additional devices they're deploying. >> guest: yeah. >> host: broadband capacity has been a continual issue for this industry. time warner has done some experimentation with metering, and i just came from a luncheon where john leibovitz of the ftc said he was surprised that metering hadn't caught on more, heavy users, in fact, shouldn't pay a little more. what has time warner's experience been with that, and what do you think of this as a larger scale deployment? >> guest: well, we don't have any plans to roll out consumption-based billing at this time, but i think john's points were very good. those who use less should pay less. i think it would be great if we could lower prices or at least not take prices up as fast for people who use a lot less. so we're delighted that people are using more, growth of internet traffic is skyrocketing particularly peak growth during

prime time which is 8-10:00 at night. it is a challenge to build enough capacity to keep up with all of that growth, but it's terrific for us. people are getting more and more value out of their high-speed data connections, and that's exactly what we want. >> host: so in the area where your job intersects with washington, what would your message be to washington regulators to have the congress about -- or to the congress about what to do to encourage this growth or not to stand in the way of it? >> guest: i think not to stand in the way of it is just the way to put it. i meet with regulators fairly often, and we talk about things like the all bid initiative. i don't know whether your viewers know anything about that -- >> host: can you tell us about it? >> guest: network neutrality. >> host: yep. >> guest: and they ask how i would write the regulations, and i have to say i have no idea how to write those regulations. things are moving so fast, i'm

sure that whatever we write today will be wrong a year or two from now. so i think the market is as dynamic as it can possibly be right now. there are a lot of checks and balances in the marketplace, and i don't think regulators should try to pick winners and losers or the right technologies. >> host: so the message is hands off for now, let this shake out a bit and see where the market goes? >> guest: yeah. and certainly don't put acts of regulation in place. there aren't problems right now. so why would you try to anticipate problems and put regulations in place? >> host: we're just about out of time, but as we're sitting here on day two, tell me what you've seen as you walk around the floor and what's interested you the most, other than your own services? >> guest: i think it's interesting to see what the other cable operators are doing over in cablenet. there are lots of new streaming technologies which is an important thing for us, how to

get video over the internet or using internet technologies, how are we going to deliver video. those technologies are improving very rapidly which is a good thing for somebody who worries about network capacity. um, and then i'm encouraged by the other devices that are now capable enough to receive our video services. >> host: is it possible to see where this business will be in five years? >> guest: i'm not that good. [laughter] but i can't wait to see it. it's fun to watch it roll out. >> host: well, you won't even be at your 40th anniversary in five years, but look forward to talking to you then about how this mays out. thanks, kevin leddy, for your time. >> guest: thanks, susan. >> look for more interviews from the cable show and other "communicators" programs in our video library at c-span.org. >> and you can also see "the communicators" each monday in prime time. if you missed any of this discussion with doug herzog of

mtv and kevin leddy of time warner cable on developments in the cable industry, watch "the communicators" again tonight at 8 eastern right here on c-span2. >> starting next month, we will be able to remove 10,000 of our troops from afghanistan by the end of this year. and we will bring home a total of 33,000 troops by next summer. >> follow the timeline on the war in afghanistan and search over 4,000 entries online at the c-span video library. search, watch, clip and share. every c-span program since 1987 all free, anytime. it's washington your way. >> the c-span networks. we provide coverage of politics, public affairs, nonfiction books and american history. it's all available to you on television, radio, online and on social media networking sites. and find our content anytime through c-span's video library.

and we take c-span on the road with our digital bus and local content vehicle, bringing our resources to your community. it's washington your way. the c-span networks, now available in more than 100 million homes. created by cable, provided as a public service. >> we are live this morning for the start of a daylong forum on the implementation and impact of the nation's financial reform legislation signed into law just over a year ago. hosted by the pew financial reform project and new york university's business school, it begins with remarked by michael barr, he's a former assistant treasury secretary for financial markets. and a little bit later a panel discussion including comments by a former chair of the white house counsel of economic advisers during the clinton administration. this is live coverage on c-span2. >> not completed. i think john walsh last week in london, um, said quite interestingly that there are many different moving parts to

this reform effort, and do they add up to something that's going to work well? that's one of our questions. clearly, we're only part of the way along, so i think we have to find out from our conversations today, um, whether things are going in the right direction and going in at a satisfactory pace. the program today is a full one. um, hopefully, it will answer some of these questions for us. we must tick is to the timeline -- stick to the timeline as well as we can, although we're starting a few minutes late. we want to have as much participation as possible, but please keep your comments and questions brief during our question and answer period. we start with michael barr talking about the, he's one of the main architects of dodd-frank. tom cooley and martin beatty are on our panel to kick us off, and they're going to discuss his remarks and their end thoughts about architecture. we'll then turn to pat parkinson

who was also an architect of implementation on assignment from the fed, an architect of the dfa legislation, i mean. and kim and vince, two leading scholars of the federal reserve are going to be discussing the role of the fed which has been affected to a significant degree by the reform effort. um, then we'll take a short break. we have then systemic risk as our topic, measurement, monitoring and management. reducing the probability and severity of future crises. matt richardson's going to be talking to that subject, and then we have two practitioners, nelly lang and dick burner who's the new counselor at the treasury in charge of standing up the ofr. at lunch we have remarks from tom hannig, the kansas city fed

president. an independent thinker, i think one might say, within the federal reserve system. and after lunch we turn to shadow banking, tobias harrington. and a conversation with neil barofsky which i'm looking forward to. an afternoon break which we'll take if we can, we may be short of time. and we'll finish up with international coordination without which nothing since this global problem if you fix a part of the problem and don't fix the whole thing, you can get into trouble. i'd also like to acknowledge our distinguished moderator for the day, jon hilsenrath is here, christa freeland from reuters and steve weissman from the peterson institute are going to be running our panels, and i hope they'll hold our panelists' feet to the fire, provoke wider participation and maintain

discipline at the same time. good luck. [laughter] um, mechanics. i don't think there's anything mysterious here. food will be in the back during our breaks. if you haven't already found them, our bathrooms are down the corridor here towards the elevators and beyond. papers are on the resource table outside, materials will be online, available online at www.pewfr.org and an e-book from selected speakers will be available from tavern -- stan in due course. and, please, when you're speaking or asking a question, identify yourself. and, again, if you can keep your comments short, that will help us move along. it's my pleasure to introduce michael barr. professor barr is a professor at the university of michigan law school, but not perhaps a typical michigan law professor. he managed to be on leave at the key moment from 2009 to 2010 as

assistant secretary for financial institutions at the u.s. treasury. for impact, i think, your timing was perfect, michael. you couldn't have chosen a time to have more, a more extraordinary role in terms of leadership within the reform process. but it comes from an extraordinary earlier career of impact along the way starting out as a, clerking for justice souter on the supreme court. so a distinguished career. so to give us insight into the kitchen when dfa was being cooked and an assessment of how we're doing now, i'm delighted to introduce professor barr. >> thank you very much, charles, for having me here and all of you for coming this morning. i'm going to give some formal remarks to open us up, and then the panel has promised me to

savagely dispute everything i say which should provide a lot of entertainment for all of you. you go back over two years ago, the united states and the global economy faced the worst economic crisis since the great depression. the crisis was rooted in many years of unconstrained access and prolonged come play complac. the crisis made painfully clear what we should have always known, that finance cannot be left to regulate itself, that consumer markets permitted to profit on the basis of tricks and traps rather than to compete on the basis of price and quality will, ultimately, put us all at risk. that financial markets function best when there are clear rules, transparency and accountability, and that markets break down, sometimes catastrophically where there are not. if -- if more years a core strength of the u.s. financial system had been a regulatory structure that sought a careful balance between incentives for innovation and competition on

the one hand and protections from excessive risk taking on the other. over time those great strengths were undermined. the careful mix of protections we created eventually eroded with the development of new products and markets for which those protections had not been designed, and our regulatory system found itself outgrown and outmaneuvered by the very institutions and markets it was designed to regulate. in particular the growth of the shadow banking system permitted financial institutions to engage in maturity transformation with too little transparency, capital or oversight. the years leading up to the crisis saw the growth of large short-funded and substantially interconnected financial firms. risks moved outside the banking system to where it was easier to increase leverage. legal loopholes and regulatory gaps allowed large parts of the financial industry to operate without sufficient oversight. and entities performing the same

market functions as banks escaped meaningful regulation on the basis of their corporate form. moreover, banks could move activities off balance sheet and outside the reach of stringent regulation. derivatives were traded in the shadows, repo markets became chrisingier as -- riskier as markets shifted. the lack of traction parent si and securitization hid the growing wedge in incentives facing different players in the system and failed to require sufficient responsibility from those who made loans or packaged them into complex instruments to be sold to investors. synthetic products merely multiplied risks in the securitization system. the financial be sector as a whole under the guise of innovation piled ill-considered risk upon ill-considered risk. as the shadow banking system grew, our system failed to require real transparency,

sufficient capital or meaningful oversight. rapid growth in key markets often hid misaligned incentives and underlying risk. financial innovation outpeaced the capacity -- outpaced the capacity of regulators and markets to understand these risks and to adjust. and throughout our system we had increasingly inadequate capital buffers as both market participants and regulators failed to account for the new risks appropriately. short-term rewards in if new financial products and rapidly-growing markets overwhelmed or blinded private sector gatekeepers and swamped those parts of the system that were supposed to mitigate risk. consumer investor protections were weakened, and households took on risks that they did not fully understand and could ill afford. rising home and asset prices had helped to feed the financial system's rapid growth, and a high declining underwriting standards and other underlying problems in the origination and securitization in particular of mortgage loans.

