. the lender of last resort may well be producing a result that is better for everyone in the economy when it intervenes in a financial crisis. but since the counterfactuals are difficult to establish, and the these issues are discussed in s5, s7 and b5. i am quoting here from my 2011 ( http : / / www. bis. org / review / r110414f. pdf ). paper, “ central bank lessons from the global crisis. ” bis central bankers ’ speeches moral hazard argument is easy to deploy, the public sector may shy away from acting as lender of last resort except in extremis. hence the phenomenon of too big to fail. if policymakers reach a point at which they confront a choice between allowing a large and / or systemically interconnected bank to fail without their having reasonable assurance that its essential activities will continue, they may well step in to “ save ” the financial institution. by “ save ”, i mean, allow the bank to continue to exist and to carry out the functions that are needed to prevent a financial crisis. it is essential to emphasize that this requires a resolution process that does not, and should not, preclude actions to ensure that equity and bond holders lose all or most of the value of their assets, to an extent that depends on circumstances. and the ability to do this depends on the resolution processes for insolvent financial institutions. in this context, the progress that has been made since 2008 in developing effective resolution mechanisms will play a key role in dealing with the too big to fail problem by significantly reducing the probability of a bank being too big to fail. this is a good point at which to turn to the regulation and supervision of the financial system. lesson t5 : regulation and supervision of the financial system. 11 the natural and sensible reaction to the problem that the central bank and the government face when the dark clouds of a massive financial crisis appear on the horizon, is to make two sets of decisions. the first relates to its immediate actions and the short run, where the goal should be to intervene in a way that prevents the massive crisis, at minimum future cost to the economy and the society. the second is for the longer run, to rebuild the financial system in such a way that the probability of having to confront such a situation again is reduced to a very low level. hence regulations should be strengthened, essentially as they have been recently, through the activities of governments,

to the current capital structure. i will end with some suggestions regarding basic principles for assessing possible future changes to our system of prudential supervision and regulation. to begin, financial innovation is nothing new, and the rapidity of financial evolution is itself a relative concept - - what is “ rapid ” must be judged in the context of the degree of development of the economic and banking structure. prior to world war ii, banks in this country did not make commercial real estate mortgages or auto loans. prior to the 1960s, securitization, as an alternative to the traditional “ buy and hold ” strategy of commercial banks, did not exist. now, banks have expanded their securitization activities well beyond the mortgage programs of the 1970s and 1980s, to include almost all asset types, including corporate loans. and most recently, credit derivatives have been added to the growing list of financial products. many of these products, which would have been perceived as too risky for banks in earlier periods, are now judged to be safe owing to today ’ s more sophisticated risk measurement and containment systems. both banking and regulation are continuously evolving disciplines, with the latter, of course, continuously adjusting to the former. technological advances in computers and in telecommunications, together with theoretical advances - - principally in option - pricing models - - have contributed to this proliferation of ever - more complex financial products. the increased product complexity, in turn, is often cited as the primary reason why the basle standard is in need of periodic restructuring. indeed, the basle standard, like the industry for which it is intended, has not stood still over the past ten years. since its inception, significant changes have been made on a regular basis to the accord, including, most visibly, the use of banks ’ internal models for assessing capital charges for market risk within trading accounts. all of these changes have been incorporated within a document that is now quite lengthy - and written in appropriately dense, regulatory style. while no one is in favor of regulatory complexity, we should be aware that capital regulation will necessarily evolve over time as the banking and financial sectors themselves evolve. thus, it should not be surprising that we constantly need to assess possible new approaches to old problems, even as new problems become apparent. nor should the continual search for new regulatory procedures be construed as suggesting that existing policies were ill - suited to the times for which they were developed or will be ill - suited for those banking systems at an earlier stage of development. indeed, so