help reduce the costs imposed on banks at a time when capital and lending are already under pressure. policymakers should consider additional steps to reduce the possible procyclical effects of deposit insurance costs while still ensuring that riskier banks pay higher premiums than safer banks. one possibility would be to raise the level to which the designated reserve ratio may grow in benign economic environments, so that a larger buffer is available to be drawn down when economic conditions worsen and insurance losses are high. systemic risk authority the policy actions i've discussed would inhibit the buildup of risks within the financial system and improve the resilience of the financial system to adverse shocks. financial stability, however, could be further enhanced by a more explicitly macroprudential approach to financial regulation and supervision in the united states. macroprudential policies focus on risks to the financial system as a whole. such risks may be crosscutting, affecting a number of firms and markets, or they may be concentrated in a few key areas. a macroprudential approach would complement and build on the current regulatory and supervisory structure, in which the primary focus is the safety and soundness of individual institutions and markets. how could macroprudential policies be better integrated into the regulatory and supervisory system? one way would be for the congress to direct and empower a governmental authority to monitor, assess, and, if necessary, address potential systemic risks within the financial system. the elements of such an authority's mission could include, for example, monitoring large or rapidly increasing exposures – such as to subprime mortgages – across firms and markets, rather than only at the level of individual firms or sectors ; ( 2 ) assessing the potential for deficiencies in evolving risk - management practices, broad - based increases in financial leverage, or changes in financial markets or products to increase systemic risks ; ( 3 ) analyzing possible spillovers between financial firms or between firms and markets, such as the mutual exposures of highly interconnected firms ; and ( 4 ) identifying possible regulatory gaps, including gaps in the protection of consumers and investors, that pose risks for the system as a whole. two areas of natural focus for a systemic risk authority would be the stability of systemically critical financial institutions and the systemically relevant aspects of the financial infrastructure that i discussed earlier. introducing a macroprudential approach to regulation would present a number of significant challenges. most fundamentally, implementing a comprehensive systemic risk program financial stability forum ( 2008 ), " report

of the financial stability forum on enhancing market and institutional resilience : follow - up on implementation ", october 10. would demand a great deal of the supervisory authority in terms of market and institutional knowledge, analytical sophistication, capacity to process large amounts of disparate information, and supervisory expertise. other challenges include defining the range of powers that a systemic risk authority would need to fulfill its mission and then integrating that authority into the currently decentralized system of financial regulation in the united states. on the one hand, it seems clear that any new systemic risk authority should rely on the information, assessments, and supervisory and regulatory programs of existing financial supervisors and regulators whenever possible. this approach would reduce the cost to both the private sector and the public sector and allow the systemic risk authority to leverage the expertise and knowledge of other supervisors. on the other hand, because the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient. for example, a systemic risk authority would need broad authority to obtain information – through data collection and reports, or when necessary, examinations – from banks and key financial market participants, as well as from nonbank financial institutions that currently may not be subject to regular supervisory reporting requirements. a systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified systemic risks – in coordination with other supervisors, when possible, or independently, if necessary. the role of a systemic risk authority in setting standards for capital, liquidity, and risk - management practices for the financial sector also would need to be explored, given that these standards have both microprudential and macroprudential implications. in general, much discussion will be needed regarding what can reasonably be expected from a macroprudential regime and how expectations, accountability, and authorities can best be aligned. important decisions must be made about how the systemic risk regulation function should be structured and located within the government. several existing agencies have data and expertise relevant to this task, so there are a variety of organizational options. in any structure, however, to ensure accountability, the scope of authorities and responsibilities must be clearly specified some commentators have proposed that the federal reserve take on the role of systemic risk authority ; others have expressed concern that adding this responsibility would overburden the central bank. the extent to which this new responsibility might be a good match for the federal reserve depends a great deal on precisely how the congress defines