when home prices began to flatten and then to decline, these fault lines were revealed. the asset implosion in housing led to cascades throughout the financial system and then to contagion from weaker firms to stronger ones. failures in the shadow banking system fed failures in the more regulated parts of the banking system, and then in the fall of 2008 the credit markets froze. the overreliance on short-term funding, opaque markets and excessive risk taking that had been the source of significant profit on wall street and in financial capitals globally fanned panic that nearly collapsed the global financial system. in my view, comprehensive reform was essential, and one year ago president obama signed into law the dodd-frank act. the act provides for supervision of major firms based on what they do rather than their corporate form. shadow banking is brought into the regulatory daylight. the larger financial firms will be required to build up their capital and liquidity buffers,

constrain their relative size and place restrictions on the riskiest financial activities. the act comprehensively regulates derivative markets with new rules for exchange trading, central clearing, transparency, capital and margin requirements. the act provides for data collection and transparency so no corner of the financial market can risk go unnoticed. the act creates an essential mechanism for the government to orderly liquidate financial firms, and it creates a new consumer financial protection bureau with important consumer and investor protections. in sum, the act provides a strong foundation on which the u.s. must now carefully build a more stable and balanced regulatory system. let's look at each of these in turn. before dodd-frank if an entity were a bank, then it had tougher regulation, more stringent capital requirements and more robust supervision. but if an entity were an investment bank engaged in the same activities, then it had to

only abide by a different set of rules. for example, when u.s. investment banks needed to find a consolidated holding company regulator in order to meet european union standards for doing business in europe, the sec set up a voluntary consolidated supervised entity program with little oversight. the sec was not established as a prudential regulator, did not have clear regulatory oversight for investment bank holding companies and had little experience and few trained examiners. moreover, the leverage requirements that served as a backstop for capital requirements on banks were not applied to investment banks. in effect, this system allowed large financial institutions to choose the regulator that would offer the least restrictive supervision. the fed did not have authority to set and enforce capital requirements on these major institutions that operated outside of bank holding companies. that meant they had no supervision over investment banks, diversified financial institutions like aig or the

nonbank financial companies competing with banks in the mortgage, consumer credit and business lending markets. the office of thrift supervision viewed its role as supervising thrifts, not holding companies such as aig, and regulators permitted banks and thrifts themselves to engage in riskier mortgage lending stepping in with guidance on the subprime market only when it was too late. today the dodd-frank act has provided authority for clear, strong and consolidated supervision and regulation by the federal reserve of any financial firm regardless of legal form whose failure could pose a threat to financial stability. we will have a single point of accountability for tougher and more consistent supervision of the largest and most interconnected financial firms. all bank holding companies will be supervised by the fed, and the largest ones will be subject to heightened standard. the office of thrift supervision has been abolished, and all savings and loan holding companies will be supervised by the fed. nonbank financial institutions

designated by the financial stability oversight council will also be fed supervised, and the voluntary investment bank holding company regime has ended. dodd-frank also provides for more stringent prudential standards for these major bank and nonbank firms. the fed is charged with putting in place stronger requirements for capital and liquidity. annual stress tests will be you canned. enhanced rules on lending limits and counterparty credit exposures. the fed is required to use supervision which will take into account not only the risk within the institution, but the risk that this institution poses to the financial system as a whole. major firms will be subject to a concentration limit that generally prohibits a financial company from engaging in mergers or acquisitions that would result in the firm's liabilities including wholesale funding and off-balance sheet exposures exceeding 10% of the liabilities of the financial system as a whole. these enhanced prudential measures for major financial

firms are likely to reduce risk in the financial system and to reduce too big to fail distortions. but for dodd-frank, no regulator or supervise had legal authority or the responsibility to look across the full sweep of the financial system and to take action where there is a threat. today while the regulatory infrastructure is undoubtedly far from ideal with too many divided responsibilities, the financial stability oversight council is accountable to identify these threats to financial stability and to address them. the fsoc will have access to information across the financial services marketplace and a new office of financial research is empowered to collect data from any financial firm and to develop and enforce standardization for such data collection. before dodd-frank the derivatives market group grew up in the shadows with little oversight. credit derivatives concentrated risk. synthetic securitization with embedded derivatives magnified

failures in the real securitization market, and major financial firms used derivatives to increase their credit exposure to each other rather than to decrease it. we should never again face a situation where the potential failure of a virtually unregulated capital-deficient major player in the derivatives market such as aig can impose devastating risks on the entire financial system. the opacity of this market meant that the government and market participants did not have enough information about the location of risk exposures in the system or the extent of mutual interconnections among large firms. so when the crisis began, regulators, financial firms and investors had an insufficient understanding of the degree to which trouble at one firm spelled trouble for another. this lack of information magnified contagion as the crisis intensified, causing a damaging wave of margin increases deleveraging and credit market breakdowns. the lack of transparency and

sufficient supervision and inadequate capital left our financial system vulnerable to concentrations of risk. today regulators are putting in place the tools to comprehensively regulate the derivatives market for the first time. the act provides for regulation and for transparency for transactions. it provides for strong prudential capital and business conduct regulation of all dealers and other major swap participants in the derivatives markets. and it provides for regulatory and enforcement too manies to go after manipulation, fraud or other abuses in the these markets. the act requires standardized derivatives to be centrally cleared which will substantially reduce the buildup of bilateral counterparty risk between major financial firms. central clearing parties themselves will be subject to strong prudential and is capital supervision. such derivatives would also be traded on alternative swap execution facilities which will improve pre and post trade price transparency. exchange trade will help to

improve price competition as well as safety and soundness in the derivatives system as market participants and regulators will have full access to current prices in the event of system disruption. even noncentrally cleared otc derivatives would be report today a trade repository making the market far more transparent. the act provides for prudential regulation of all otc dealers and major swap participants including business conduct rules, capital rules and prudential supervision. the act provides for both capital and initial margin requirements for derivatives transactions that are not centrally cleared, providing a strongincentive to use central clearing and a bigger buffer should problems arise in the otc market. at the same time as the act performs derivatives markets, it also provides a framework for financial utilities and for clearing and settlement act activities. included in the wholesale funding markets.

in a lead-up to the financial crisis, major financial firms became increasingly funded not by traditional bank deposits or even longer-term funding in the commercial markets, but rather by overnight fund anything therepo markets, and these markets became increasingly concentrated. it also became riskier because counterparties came to accept not only treasury securities as collateral, but also highly-rated asset-backed securities. and these securities in turn became riskier as credit rating agencies became increasingly willing to label as safe assets that were lower quality including pools of securities backed only by poorly-underwritten subprime and alt-a mortgages. when the financial crisis hit, the repo markets froze causing a massive contraction in available credit. the dodd-frank act fundamentally reforms the wholesale funding markets by providing strong authority for the federal reserve to regulate financial market utilities and critical

payments clearing and settlement activities, to set new rules for capital, collateral and margin requirements and to establish uniform prudential standards for the market. these reforms coupled with bake changes to -- basic changes under basel iii rules, liquidity concentration limits under the act and reforms to the posit insurance corporation. these reforms will have the effect of taxing short-term liabilities, enforcing firms to internalize more of the costs of this funding system. at the same time, sec changes to the regulation of money market mutual funds under rule 2a7 will mean funds have somewhat stronger liquidity positions. the act also fundamentally transforms regulation of the last major element of the shadow banking system, securitization. the act requires deep transparency into the structure of securitization including information about assets and originators.

