it is the quality and amount of capital that gets a company through unexpected asset problems encountered during the course of business. for that reason, i will focus my attention here on the quality and amount of capital. stockholder tangible common equity is the strongest form of capital. it is immediately available to meet creditor obligations and absorb losses. fundamentally, this is what defines a meaningful measure of leverage. other measures of capital include different hybrid debt instruments or intangibles that attempt to account for potential value and future earnings. for example, goodwill is an intangible that is not immediately available and evaporates quickly when a firm encounters asset problems. trust preferred stock is a hybrid - debt instrument that carries cash flow demands over the life of the instrument. thus, i measure leverage as a firm ’ s total tangible assets measured against tangible common equity. the leverage at banking organizations has been rising steadily since the mid - 1990s. the increase, however, is not immediately obvious because of the different ways capital and leverage can be measured ( chart 1 ). for example, in 2007 just before the crisis began, leverage for all banking organizations based on total equity capital, which includes common equity, perpetual preferred stock, and goodwill and other intangible assets, was the same as it was in 1993, $ 13 of assets for each dollar of capital. the story is quite different when you focus on tangible common equity by excluding perpetual preferred stock and goodwill and other intangible assets. tangible total assets rose from 16 times tangible common equity in 1993 to a multiple of 25 in 2007. the increased reliance on lower quality capital in recent years is clearly seen by the large gap among the various leverage measures in recent years as compared to the early 1990s when all the measures were about the same. moreover, a closer examination of the distribution of leverage across firms of different sizes shows that almost all of the increase in leverage is due to the largest banking organizations ( chart 2 ). for the 10 largest banking companies, leverage based on tangible common equity almost doubled from 18 in 1993 to 34 in 2007, and this doesn ’ t include their off - balance sheet activities. for the rest of the industry, leverage rose from 14 to just 17 ( chart 3 ). i would also note that for broker - dealers, which are an increasingly important source of credit through the shadow banking system, financial leverage rose from 13 in 1992 to 47 in 2007 ( chart 4 ). as a result, with twice as much leverage as all other banking organizations

had a unique role in supporting the economy through their credit intermediation activities and in connecting individuals and businesses to the payments system. these activities have placed banks at the center of policy concerns over systemic risk. however, given the growing role of capital markets and nonbank institutions in the intermediation process, we should begin to ask ourselves whether these broader market segments pose systemic concerns that are independent from those already arising from their linkages to the banking system. the importance of maintaining financial stability and addressing systemic threats to the economy justifies the federal safety net and the need for prudential supervision. we have a long history of using prudential or safety and soundness supervision of the banking system to limit the potential risks to this safety net. the premise behind this approach is that the health of the financial system can be solidified by monitoring and controlling the risks assumed by individual banks and by requiring appropriate levels of capital and liquidity to support their operations. to the extent these supervisory objectives can be met, the risk of serious failures and safety net losses can be reduced. our changing financial markets, though, are now prompting us to examine how far this framework of prudential supervision and safety net protection can and should be extended. the federal reserve ’ s current role as the central bank for the united states, the federal reserve has been assigned a critical role in promoting financial stability and responding to financial crises. this role is inherent in many of its powers including : banking supervision, the provision of liquidity through the discount window and open market operations, and payments system oversight. the federal reserve ’ s responsibilities for banking regulation and prudential supervision are largely aimed at preventing financial crises and protecting the federal safety net. accordingly, these efforts encompass capital adequacy standards for state member banks and holding companies, consolidated oversight of the risk exposures and risk management practices of these institutions, and corrective enforcement actions to deal with serious problems. the system ’ s responsibilities for supervising holding companies and state member banks also provide valuable insights on the operation of individual institutions and banking markets. moreover, with regard to crisis management, this supervisory experience and the information obtained in the supervisory process have been increasingly important in designing appropriate responses to financial disruptions. to deal with or manage potential crises, the federal reserve also relies on its authority to inject liquidity into the financial system. although other regulatory agencies also bear responsibility for helping to ensure financial stability, the federal reserve ’ s authority to supply liquidity gives it a unique