms to vote for tarp. those actions are further evidence for the proposition that, no matter what their general economic policy principles, government officials faced with a cascading financial crisis that threatens to bring down the national economy will usually support measures to rescue large banks. in order to avoid the need for a new tarp at some future moment of financial stress, the regulatory system must address now the risk of disorderly failure of sifis. rationale for enhanced capital requirements last fall central bank governors and heads of supervision from countries represented on the basel committee on banking supervision agreed to the important package of reforms in capital regulation known as basel iii. the basel iii requirements for better quality of capital, improved risk weightings, higher minimum capital ratios, and a capital conservation buffer comprise a key component of the post - crisis reform agenda. but they are just that – a component. although a few features of basel iii reflect macroprudential concerns, in the main it was a microprudential exercise. the new minimum equity capital ratio and conservation