securitization sponsors must generally retain risk in the securitizations they sponsor so the incentives are better aligned among participants in the market. capital rules better account for capital risks. now bringing the most common forges of securitization onto the balance sheet, and credit rating agencies will be subject to comprehensive oversight by the sec including shopping and conflicts of interest. ratings themselves will be more transparent including key information on rating methodology, compliance with methodology, underlying qualitative and quantitative data, due diligence and other protections. now, in the consumer markets before dodd-frank consumer protection was fragmented over seven federal regulators, most of which chose to focus their areas on other areas. nonbanks could avoid federal supervision, and banks could choose the least restrictive consumer approach among several

different banking agencies. federal regulators preempted state consumer protection laws without adequately replacing these important safeguards. fragmentation of rule writing, of supervision and enforcement led to finger pointing in place of effective action. today the consumer bureau has market-wide coverage. the bureau will focus on more effective regulation and supervision and can set high and uniform standards across the market. it can focus on improving financial literacy, and it can help to set a level playing field for competition. before dodd-frank the government did not have the authority to unwind large, highly-leveraged and substantially interconnected financial firms that failed such as bear stearns, lehman brothers and aig without disrupting the broader financial system. today major financial firms will now be summit to heightened prudential standards including higher capital and liquidity requirements, stress tests and living wills. major firms will be required to internalize the costs that they

impose on the system which will give them incentives to shrink and reduce their complexity, leverage and interconnection. and should such a firm fail, there will be a bigger buffer to absorb losses. these measures will help to reduce risks in and among these financial institutions n. the event that such an institution fails, these actions will also minimize the risk that any one firm's failure will pose a danger to the stability of the financial system. but the crisis showed that the u.s. government did not have the tools essential to respond effectively when the failure of a firm threatened financial stability. and that is why the dodd-frank act permits the government, in the limited circumstances, to resolve the largest and most connected firms consistent with the approach long taken for bank failures. this is the final step in addressing the problem of moral hazard. to make sure that the u.s. has the capacity to break apart or unwind major financial firms in an orderly fashion that limits collateral damage to the system. under the orderly liquidation

authority, the fdic is provided the tools to wind down a major financial firm on the brink of failure. shareholders and other providers of regulatory capital to the firm will be forced to absorb losses. management will be terminated. critical assets and liabilities of the firm can be transfer today a bridge institution. liquidity can be obtained through treasury borrowing that is automatically repaid from the assets of the failed firm or, if necessary, from other major firms in the economy, not from taxpayers. in that manner the resolution authority allows the government to wind down a firm without exposing the system to sudden, disorderly failure that puts the financial sector as a whole at risk. but we need to have some humility about the ability to predict every systemic failure of a major financial firm, and to be sure that the creation of a domestic resolution authority is not enough. while the u.s. is implementing the dodd-frank act, it is also critical that global reforms

proceed as well. in particular, the u.s. should continue to press for progress on resolution authority on derivatives and capital. resolution of a major financial firm will require internumber cooperation, and that's -- international cooperation and that's why it's critical that other nations participate in supervisory colleges. it's also critical that that they implement the derivatives framework that requires robust margining that moves to central clearing and exchange clearing and that provides for full transparency. and on capital in basel iii, minimum capital ratios are now set at a level that will represent a significant increase in firms' capital requirements. these new requirements include the creation of a capital conservation buffer above the minimums which, if breached, will restrict the firm's abilities to pay dividends or buy back stock. basel is now at work on how to implement a capital surcharge for the largest, most

interconnected financial firms and reached, i think, significant progress over that over the weekend. how to use instruments in which debt transforms into equity under specified circumstances to further reinforce that terms must bear the cost of their own failure. ..

>> furthermore basel iii for three instituting explicit quantitative liquidity requirements for the first time to ensure financial firms are better prepared for liquidity strains. in my view this is enormous progress. that united states had an urgent obligation to fix the failures that threatened our financial system and it helped to trigger the worst global economic crisis since the great depression. the crisis caused a recession that has hurt and cost american families and american businesses quite dearly. in my view the dodd-frank act puts in place most of the key reforms that were necessary to establish a firm foundation for financial stability, and economic growth in the months and years ahead. thank you very much. [applause] >> okay, i'm trying to -- do you both have prepared remarks?

d. want to get up and speak at the podium? >> i'm happy speaking from here. >> okay. why don't i briefly introduce our other two panelists, martin bailey is a former head of the council of economic advisers, an adviser -- i'm doing this off the top of my head. i'm trying to do this without reading. mckinsey, and also senior fellow at the brookings institute, so he has a wealth of knowledge in both policy arena and the academic arena. why don't we start off with martin, and then we can go onto tom cooley. >> thank you. this microphone is on. i'm going to make some comments on dodd-frank. these are not comments on michael, who i think has done a terrific job, get a terrific job, and at treasury, and working on some of these very

difficult issues. so i've got a few concerns about dodd-frank, but i do think we should all be grateful for the job that michael did. when dodd-frank past i was pleased that an important step forward have been made in making the u.s. financial sector safer. in particular, while placing the fed in charge of monitoring was not miss a show in my first choice, i thought it was a better thing to have the fed -- the fred -- the fed monitor all major financial institutions. that was an improvement over the previous system we had in which aig, bear stearns and others were regulated by institutions that really didn't have the ability to control or recognize the potential for failure of these companies. so i think that is a step forward. i intended to -- the protection agency. in my view they should always be

a resistance to the creation of a new agency and unless that's truly necessary, and there were and still are concerns of the cfpa may not fully understand the way financial markets work. some regulations designed to protect consumers may end up limiting the access of low income consumers to borrowing or credit cards. in the end however i was persuaded that because some financial institutions had followed dubious business practices designed to exploit their forgetfulness or lack of knowledge the borrowing public, that it is important to have such an agency. i strongly hope that works to help consumers and avoid some of the pitfalls that would be involved in making credit more difficult to obtain. the most important concern about dodd-frank in my judgment is that it may have eliminated or undermined the ability of the fed and treasury to act quickly and strongly to prop up the

financial system and prevent collapse in the event of a new crisis in the future. both conservatives and liberals alike were outraged at financial institutions received support from the fed or from taxpayers, or a combination. on the left the bailouts were seen as a distribution from poor to rich. to conservatives the bailouts create a moral hazard problem that will encourage the next generation of financial ceos to take even more risks, knowing that if they fail they will be bailed out. with both left and right unite against bailouts, dodd-frank limited the power to act under circumstances to prevent the financial meltdown. i think this was the wrong lesson from the crisis. the direct costs to taxpayers of the bailouts to wall street banks was very small. fannie mae and freddie are a different story. while the cost to shareholders and to senior executives in institutions that got into trouble were enormous. they lost a lot of money and in

many cases lost their jobs. whether they were bailed out or not. they are problem moral hazard is a real one that exists in our economy. in fact, this problem in health care area is drawing us into bankruptcy. so moral hazard can be and is a serious problem. and it's sort is something of financial regulation should pay attention to. but i don't see how future financial ceos will be taking excess risks because they look back at bear stearns, aig or citi and think the same fate would be fine for the own institution. the moral hazard problem should be viewed through a realistic lens and not as a bumper sticker. let me know also that the cost of the financial breakdown of not stepping in are really enormous, and would have made the recession we're in now even worse. in other words, despite many mistakes along the way, the fed and the treasury did the right

things in supporting financial markets and financial institutions in order to prevent a total breakdown of the financial sector. one of the things the movie too big to fail got correct was the serious and imminent danger of economic collapse faced in the fall of 2008. we are not in a situation where financial institutions are even more concentrated than they were before the crisis, have emerged under pressure from the treasure. multiple failures among these large institutions would be even harder to deal with than before, and we have limited the power of the fed and the treasury to deal with them. the second question with the dodd-frank is whether it is, in fact, creating an unwieldy structure that will inhibit the workings of financial markets and efficiency of financial markets. recall that our financial system was, in fact, highly regulated before the crisis. citibank had rooms full of regulars that were supposed to

be poring over the books making sure that everything was all right. insurance companies large and small were and are highly regulated. the problem in the crisis was that no one thought through the crisis -- the 30% decline of home prices. no one thought this was possible. the problem in other words, was not that there were insufficient regulation come it was that there were as ineffective regulation. i want to give dodd-frank the benefit of the doubt here. the nature of the new regulatory system is emerging with some international cooperation, and i think it will fix some of the obvious problems of the old system. we must make sure the result is, in fact, a more effective system and not just a series of process changes that are a gold mine for accounts without much increase in safety. it would be nice to see steps taken to improve their pay and training of leading regulators on the one hand, and to see evidence that those regulators who fail to regulate effectively in the crisis have been relieved of their jobs.

let me now talk about the resolution mechanism. while dodd-frank limited the power to act under the fed and treasury to act, it set up in its place a process that is designed not to avoid the failure of a large institutions but to resolve those institutions in the event they get into trouble. this resolution authority has been given to the fdic. i have read the fdic white paper on resolution and what it would've done in the case of lehman and i didn't really understand it. much of what is written about the resolution process seems designed to reassure politicians and the public that it's not a bailout, so it's designed to say no more bailouts. so okay, that means that the fdic process is not a bailout. it should be viewed as a kind of better bankruptcy procedure. how much better? i think any objective observer who looked at what happened at

global financial markets after the lehman bankruptcy would say that it was a disaster. financial markets went into a freefall, the fed was forced to step in and provide huge guarantees, the stock market dropped like a stone with the dow falling below 6000 some weeks after the event. it's natural in a crisis for able to try to move their wealth in safe places and avoid whatever may be ahead. collectively this response triggers runs a financial institutions and potential financial costs. so a better bankruptcy would have to avoid these consequences and we need to understand how the fdic will accomplish this as part of its modified bankruptcy process. another way to look at what the fdic process is is that it is actually a bailout, a bailout in disguise. lehman had 50-70 billion of assets. we are told that the treasury refused to guarantee, so the viable cost of lehman could not be sold to the koreans or anyone

else. the fdic says that it would have created a rich institution and kept the viable parts of lehman afloat, and available for sale. this sort of sounds to me like they would have done what treasury refused to do, namely bailout live in. now, since i have just argued that bailouts may be better than meltdowns, i guess for me this version of the fdic resolution process is a kind of disguised bailout is preferable, one which causes the whole system to go down. but i think there's some questions about whether, you know, the public and the congress is understanding if that's what is, it also seems to me surprising to put the fdic in this role. they are the caretaker of insured deposits, not the curator of financial markets. and i do not see how fdic would have the resources or authority

to respond effectively to a future situation where multiple, very large and may be small were failing and global markets were in turmoil. maybe this is just a failure of my understanding, but as a representative citizen i would like to feel more confident about this new resolution process. my suggestion is that we commission one or maybe more independent research studies that would try to rerun the crisis period with the new limits on fed power and the fdic resolution mechanism in place, and ask whether or not the research doing the study believe that the outcome that would've happened is counterfactual would have been better or worse than the ones we actually had. stress test the banks have turned out to be a good idea, and i think it would be worth doing a stress test for policy if we could do it effectively.

