ben s bernanke : lessons of the financial crisis for banking supervision speech by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the federal reserve bank of chicago conference on bank structure and competition, chicago, illinois ( via satellite ), 7 may 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * after more than a year and a half of financial crisis, both bankers and policymakers must contend with two questions : what have we learned from this extraordinary episode? and how can we apply those lessons to strengthen our banking system and to avoid or mitigate future crises? getting the answers to these questions right is critical for our future financial and economic health. 1 the federal reserve has been intensively evaluating the lessons of the crisis, both with respect to the companies we supervise and to our own policies and procedures, and we are actively incorporating what we have learned into daily supervisory practice. increasing the effectiveness of supervision must be a top priority for our institution. in my remarks today i will outline some steps that the federal reserve has already taken in the wake of the crisis to strengthen capital, liquidity, and risk management in the banking sector, as well as to improve the supervisory process itself. i will also touch on what we have learned about the importance of effective consolidated supervision and the potential benefits of a more macroprudential orientation to financial oversight. the federal reserve's role in banking supervision it may be useful first to briefly review the federal reserve's bank supervisory responsibilities and how they interact with the other parts of our mission. the fed has supervisory and regulatory authority over bank holding companies ( including financial holding companies ), state - chartered banks that choose to join the federal reserve system ( state member banks ), the u. s. operations of foreign banking organizations, and certain types of u. s. entities that engage in international banking. 2 in fulfilling these responsibilities, we work with other federal and state supervisory authorities to promote the safety and soundness of the banking industry, foster the stability of the broader financial system, and help ensure fair and equitable treatment of consumers in their financial transactions. the federal reserve banks manage the process of onsite bank examinations, while providing a strong regional presence that allows us greater insight into local economic conditions. besides working with other u. s. agencies responsible for the oversight of banking and other areas of the financial

risk management because capital serves as such an important bulwark against potential unexpected loss, u. s. supervisors have been giving it very close attention since the beginning of the crisis. we have been closely monitoring firms'capital levels relative to their risk exposures and discussing our evaluations with senior management. we have also been revisiting our policies regarding capital ; for example, earlier this year we issued supervisory guidance for bank holding companies on dividends, capital repurchases, and capital redemptions, reemphasizing in the process that holding companies must serve as a source of strength for their subsidiary banks. as you may know, the federal reserve is leading the interagency supervisory capital assessment program, which is aimed at ensuring that the largest and most systemically important u. s. banking organizations have a capital buffer sufficient to remain wellcapitalized and actively lending, even should macroeconomic conditions prove worse than currently anticipated. more than 150 examiners, supervisors, and economists from the federal reserve, office of the comptroller of the currency, and the federal deposit insurance corporation cooperated in a simultaneous review and evaluation of the prospective losses and earnings of 19 major institutions, which collectively hold about twothirds of the assets of the u. s. banking system. the exercise has been comprehensive, rigorous, forward - looking, and highly collaborative among the supervisory agencies. undoubtedly, we can use many aspects of the exercise to improve our supervisory processes in the future. although capital remains a critical bulwark of a strong banking system, the crisis has also demonstrated the importance of effective liquidity management. along with our colleagues at the other u. s. banking agencies, we are monitoring the major firms'liquidity positions on a daily basis and are discussing liquidity strategies, key market developments, and liquidity risks with the firms'senior managements. as we have learned over the past year and a half, adequate liquidity management entails more than holding assets that are liquid in normal times ; firms must take into account how their liquidity positions might fare under stressed market conditions. we are also requiring firms to consider risks arising from the need to fund off - balance - sheet positions. the third key element of safe and sound banking, after capital and liquidity, is effective risk management. the crisis exposed the inadequacy of the risk - management systems of many financial institutions. we have stepped up our efforts to work with banks to improve their riskidentification practices.