effect, establish a cross - firm, horizontal perspective as an ongoing organizing supervisory principle. this new approach will have a macroprudential dimension as well. to advance both macroprudential and microprudential goals, we are instituting a quantitative surveillance mechanism ( qsm ) for large, complex financial organizations. the qsm will use supervisory information, firm - specific data analysis, and market - based indicators to identify developing strains and imbalances that may affect basel committee on banking supervision ( 2009 ), strengthening the resilience of the banking sector – consultative document ( basel, switzerland : bank for international settlements, december ). multiple institutions, as well as emerging risks to specific firms. periodic scenario analyses across large firms will enhance our understanding of the potential effects of adverse changes in the operating environment on individual firms and on the system as a whole. market discipline has been an underdeveloped policy tool despite numerous ideas put forth over the years. yet it is hard to imagine a practical counterstrategy to the undesirable consequences of too - big - to - fail perceptions that does not include a credible alternative to the current hobson ’ s choice of bailout or disorderly bankruptcy. consequently, most regulatory reform proposals have prominently featured a special resolution mechanism that would raise the real prospect of losses for investors and counterparties of even the largest failing institutions. at present, of course, the law provides the fdic with authority to resolve failed insured depository institutions, but there is no parallel authority for the holding companies of which these banks are a part or for other systemically important financial firms. regulatory reform : the ongoing debate the rough consensus around the reform elements just described has hardly meant an end to the debate for at least three reasons. first, as already noted, there is considerable continuing disagreement over the key features of some of these proposals, even when the basic idea is accepted. the significant differences over the best form of resolution mechanism provide one example. second, as also mentioned earlier, some ideas that may be promising ideas in concept – such as special charges calibrated to the systemic importance of a firm – are not easy to develop and put into practice effectively. until more - detailed proposals are generated, judgments on the likely efficacy of these ideas will obviously be difficult to make. third, many participants in the public policy debate who would agree with some form of this consensus agenda nonetheless believe that it falls short of what is needed to ensure financial stability. those who believe

bank regulatory agencies and through a series of legislative changes culminating in the gramm - leach - bliley act of 1999. by the turn of the century, the depression - era cluster of restrictions on commercial banks had been replaced by a regulatory environment in which they could operate nationally, conduct a much broader range of activities, and affiliate with virtually any kind of financial firm. these changes enabled a series of acquisitions that resulted in a number of very large, highly complex financial holding companies centered on large commercial banks. at the same time, independent investment banks had grown into a group of very large, complex, and highly leveraged firms. of course, financial engineering had been rapidly changing the character of the financial services sector as a whole. among other things, securitization and associated derivative instruments were merging capital markets and traditional lending activities, thereby fueling the growth of the shadow banking system. the regulatory system had also evolved, notably through progressively more detailed capital requirements and increasing demands that banking organizations enhance their own riskmanagement systems. supervisors counted on capital and risk management to be supple tools that could ensure stability even as financial activities changed rapidly. truthfully, though, there was no wholesale transformation of financial regulation to match the dramatic changes in the structure and activities of the financial industry. in particular, the regulatory system did not come close to adequately accounting for the effects of securitization and other capital market activities on both traditional banking and systemic risk. meanwhile, as shown by the intervention of the government when bear stearns and american international group were failing, and by the repercussions from the failure of lehman brothers, the universe of financial firms that appeared too big to fail during periods of stress included more than insured depository institutions and, indeed, reached beyond the circle of firms subject to mandatory prudential regulation. the extension of funds by the treasury department from the troubled asset relief program and of guarantees by the federal deposit insurance corporation ( fdic ) from the temporary liquidity guarantee program to each of the nation ’ s largest institutions revealed the government ’ s conclusion in the fall of 2008 that a very real threat to the nation ’ s entire financial system was best addressed by shoring up the largest financial firms. regulatory reform : the consensus to date the crisis thus arose against the backdrop of a regulatory system that had not adjusted to the extensive integration of traditional lending with capital market activities, which had created new sources of systemic risk. the already significant too - big - to - fail