since these comments have focused on area concern of dodd-frank let me conclude with some praise. it was essential that steps be taken to make the system safer and to avoid excessive risk-taking that brought down the economy. as the new regulatory structure emerges there are many elements that undoubtedly will make banks rather institutions safer. higher capital requirements, better reporting, more unified structure for large institutions, the creation of the fsoc, and to monitor developments. these are all positive steps. we are not unfortunately right now protected from a new financial crisis because sovereign debt is vulnerable including treasuries. for a while at least i think it will not be the source of new crisis. we just need to make sure if or when this new crisis happens in the future we can, in fact, sustain the financial system. thank you. [applause]

>> let's move on to thomas cooley and we'll give you a chance to comment on the comment and we'll open up after that. tom cooley is a professor at new york and a former dean of the stern school. and importantly, he spearheaded a research project in policy initiative that yielded 18 white papers by 33 nyu professors on restoring fidelity to the financial system. so he comes at the subject with great depth of knowledge. tom cooley. >> thank you. well, i should begin by thanking our host for agreeing to cosponsor this course so early of the dodd-frank act, and particular i want to thank michael barr for his hard work, his principal forces designing the dodd-frank act. it's an unquestionably difficult job to fashion regulation that

is both effective and politically implementable. and then has to listen to critics like myself and my colleagues from the politics free realm of academia to contrast what is achieved to some ideals that is politically unfeasible, politically unlikely. nevertheless, that's what we are doing and do what we must. i commend michael barr for his very thorough and very succinct analysis of the crisis, and very rich subscription -- description of all its moving parts. in particular the description of the role of the shadow banking sector engage in regulatory arbitrage, and accumulating the risk that led to the incredible destructive events of 2007-2009. like many commentators, he faulted this regulatory architecture of the 1930s for precipitating the financial

crisis. now, we can only hope that the regulatory architecture developed in the framework of dodd-frank will give us six decades or more of financial stability and economic growth as the reforms of the 1930s did. and we can hope that they spell the end of too big to fail. certainly, the intent is there and many of the right ingredients are on the table. that i think there is a lot of wishful thinking involved in doing this legislation is likely to repeat the excess of the earlier reform. in the 1930s the u.s. made a choice to move away from universal banking toward a tightly regulate system. the reforms were successful because they address market failures of the financial system at the time, and address the problems of moral hazard that were likely to rise as a consequence of their solution. it was a belt and suspenders approach to regulation. in contrast, dodd-frank act

reforms seems to me more like a group of regulators propose to reach out and hold up the pants should they start to fall. you know, maybe that will work, but from my perspective it seems like a missed opportunity to streamline the regulatory architecture and make the safeguards and the system more automatic, less vulnerable to regulatory arbitrage, and less vulnerable to political interpretation because i don't some of this is easily said but hard to achieve. some of it may be achievable even in this implementation phase. so to understand where the concerns lie you have to understand why the regulatory architecture of the 1930s met its demise. a popular version of this story, we had a burst of free market fundamentalism and decided to do a way with the restrictions embodied in the glass-steagall act. that there was a high degree of

free market fundamentalism is not in dispute. one has to require, one only has to recall the testimony of brooksley born, head of the cftc about the dangers of unregulated derivatives that were summarily dismissed by treasury secretary larry summers and fed chairman alan greenspan. but by the time gramm-leach-bliley act was passed in 1999, the regulatory architecture of the 1930s was long since dead. killed not by a set of beliefs about the ability of markets of disciplined, but by innovation. innovation occurred for many reasons. the end of the bretton woods system of exchange rates created the need for currency and swap arrangements. higher inflation rates in the 1970s inspired the development of certificates of deposit, and now i cannot i cannot. there was ongoing constant regulatory arbitrage.

the drive to innovate and incredible resiliency of the shadow banking system is at the heart of my unease about the dodd-frank act. all the runs that occurred at the onset of financial crisis occurred in the shadow banking sector, runs on wholesale funding markets, money market funds and so on. and much of a dialogue around the dodd-frank act, and its implementation, and michel's speech this morning has acknowledged this, but there seems to me a fundamental misconception about the nature of shadow banking and the fundamental role of regulation. and i will get back to that in a minute. but first let's think about what we want from the dodd-frank act. this is not a statement about some ideal regulatory framework. it's kind of too late for that, and i was politically infeasible anyway. but what we want from an implemented version of what we have? our goal should be a regulatory system that encourages

innovation and competition, provides a transparent financial system, ensure safety and soundness, preserves the u.s. position as the center of global finance, and deals as much as possible with the problems of moral hazard and time inconsistency. we talk about a lot of these issues in our recent book, and they don't want to rehearse them all here. although we think there were some missed opportunities. we give the dodd-frank act a lot of praise for improving transparency, praise for doing sensible things about consumer protection, worrying about the right ingredients for safety and soundness. but there's some big areas for concerns that remain. in good architecture it said form should follow function. i think the same thing is true in regulatory architecture, particularly for the financial system. in the dodd-frank act misses the boat a bit on that score.

the act worries a lot about the dangers in the shadow banking system and gives the federal reserve the responsibility for identifying systemically important financial institutions, setting out the requirements, nevertheless it leaves a lot of discretion to the fsoc to decide what to do about shadow institutions. needless to say, it was disconcerting in light of that to the treasury secretary a week or so ago, who had the episode, that it might be dangerous to set capital requirements for banks to hide because they might drive activity into the shadow banking sector. this is disconcerting because capital requirements are the backbone of safety and soundness. there are plenty of rational analyses messages that can't requirements should be greater than those being contemplated by basel iii, greater than those that were announced this

weekend. and more over the right analysis is not that we should lower capital requirements for banks and bank holding companies, but that we should apply them to all institutions, regardless of their form. capital requirements should be applied at the level of market and product. and not restricted to particular institutional reforms. if the dodd-frank act is going to be viable for viewing with universal banks and operating across the border environment, it's going to have to address this problem. host countries are going to want to capital associate with the markets that institutions are operating in. more capital is to the market, the transactions that create risks by intermediation and maturity transformation, the more ineffective it would be at ensuring the health of the system. the other problem that this recent episode highlights is that time inconsistency of the

framework. as long as there is discretion on the part of regulators about capital requirements, and their application, then there are incentives to do what is optimal in the short run rather than worry about the long-term health of the financial system. even though you are on a diet, it's often optimal in the short run to stop in for an ice cream cone and get back on track, promised to get back on track next week. and that's why there have been so they proposals for institutionalizing strengthening capital when times are good, to better withstand shocks when they are not. the other big open question is whether the dodd-frank act really does into too big to fail. if it does, then that addresses a lot of concerns about moral hazard because that is indeed a major source, not the only source, of moral hazard in the system. one interpretation is that the order of liquidation spelled out in the act can be successful in

resolving failed institutions. and this eliminates a major distortion in the financial system, this is true. the recent back testing by the fdic to assess how well the system would have worked for lehman is encouraging in this respect. i, too, had questions, there were aspects of it that i didn't understand. and i came away feeling that it may be a little more, a little over optimistic. but once again that big flaw is that it relies too much on discretion. discretion leads to regulatory capture, and time and consistent policies. one need look no further than the fdic itself to see that this is a real problem. the fdic is one of the most successful regulatory institutions to come out of the 1930s. but it was vulnerable. it did not want to over find the

insurance fund. that leaves under founding and s&l crisis. in fact, the dodd-frank act is a little more wrong headed in because it proposes that in the event of a costly resolution of a failing institution, surviving healthy institutions can be asked to cover the cost rather than have taxpayers pay them. but this seems completely backwards to me. you don't design insurance this way. for one thing, it is time and consistent since surviving institutions are likely to be stressed themselves in the event of a crisis. and it may encourage them to take additional risk. so this is a little bit like what's going on in europe, but there's a big difference. in europe when they decided to engage in this series economic union, they realized that for it

to be successful the members had to follow monetary discipline and fiscal discipline. and as a precondition for getting the eurozone going, countries had to lower their inflation rates and bring their fiscal policies in line. and what happened? well, what happened was they created an institution, the euro and the european central bank, to ensure the time consistency of the monetary discipline. and as a result am a monetary discipline was not a problem, but they didn't put any institution in place to ensure the time consistency of their proposals for fiscal discipline. and fiscal discipline is threatening to blow the system apart. so you need institutions which make these commitments

institutionalized, automatic. there's a way to avoid some of the problems in the order of liquidation of authorities, and the idea of what constitutes a living will is still open to interpretation. one could eliminate a lot of the discretion and timing consistency by not only ordering all the beneficiaries and their priorities in that will, but by building into the capital structure the orderly recapitalization of the firm, allowing it to continue as a going concern. and michael talked about the enthusiasm for these kinds of approaches that are rapidly gaining support in europe and elsewhere. this is what lies -- this is the spirit of what people call bail and/or convertible bonds, cocoa bonds, and so on. of course, with these solutions as well there are debates about triggers and so on, but these are second quarter issues of discretion compared to first order.

