focus. the very large negative externalities associated with such failures could be realized through a classic domino effect or through contagion effects. as the financial crisis showed, losses in a tail event are likely to be correlated for large firms deeply engaged in trading, structured products, and other capital market instruments, and relying on similar sources of short - term funding. thus, the regulatory framework should aim to reduce the chances of distress or failure at such firms to a greater extent than traditional, microprudential regulation would. moreover, it should explicitly take into account the correlations and inter - dependencies in asset holdings and funding. finally, the regulatory system should aim to offset the perception of too - big - to - fail status, which carries with it the possibility of funding advantages in normal times, and protection of creditors and perhaps even shareholders in highly stressed times. the systemic perspective and consequent aim of protecting financial stability argue for the stronger and broader regulatory measures that have been undertaken in recent years. at the other end of the spectrum are community banks, conventionally defined as those with less than $ 10 billion in assets. the roughly 5, 700 banks in this group constitute 98 percent of insured commercial banks in the united states, but hold just under 20 percent of the aggregate assets of all commercial banks. indeed, 90 percent of community banks are what supervisors classify as “ small ” community banks – those with less than $ 1 billion in assets. while these banks will suffer the fallout from systemic problems, they are unlikely to cause such problems. the regulatory aim, therefore, is about as close as can be to the traditional microprudential bank regulatory aims of protecting the federal dif and limiting the use of insured deposits by restricting the scope of bank activities. it is true that the relative lack of geographic and portfolio diversification in many community banks can make them vulnerable to localized economic problems. but that is just the kind of problem that traditional microprudential regulation has been concerned with addressing. what, then, of the 80 or so u. s. banks that have assets of $ 10 billion or more, but are not among the eight large, complex institutions that have been designated of global systemic importance? obviously they vary enormously in size, from just over $ 10 billion in assets all the way up to very large regional banks with hundreds of billions in assets. they bridge the $ 50 billion threshold for enhanced prudential standards established by dodd - frank. yet, whatever their size

##wn at a higher figure, we might explore simpler methods for promoting macroprudential aims with respect to banks above $ 10 billion in assets but below the new threshold. were such a change to be adopted, bank holding companies with less than $ 100 billion in assets would not be subject to any of the enhanced prudential requirements of section 165 of dodd - frank ; bank holding companies with assets between $ 100 billion and $ 250 billion would be subject to supervisory stress testing and a basic set of the section 165 requirements ; and holding companies with $ 250 billion or more in assets would be subject to the supplementary leverage ratio, the full lcr, and the countercyclical capital buffer provision. of course, this is not the only way to draw the lines, and there could be reasons for applying additional requirements to specific banks, even if they fall below the presumptive asset threshold. but i use this example to illustrate how the specification of aims and the progressive stringency of section 165 could be usefully combined. largest institutions. specifying prudential regulatory aims in the context of community and middle - range banks suggests a rationalization that could possibly eliminate certain requirements as they apply to some of these banks. in the case of the liscc institutions, however, i believe there are additional requirements needed to implement prudential aims associated with financial stability. these include capital surcharges and minimum amounts of “ gone concern ” loss absorbing capacity, among others. most important is continued work on bis central bankers ’ speeches the vulnerabilities posed by short - term wholesale funding and, more generally, by large trading books, including maturity matched books of securities financing transactions. the regulatory response to these vulnerabilities will likely require some combination of measures directed at capital, liquidity requirements, and resolution procedures. there is also a need for a complementary set of measures such as minimum margining requirements applicable to all securities financing transactions, whether or not they involve systemically important firms. but there are some opportunities for rationalization even with respect to regulation of the larger institutions. while necessary new rules will now be applied to these institutions, vestiges of the pre - crisis regulatory approach that did not rest on well - specified regulatory aims are still in place and might sensibly be modified or removed. most prominent in this regard is the basel ii irb approach for risk - weighted capital requirements. the irb approach, which generally applies in the united states to all bank holding companies with