addition to increasing capital ratios, regulators are likely to introduce required liquidity ratios. experience, including that of the last year, suggests that there should be a liquidity ratio, and that the range of assets defined as being liquid should be small. here too is an area where international agreement and coordination would be desirable, but where national regulators should not wait for international agreement before introducing liquidity ratios. financial institutions are likely to complain that higher capital ratios and the introduction of formal liquidity ratios increase their costs of doing business and are in effect tax increases. given the vivid demonstration during the last year of the fragility of financial systems faced with a loss of confidence, and the fact that their survival depends on government backing and action – in the last year on a massive scale – it is fully appropriate that financial firms be required to self - insure against future crises by holding more capital and more liquidity. the tax treatment of the counter - cyclical elements in the additional capital may need to be considered. too big to fail, resolution mechanisms, and moral hazard. the experience of the last year has brought much - needed clarity to the " too big to fail " issue. some of the great names of financial history have disappeared ( e. g. lehman brothers ), some companies are in the process of working their way out of existence ( e. g. aig ), many would not have survived but for government assistance ( e. g. citigroup ), and many holders of their shares have suffered very large losses. it is likely that the need to show that the authorities would not save every big financial institution – in other words to counter the effect on financial behavior of the " too big to fail " doctrine – was a factor in the decision not to save lehman. the worldwide panic brought on by the lehman failure led directly to the decision two days later to provide massive aid to aig, making it seem that " too big to fail " was alive and well. but the truth is that if some part of aig survives, it will not recognizably be the same institution, and that the shareholders of the original aig will not recoup their investments – in other words, it has failed. similarly, much of citigroup is now state - owned, and its private sector shareholders have suffered very large losses. for a concise summary of the issues with regard to international coordination and possible solutions, see " lessons of the financial crisis for future regulation of

and effectiveness of prudential regulation and supervision must be improved " ; 3 ( iii ) " institutional policies and standards must be strengthened, with particular emphasis on standards for governance, risk management, capital, and liquidity " ; and ( iv ) " financial markets and products must be made more transparent, with better - aligned risk and prudential incentives. the infrastructure supporting such markets must be made much more robust and resistant to potential failures of even large financial institutions ". regulation and supervision of the financial system systemic or macroprudential regulation. almost all the reports on the reform of the financial system see a need for macroprudential or systemic regulation, and many place this responsibility with the central bank. the u. s. treasury report of june 2009 ( p. 11 ) defines macroprudential supervision as supervision that considers risks to the financial system as a whole, and recommends placing the responsibility for such regulation with the fed. to give the fed the capacity to meet this responsibility, the report ( p. 10 ) specifies that it should have the authority to regulate " [ a ] ny financial firm whose combination of size, leverage, and interconnectedness could pose a threat to financial stability if it failed ( tier 1 fhc ) …. regardless of whether the firm owns an insured depository institution ". further, the prudential standards for these firms should be the uk and us governments, and the eu presidency, have all issued reports on financial sector reforms. see hm treasury, reforming financial markets, july 2009 ; us department of the treasury, financial regulatory reform, june, 2009 ; and the presidency conclusions of the council of the european union, june 19, 2009, which essentially adopt the recommendations of the report of the high - level group on financial supervision in the eu, chaired by jacques de larosiere, brussels, february 25, 2009, with regard to the establishment of a european systemic risk board, whose chair is to be elected by the members of the general council of the ecb. see also : the g - 30 report, financial reform : a framework for financial stability, january 2009 ; financial services authority, uk, the turner review : a regulatory response to the global banking crisis, march 2009 ; committee on capital markets regulation, the global financial crisis : a plan for regulatory reform, may 2009, which includes a table comparing its 57 recommendations with those of other reports, pp 221 - 225 ; a series of reports on regulatory issues by the financial stability forum,