at the end of the day, dodd-frank act will be most successful if it is implemented in a way that leaves less room for interpretation of the rules of the game, let's focus on traditional organizational forms, and more on identifying banking and maturity transformation, wherever they occur, and associated capital requirements today. a final note, at the current stage of implementation there's a lot of hand wringing about not setting capital requirements so high, as to encourage capital flight, discourage lending and financial intermediation. this seems to me from my perspective exactly the wrong debate to be having. the depth and expertise of our capital markets and the quality and stability of our institutions are our greatest asset. the only thing that is tarnished right now is our reputation for safety and soundness. and the best way to recoup that is by strengthening our

reputation for transparency, and nondiscretionary wills of the game. thank you. [applause] >> so, there's a lot there for michael to respond to. i will give you an opportunity to do it. i will note beforehand that i see some hints of contradiction in the critiques that we got. on the one hand, martin talks about the dodd-frank bill that too narrowly constrains the ability of authority to respond to a crisis, particularly the fed and the treasury. and tom says there's too much discretion in the hands of authorities. there's questions also raised about how the orderly liquidation process will work. i will let you decide which of these issues you want to hit on, and then we'll open it up for more conversation. >> thanks, john. first i just want to thank martin and tom for their very

gracious comments. and i think quite helpful insights about the dodd-frank act, so i might just take two minutes or three minutes, highlights and issues and then we can open it up, or john can lead us through. on martin's comment, i think i agree with an aspect of martin's comment with respect to resolution authority. that is, if there is, if there is an error in the dodd-frank act on the necks of crisis tools, which undoubtedly there will be, it is in the direction martin indicated. that is, in the direction of being overly constraining of the treasury and the fed in a crisis. i don't think the error, although often in the public debate, people suggest there is in the other direction. i think martin is correct, that if we erred, we erred in limiting authorities, not

insufficiently tough about them. on tom's comments i do think that there's always a debate in the regulatory structure, it's impossible to escape between rules and discretion. it's a debate that has been around for hundreds or thousands of years. and the question is not do we have only rules-based regime, or only discretion-based regime, the question is whether on a very complicated continuum you make sets of trade-offs on particular policy questions. and the dodd-frank act i think over all moves the spectrum on most other policy issues addressed more towards rules than it had been. not in a revolutionary way, but in a modest way. in terms of the 1930s issues,

i don't think that the glass-steagall act or the gramm-leach bliley act, universal banking issues were central to the crisis over to the pass of reform. i do think that the shadow banking system and innovation were at the core of the financial crisis, and i do think that the dodd-frank act addresses those in a way that provides a framework for being safer in the future. it doesn't guarantee it but it provides a framework for addressing the needs of oversight transparency and capital requirements in the shadow banking system that are so critical going forward. lastly come on resolution authority i think people can argue both ways about whether the resolution authority should be prefunded or post funded. actually don't think that's an

integral question the resolution. i think the question about resolution are, is it effective and crisis management? and the pre-or post-funding i don't do as a time consistency issue because the firm that has gone into resolution is not paying for insurance for depositors. it is the financial system as a whole that is benefiting from the essence to resolve the firm to having the rest of the firms in the system pay strikes me not backwards or time inconsistent. but this is an incredibly rich area and one that i think it's very easy for reasonable people to think opposite things about, so i'm anxious the conversation to begin. >> okay. some going to ask a few questions and we'll open it up and give people in the odds sure have a lot of questions to ask, too. i want to start out with picking up on an interesting debate that

james dimon and ben bernanke had on a conference at the american bankers association was holding a week or so ago. james dimon asked whether regulators have considered the curative effects of dodd-frank and the efforts to erase capital standards across the globe, and post the challenge that this is restraining the recovery. so i would like to hear michael talk about this, and then anyone on the panel, too, what are the acute effects of the reforms of the financial system, and are they hurting the economy? >> i do think it's important to look across the range of reforms that are happening in the capital rules and dodd-frank act supervision authorities and derivatives reform and the like and to make sure that they make sense together. so i guess i agree with that,

but there is no bleeding the fact that just implement laws. congress passed a set of laws and you have to implement them. i do think the financial industry as a whole tends, i don't want to paint with too broad a brush, but talks out of both sides of its mouth. on one side they say we need certainty, and on the other side the financial industry says we don't want that certainty. we wanted different certainty. so there is, you know, a desire for example, to delay derivatives reform in the interest of worrying about european competitors and the like. i just think that card is to continue to mix my metaphors, overplay. whether it's affecting the current economic situation, and martin and tom may have a lot more to say tonight, i'm

skeptical of that argument. i think that there is some amount of uncertainty that businesses have about the business environment, and there's some uncertainty that financial institutions have about the regulatory environment but i think there are very different concerns. so uncertainty in financial and climate i don't think it is inhibiting major financial firms from lending right now. they have huge capitation's insufficient funds to land. i think that the economic uncertainty for regular businesses is inhibiting their ability to hire workers, and i think that is harming the economy. >> martin, what do you have to say about this? you have frequent contact with business executives. >> yes, i am. although mostly mckinsey says businesses and their borrowing costs are very low at the moment so they are not facing -- they are concerned about a lot of

things, including future taxes, regulation, all that kind of stuff. but i don't think their borrowing costs particularly concern for them. i am aware of -- it's harder to get a reading on small business, and one reads conflicting stories about it. i think there are small businesses that would like to expand, who have difficulty getting funds. i think they're a couple of reasons for the. if you're talking real small business or startups i think that's because traditionally they have relied on family and friends and equity in homes, which they don't have. so i think that's a fallout from the housing crisis. [inaudible] >> and credit cards for that kind of barring. slightly larger businesses, i think there are some that would like to expand it i think many don't want to expand because they don't have the demark. but some of them would like to expand and are having difficulty. i think it's not so much because

the banks can't link to them as the risk premium has gone up. i even hear that bank regulators have become more cautious so they're looking over their shoulders and saying not sure you should be making that known. so i think we do have a problem. i'm not sure its associate at this time with capital requirements. i want to make one quick comment on the earlier discussion, and while i think it's starting to the shadow banking system played a huge role in this crisis, i think there were plenty of regular banks that got into a lot of trouble. wamu, wachovia, citi and others, and a lot of smaller banks, state regulated banks that originated a lot of the bad loans. so i think this really was a house and related crisis, a lot of the moral hazard occurred because of smaller banks that initiated loans, and then sell them off to someone, someone

else. so i think it's a mixture of non-bank in the banking sector in this crisis. >> i'd like to paint a scenario and hear how you all respond to this. imagine a moment which doesn't seem unimaginable to me, which european -- europe loses the political will to continue to fund greases unbearable debts. greece defaults. this has a negative effect on european banks which remain undercapitalized, a big bank or to fail. this causes a run on the american money market funds, which have exposure of about a trillion dollars in european banks. and we find ourselves very quickly back at a moment very

much like 2008. do you find this scenario like this to be plausible? and if so, what has dodd-frank accomplished? >> maybe i will start and others can join in. first of all, i think it's a terrific and i think central important question. i do think there is a real risk right now, as there has been for many months now, and that crisis in europe hurts not just the european banking sector, but also the u.s. banking sector and the u.s. financial sector. the money market fund system is still i think not fully resolved. that is, i think that the changes under rule 2a-7 of that improve the liquidity position of money market funds is good,

the basel accord he ruled that will kick into place for banking sector are good and will help. the regulation of capital march and collateral requirements in the retail sector will also help significantly. but there's still weaknesses -- i'm sorry, and then blast out point out the significant capital cushion that is built up in the u.s. financial system rather remarkably in the last year will also help a lot. so in all those senses, the system is more resilient and safer than it was just a short time ago. i do think we have not yet fully reformed, if you will, or fully solve the problem of the money market mutual fund system. and as you saw, you have seen

proposals across the board for different approaches to that, including either private sector capitalization of the liquidity fund, or a floating required or split hybrid requirement for floating in a the products. i think we'll have to continue to make reform in that area to bring more resiliency into that aspect of the system. >> yeah, i think i agree with michael. i think that in the future we're going to have to see some reform of the money market industry to bring it more into the regulatory umbrella. there are a lot of reforms being talked about and put in place. it seems to me they are not quite sufficient yet. although i'm less worried about the effects of the scenario you described for just for money market funds, per se. i'm more concerned about what

contagion effect of such an event would be for the european economies, because right now it's kind of a knife edge. everybody has the feel about greece, and i don't know about any positive ones. they are are slightly mixed opinions about portugal. they have a better program in place, but the big worry is spain, and then it's been comes under the microscope, then italy. there's the potential for major sovereign debt crises. and those could easily trigger an event like the one we experienced. >> i'd agree with that. i don't think there's a prayer that greece can avoid some form of default, and so then there is the question of whether that triggers -- i think the greece defaults by itself, if it stopped there wouldn't be so

bad. whatever we do in the united states i think germany and france bill out of their banks. they would bail them out, and probably -- bail out greece which i think would be a bad idea, or they'll bail out the banks. i say it's a bad idea because i just don't think greece can repay all its debt in order to service all this foreign debt. it has to become a net exporter, and it's going to be a while before they get that part of the thing in she. they are not competitive within the euro. but yeah, if -- if the other dominoes start going down, watch out, maybe a good time to put one's money under the mattress. [laughter] >> i've got one more question. everyone on the panel talked about the disparity between what good policy looks like on paper

and what policy that gets created given the political constraints, that policymakers face. i'd like to hear from michael about what lessons you learned about how to manage a politically constrained -- a political constraints that one faces when trying to construct new financial architecture, and also interested in hearing from the panel, this is obviously an age-old problem, but to what extent do you think our political system is more or less capable of producing good policy outcomes in this day and age? >> i don't know how to answer that, john. i was looking over at amy hillis joined us here. we had a lot of conversations that were about that very topic. and amy was right more than i was about the answers to that

question. but they were usually pretty pessimistic answers. so, what do you do? i mean, you know, it's like any other constraint. we live in the world we live in and not in a different world. and the political system is no different from out. and it's much better to design good policy that works for the world you live in than to design policy that works for a world you don't live in. so i think just not being pigheaded is the answer i would give. >> well, this is a moment in history when it's a little hard to be optimistic about policy. everything is so polarized. my colleagues at the brookings report that congress is more polarized than it's ever been. that is to say, the most liberal

republican is more conservative than the most conservative democrat, so working out agreements in that environment is pretty difficult. to take a slightly more positive turn, i think we do pass legislation, we find out how it works. areas than a process. it's not ideal. i mean, it's got a lot of lobbying in it but it's also got a lot of politics in it, and hopefully things do get better. i'm a big fan of senator sarbanes. he helped me get confirmed twice. the first round of sarbanes-oxley was not great. i mean, it was extremely expensive to administer and it wasn't clear -- it's not clear to me that it has added to the safety or accounting practices of companies, but it's been modified and it's now much better than it was. i still don't think it's great but it's better than it was. so i think we do have to rely on

this process and hope it gives us eventually we find out where the problems are and legislation, and then we make changes. >> well, i'm slightly more optimistic. i think inspite of my criticisms of the dodd-frank act i think it really had its heart in the right place and it's got a lot of the important ingredients that we need to make the system sounder and safer. and i think it's structured in a way that it's open to interpretation and improvement. and i think it's a remarkable accomplishment. i mean, it took a crisis of that magnitude, and it really was a severe crisis, to get this done. so let's hope that every positive piece of legislation does require such enormous cost to drive us forward.

>> okay, we have about 20 minutes i guess for questions from the audience. does anybody want to -- >> i agree. a lot of positives. [inaudible] >> you have a mic coming. >> alice rivlin, brookings. let me make a general comment about dodd-frank, although much to admire in it. dodd-frank, and this conversation and others about regulation are very focused on the end stage, on the crisis itself and what do we do if we ever get in that situation again. and that's admirable. but the fundamental problem was, there was too much borrowing in the united states. and very lax lending standards, and it wasn't just housing. it was credit cards. it was auto loans. it was commercial real estate. it was everything.

we were enormously over borrowed. and i would like to little bit of analysis from michael and others about what do we do to avoid bad again, without going to extremes? martin said one of the dangers of the consumer protection agency is that it might limit access to credit. for heavens sake, we need to limit access to credit, that's the whole point. we don't need to overdo it. and it isn't just a question of poor people, as often the conversations well, not all poor people should own houses. well, of course. but it was important people who are doing most of the borrowing. it was everybody. so, what are we going to do about that and how does dodd-frank help? >> i think, alice, that the dodd-frank act is quite focused on setting up a regulatory

structure that reduces leverage in the system. and i guess i encompass and dodd-frank the set of reforms that are being accomplished in parallel to the basel process. in dodd-frank itself, the focus on looking across the financial system, not just in banks, i'm looking at improving the resiliency of the system through use of central clearing parties and derivatives contracts, the imposition of margin and collateral requirements or derivatives trades, the ability to require risk retention in the securitizations are all examples of that kind of focus. [inaudible] >> some working down my way. i'm starting with the big numbers. and then if you look at, similarly if you look at the

basel process reducing leverage in a system, international leverage ratio, liquidity requirements and capital requirements are all building more resiliency in the system. so that's at one end of the spectrum. i'm going to jump now to the other end of the spectrum. so, in title 14 of the act there's a fundamental reform of the rules in the mortgage market. and one of those provisions which you would think would not be required, that instead we would use common sense, there's a rule in there that says the lenders have to look at the bar was ability to repay. it is now a requirement of the dodd-frank act that you get documentation of loans and you have an assessment of the war was ability to repay. and you can't pay a loan broker and a worse mortgage and a better mortgage. and a number of other changes like that that are designed to go to the very front income and there's a set of rules in between picks i think the act

does get at this very fundamental question. >> i agree with the basic sentiment that you express which is this problem was over borrowed which led to a housing bubble which then got us into trouble once the housing prices fell that much, the whole system was extremely vulnerable. i will stick by my statement saying i don't want to constrain lending too much too low income folks, precisely for the reason you gave, which is they were not the ones that were doing so much excess borrowing. obviously, there was some subprime loans that shouldn't have been made, but the big lending was not to them. it was alt-a mortgages to families wanting second homes and getting equity out of their homes and buying cars and boats and all that kind of thing. so i do think we need a policy that rents back the amount of borrowing that we do as an

economy. and i would think the obvious way to do that in our current situation would be to gradually limit the tax deductibility of interest and make borrowing less attractive. because after all, that creates, i don't know if it's exactly a subsidy, but it creates a very favorable circumstance for upper income people to borrow. it does nothing for low income folks to buy houses and don't get much benefit from that deductibility. so i would do that. that's in the proposal i think, isn't it? a good. so then i got it right. >> hi. paul with the clearing house. question for michael and the other panelists. we are all racing perhaps an unintended consequence which is concentration within the banking system and part driven by

dodd-frank, dnc just announced a shutting of its many retail branches. i guess the theory being with the revenue challenges, commercially, as well as under the regulatory framework, expense reduction is a principal driver behind many of these excessive capital deployment of the capital over to meet historical levels, also potentially driving more risk into the system. so could you address those two banks, increasing the risk to levels that have been chopped, and secondly, concentration within the banking industry that perhaps is leading to the big news that we're so eagerly willing to curtail. >> sure. on the question on capital requirements leading to greater risk-taking, i mean there is this fundamental -- fundamentally different set of views about how capital requirements work their way through the financial system,

and you have i think some very smart people on either side of this question. so let me just state the two views and i will tell you which side i am on. number one is capital requirements increase the resiliency of the system and reduce risk-taking in the system by putting more of the firm's own capital at risk, and create a bigger buffer in the event of failure. the alternative view is that higher capital requirements just cause firms to only undertake risky projects in order to maintain the previous rlv that they're able to obtain in the market. and so, the people of the second you say are always don't adjust and people of the first view and pleasantly are saying our own these adjust to the capital requirements. this is an empirical question that has tested over time. i think somewhat better view but

not perfectly so is that capital requirement increases resilience for the system. i don't think the other cute he is a trivial view, and as i said lots of smart people have it. i think that the basic approach that we've taken in dodd-frank that basel has taken and we're likely to take in the future in the view that i think is a better view suggests that r.o.e. in the sector will go down as a result. and that risk will go down as well. in terms of concentration, i would not have view that as a cause, i'm struck him as a consequence of dodd-frank. there was concentration that was built in the system as firms fell into each other's arms in the financial crisis, and now we're dealing with out. [inaudible] >> i saw, i did mean by fall like it was an act of god. they felt into each other's arms when pushed into each other's arms. >> i think the search for yield has something to do with that as

well. for the reasons you said. >> i am a professor at the nyu school of business. michael, i was one of the faculty members involved in the book project where we tried -- all these other professions, like 30 of them to do an analysis of dodd-frank. they kept on changing the act, you know, during 2009, so a professor would write something and they would have to e-mail them and say by the way, this does all the more so could you rewrite it. >> you want me to get a little violin for you?

[laughter] >> i'm getting to my point. [laughter] >> so a lot changed in the act, so my question to you is kind of during that process, what things were you sort of not so happy about being removed, and also not happy about being put in? given that you were, you know, involved. >> there were lots of moving pieces and active change over time. i think at the end of the day, i would give us a solid a- in terms of what came out in the final product. a bunch of things were added that were not really i think central to reform, something's got weekend -- weekend around the edges. i would say one of the things that surprised me about the process was that in the conference when we thought things were going to get much, much worse, they actually got much, much better.

.. >> the provisions that changed along the way, but they're not, they're not, i think, mostly not

at the level of, you know, the top 30 things most people in the country would stay awake at night worrying about. they're things that kept me awake. >> why do you think things got better late in the process? obviously, we're seeing this now in the fiscal debate. a lot of policy gets made on the brink, and do you think it was luck that things got better at the end of the process, or do you think there was something about the process that helped to make, to make, to get hard decision made at the very end? >> well, first of all, i'd say luck is always really important to have on your side. can't do anything without it. [laughter] can't plan for it, but you shouldn't underestimate the luck or the role of personality. i think we made a bunch of changes in the end because some senators and representatives bonded during the process that, um, that chairman frank and chairman dodd had set up in ways

that people were skeptical about that of which i would include myself, had not anticipated. so i think that helped. >> that particular time was really focused on financial reform, and that helped, i think, having a sense that the country was watching improved, improved things. we had a very -- i'm not only saying this to suck up to jon, but we had a very educated press corps who had been following the debate on the bill for a year and a half who were very focused on the details and writing about it all the time. so it got a lot of public attention. and i think that, that helped as

well. and, um, and then, you know, as i mentioned at the outset, blind luck. >> well, let me just quick comment. i do think the leadership, particularly barney frank, ran a very strong conference, and, you know, you may agree or disagree with all of his policies, but he's a really smart guy and really understands the system, and i think that made a huge difference. i think the other thing i would mention is that they were trying really right up until the end to make it a bipartisan process. so i think there was an effort to really listen to all sides and pull it together, and i think that was helpful too. >> yeah. and just to highlight, you know, the point martin's making, this is really what i was alluding to before. on the senate side in particular, chairman dodd had a very tight bipartisan process for the entire, for the entire time, and the way we fixed the derivatives bill in the end was a bipartisan bill, bipartisan set of amendments. >> we have time for one or two

more questions, then i think we might take a five-minute break before we get started on the next panel. >> peterson institute for international economics. one thing that hasn't been in the discussion so far is implementation of the act and all the regulations that have been adopted or in greater volume is being drafted, discussed on envisaged. and my question is, why is that? is the implementation regulation a second order concern compared to the act itself, or what are your concerns about this implementation phase of which a number of pieces have been delayed? >> you know, implementation is absolutely critical to the act working. there are an enormous number of moving pieces.

i think that by and large the process has gone better than would normally be expected. i just mean normally in our domestic implementation process. and i think that the concerns i've had have been on not maybe in the same direction as those expressed by, by the head of chase. they've been mostly in the opposition direction. that is to say there's some concern that budget constraints imposed by the congress on the fcc and cftc in particular have slowed the process of derivatives reform, and some concern that it will be hard to get the consumer agency off the ground when you have 44 senators who said they won't confirm somebody to run that place unless they change the law. so that is, that's worrisome to

me. but if you hook at the overall -- look at the overall picture both i'd say on the basel process and on the rule writing, it's gone faster and better than i would have anticipated. >> okay. last question, and then we'll take a break. >> hi, dennis heliher from -- kelley her from better markets. i wanted to ask a macro question which is you bring up the limitations of the fed under 13-3 and how it may or may not impair its ability in the future. that flowed from the fed's lack of information to everybody including the congress. the sanders amendment passed 96-0 in the senate. unanimity is not common in the senate, and bernie sanders will never in his lifetime get 96 votes in the senate, i assume. [laughter] so it tells you the depth to which the lack of information and difficulty with the fed in terms of its bailouts and the 13-3 people didn't understand

them. that's yesterday. but in the future whether or not big parts of dodd-frank work will depend on market discipline. market discipline depends on information. the fed and the treasury have a history and a view and a culture in a bureaucracy basically surrounded by bank secrecy and not letting information out. dodd-frank went a long way in getting some provisions to try and force that to happen, but i'd like to know in particular what michael thinks about this, how in the future is dodd-frank going to work unless we have substantially more quality information disclosed from bank regulators who have a history and a culture of not putting information out? >> >> i would agree with most of what you said. that is, i think there has historically been a problem with insufficient transparency by regulated entities and by regulators. and i do think the dodd-frank act moves the needle in the right direction on that. you know, annual transparent

stress test is, i think, a huge change for the financial industry and for regulators and will be a good thing in the future. um, similarly, the ability to gather and collect information and make it available through the office of financial research, um, i think is a big change. and there are a number of others like that, but i do think that you are right that unless the regulators continue to have their feet held to the fire on being transparent, their tendency will not to be. and so i think it's good for, good for the system, for the public, for reporters and for the congress through oversight to insist on regular disclosure. >> i'll just -- >> go ahead. >> i was going to say that perhaps there has been an excess of caution in the past on the part of fed about what it reveals. publicly. but it's often been for very

good reasons. and the other, the other issue for them is the extent to which their independence as an institution gets challenged by this. and so they might have been excessively cautious for that reason, fearful of the assaults on their independence and unwillingness to reveal a lot of the data, and i think what you're going to see is a slightly more transparent set as long as independence doesn't get threatened. and certainly the treasury, i think michael's right that the ofr is going to be a very positive addition to the institutional regulatory framework in terms of improving transparency. >> um, i do think ben bernanke has tried to be more transparent in general in fed policy and has

made that one of his keystone things of reviewing the fed's views about the economy and about monetary policy. having said that, i agree that you didn't get all the transparency around the time of the crisis, and i can, i can see the problems with that and the reaction of congress which said, you know, hey, we control the pursestrings. you guys are doing all this stuff when we don't know about it. so i understand that. i think there was a concern that revealing too much information at the wrong time might actually worsen the crisis or that congress would get in there and stop them from doing the things that they felt they needed to do. so it is a question of how we structure our democracy. does everything go back to congress, or do we create institutions like the fed and give them independence? and give them the authority to manage crises when they happen? i mean, we don't go back and say, um, you know, that general

eisenhower should have done omaha beach differently even though -- [laughter] one could look back and say omaha beach was a disaster. i mean, thousands and thousands and thousands of troops died. you sort of say, well, he won the war, he got it done. so it's a tricky trade-off, i think. but i do understand congress' concern that the fed had this tremendous power over the purse and used it without always reviewing what was going on. >> just one additional point. in the heat of the crisis, the fed was engaged in what is arguably fiscal policy which is not -- >> it was. >> so there was a lot of sensitivity about that, and i think probably an excess of caution about transparency precisely because they've had to get through this, this period and deal with all of these as is sets each though that's not part of their normal agreement. >> i'm going to make one final

observation, and then we can take a break. i think it's important and instructive that the fed was forced to disclose the name of borrowers to its various facilities by not only the sanders amendment, but also by the bloomberg lawsuit. and those names and details have all come out, and the world didn't end. you know, we know more about what happened during the financial crisis, and the financial system is still functioning. i think that's instructive and helpful and probably, hopefully, will help push the fed to its continuing, towards more transparency. we have a whole panel coming up on the fed, so we can talk more about that. everyone, please -- [applause] share a round of applause.

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>> okay. you have a lot of independent-minded people, and they go off and disappear and do different things. it's a free market of ideas, yes. okay. over to you, jon. >> all right. well, i'll get started. hopefully, as i talk more people will come in the room. the last question of the last panel was an excellent segway to this panel which is about the federal reserve and its role in implementing and carrying out its piece of the dodd-frank duties. our first speaker is patrick parkinson who is the director of the fed's bank supervision and

rglation division -- regulation division. he was also suck conded to the treasury department during the formulation of dodd-frank, so he has a unique insight not only into implementing, but also into the creation of the legislation. he's been at the fed, let me see, since 1986? >> '80. >> 1980. okay, so without further ado, patrick parkinson will give us a little talk. >> well, i'd like to thank the pew charitable trust and stern school of business for the opportunity to provide my perspective on this important topic. the dodd-frank act has materially altered the federal reserve's responsibilities and authorities. given my current role at the board, i plan to focus my remarks on the fed's responsibility for bank holding companies and other financial institutions. i'll also touch on the important

role of the regulatory agencies will play going forward in the implications for future crisis of management by the federal government. i will not address the topic of monetary policy, a topic best addressed by others more directly involved in the board's monetary policy function. the dodd-frank act and the financial crisis that preceded and generated have strengthened the supervisory authorities and responsibilities of the federal reserve in three principle ways. first by expanding the population of firms summit to fed supervision -- subject to fed supervision, second by extending the fed's man, and finally by removing some of the graham-leech body authority to impose prudential standards on subsidiaries of bank holding companies. the expansion of the range of firms subject to federal reserve oversight occurred in part defactor and in part dejury. at the height of the financial crisis, most of the large stand-alone investment banks

that had avoided fed supervision and capital regulation in the years leading up to the crisis suddenly became bank holding companies or were acquired by bank holding companies. many of the large bank holding firms also sought comfort including cit and gmac. as a result of these voluntary changes, the number of large, complex financial institutions subject to fed oversight grew significantly, and many of these firms will find it hard to escape that oversight going forward thanks to the hotel california provision of the dodd-frank act. dodd-frank further extended the reach of the fed oversight to include savings and loan holding companies. i think an underappreciated aspect. on july 21st, the fed will inherit responsibility for roughly 400 savings and loans companies holding over $3 trillion in assets while the large majority of these companies are small and engage in activities that parallel

those of traditional bank holding companies, the s&l holding company population also includes ten of the 25 largers insurance companies in the united states and 180 grandfathered unitary thrift holding companies, many of which are substantially engaged in commercial activities. a few large insurance-based s&l holding companies have already sold their thrift or announced plans to sell their thrift and, thus, escape fed oversight. others may follow as they are confronted with the full scope of the fed's supervision program, but many are expected to retain their thrift. adapting to fed supervisory programs which were designed to address risks associated with more traditional banks and holding companies to these large insurance companies and other nontraditional holding companies will pose significant supervisory challenges in the coming months and years. in addition, dodd-frank gives the federal reserve supervisory authority over any nonbank financial firms and financial market be utilityies designated

as important by the financial oversight council. the board will become the supervise for any financial institution designated by the council and will need to adapt our consolidated supervision and regulatory programs for bank holding companies to those nonbank companies. dodd-frank also gives the board new authority to participate in the examination of all designated financial market utilitieses and to prescribe or recommend risk management standards for those designated utilities. in addition to expanding the universe of firms summit to fed supervision, the dodd-frank act and the financial crisis have altered the focus of the fed's supervision company programs. prior to dodd-frank and the financial crisis, the fed's consolidated supervision program was centered on insuring the safety and soundness of individual bank holding companies and minimizing the risks posed to insured depository institutions by their

nonbank affiliates. a key element is its injunction to the fed and all other federal regulators to employ macro prudential approaches to supervision and regulation. we are to oversee financial firms with a few toward protecting the stability of the broader financial system, not just protecting the solvency of individual firms. i should note that the fed has already begun to reorient its supervision program, early steps including the 2009 program which predates the passage of dodd-frank, the 2011 comprehensive capital analysis and review and the formation internally of our large institution supervision coordinating committee. but, clearly, much work remains to be done to incorporate this macroprudential perspective. dodd-frank also eliminated some of the provisions which limited the ability of the fed to examine, collect information from and 'em pose prudential

standards on subsidiary banks and other functionally-regulated bank holding companies. removal of those restrictions will help improve the fed's visibility and give the fed a greater ability to address threats to consolidated firms' safe and soundness from wherever a firm's threats emerge. dodd-frank specifically directs the fed to examine nonfunctioning regulated nonbank holding companies that engage in banking activities in a manner consistent with the way that we, the occ and the fdic, examine banks. not all elements of the dodd-frank act strengthen the role of the fed. just as the fed has been granted greater back-up supervisory authority over the primary regulators of bank holding company subsidiaries under the act, other agencies have been granted back-up authorities in areas where the fed traditionally stood alone. in the line with its responsibilities under title ii of the dodd-frank act for resolving systemically important financial firms, the fdic has

new back-up authority to examine bank holding companies and nonbank financial firms supervised by the fed that are not generally in sound condition in order to protect the deposit insurance fund. the fdic also has joint responsibility with the board for reviewing the so-called living wills or resolution plans required under the act and determining if sifis resolution plan is not credible or result in an orderly regulation. the, the sec and fdic have some authority for the for bank activities. for example, under title vii, cftc are charged with establishing business conduct and reporting standards for the swaps business of bank and nonbank swap dealers and are charged with determining which swaps entered into by the banks and nonbanks must be centrally cleared or traded. the federal reserve and other

banking agencies maintain full prudential supervisory authority over banks including authority to set capital and margin standards for unclear swaps, but the focus of regulation of derivatives in a post-dodd-frank world is moving to the cftc and the sec. the creation of the fsoc to mitigate systemic risk and to monitor regulatory developments adds a new layer to the oversight of all financial regulators including the fed. for example, the fsoc has authority to make nonbinding recommendations to the board on its enhanced prudential standards or sifi which dodd-frank requires and to all financial regulators to promote financial stability goals. the last area i want to discuss is crisis management. dodd-frank removed a number of the tools used by the government to manage the recent financial crisis, in particular dodd-frank placed significant restrictions on the fed's lending authority in section 13-3.

restricted to broad-based facilities, but the secretary of the treasury can veto the establishment of those facilities. dodd-frank reined in the tools available to the fed in times of crisis, these constraints on the authority is a positive step toward eliminating too big to fail. the narrow liening facilities of the fed employed during the crisis such as the bear stearns and aig facilities were created because there was no other government authority at the time that could be used to protect the financial system for the disorderly failure of large, interconnected financial institutions. the orderly liquidation authority in title ii provides a superior set of tools to manage the resolution of a failing financial firm in crisis, so i don't think we're shedding any tears over our loss of our narrow 13-3 authority. the resolution will be managed by the fdic, but the fed can

move a resolution under alt-a along with the treasury which must consult with the president. i believe the fed's role has been strengthened, but it has also strengthened the fdic and other arms of the federal government. now more than ever our success at meeting safety and soundness and financial stability objectives will be dependent on our ability to cooperate with those other regular lay ors -- regulators in the united states and, indeed, with other regulators abroad. thank you. [applause] >> okay. we have comments from vincent reinhart and kim shone holds which i think we're going to do here at the podium. we'll lead off with vince who is the former head of the division of monetary affairs at the fed. and, um, is now writing a series of papers with his wife on growth in a time of debt, so he has an interesting perspective on the fed and also the

macroeconomic backdrop today. >> that's right. i must apologize at the outset for all those who came here thinking they'd hear my wife speak. [laughter] it's not uncommon to hear a groan when they say, oh, it's the other one. [laughter] now, just about one year ago president obama signed into law the dodd-frank wall street reform and consumer protection act. appropriately enough, the traditional gift for a one-year anniversary is paper. [laughter] legislation over 2,000 pages in length surely consumes a lot of that. it's enactment into law changes the scope of permissible activities for financial firms. new responsibilities are given to old agencies. old functions are given to a new agency, and a council of regulators sits atop it all. chief among the responsibilities of the oversight council will be to determine the private firms that are more equal than others. being in the club of

systemically important financial institutions comes with costs rolled into the category of enhanced prudential standards, but membership has its privileges. i'm going to discuss four issues. the first two relate to the misdiagnosis central to the legislation and the irrelevance of the vaunted resolution powers at a time of crisis. the second two more narrowly concern the federal reserve. first, the act focuses on activities within the existing set up of the financial system. some activities formerly done in banks must be moved off the balance sheet, and more activities and more institutions will be under the scrutiny of regulators. but the incentive to do most of the activities remains intact. in a market economy, this means that those activities will continue to be done. financial institutions will spin off bids, rename other parts and make their balance sheets

further devoid of meaning. thus, the legislative response to the complexity of markets and institutions and related failures of o regulation shown in the financial crisis we just lived through has been to make the system more complicated and to rely more on regulation. indeed, a design principle would seem to be preseven the status quo of -- preserve the status quo of a landscape dominated by large, complex financial institutions. such complexity introduces three fundamental problems in monitoring behavior. first, supervisors are at a decided disadvantage at understanding risk taking and compliance at such firms. but if an institution is so difficult to understand from the outside, how can we expect market discipline to be effective? in the second cost of complexity is the outside discipline of credit, counterparties and equity owners is blunted. third, a complicated firm is

almost impossible to manage. senior management cannot monitor employees, especially when staff on the ground have highly-specialized expertise in law, finance and accounting. and employees who are difficult to monitor cannot be expected to look to the law on interests of where they work. a second design failure is that relating to the key reason that financial firms strive to get big and complicated. financial officials will offer them the protection of being too big to fail at a time of crisis. the privilege of sifi membership. when markets are stressed, authorities will almost surely convince themselves that a faltering firm may be the first domino to topple. that is, the new resolution authority provided in the act may give the authorities the ability to act, but it will not increase their willingness to do so in extreme mis. we've got to remember that tbtf

entered a lexicon referring to banking regulators' unwillingness to resolve large banks. they had the authority, they department have the will in the 1970s and '80s. as for the federal reserve, authorities should have no regret that some of their lending powers have trimmed back. political officials should have to sign off whenever taxpayer dollars are put to risk such as when lending to nondepository institutions. there is much to regret, however, about the new responsibilities given to the fed. my third point is that monetary policy making is already hard. adding an ambiguous mission regarding financial stability invites threats to the fed's reputationment the federal reserve is viewed by the public and elected officials in terms of the performance of all of its responsibilities. multiple goals invite multiple opportunities to remiss steps

that'll damage its reputation. missteps that are more likely when given a mission almost impossible to achieve. come pounding the problem -- compounding the problem are the consequences for the communication of policy. public officials have to strike a balance between informing and reassuring the public. this sometimes leads them to shade public statements away from from a description of the most likely outcome for events toward the most comfortable one. after all, what public official wants to be the one to trigger a run? although in the q&a session, pat, you will have that opportunity. [laughter] thus, the wider scope of the responsibilities of an agency, the more likely statements will be emptied of content. to the kit detriment of its -- to the detriment of its overall reputation. four, does the fed really need to be a supervisor to conduct monetary policy? is true, a central bank with no

expertise about financial markets, institutions and utilities would work at a clear disadvantage. but that would not be the fed stripped of regulatory powers. as the nation's central bank, the fed would continue to operate the payments and book entry system. both functions involve recording hundreds of thousands of transactions each day measured in the trillions of dollars. and working closely with key market utilities. moreover, in performing these activities the fed often extends credit within the day to financial institutions, giving it leverage to pry open its balance sheets. these roles give the fed important insights about institutions, markets and utilities. the fed's role as a provider of critical services and essential intraday credit also gives it the lever. with that as a base, the incremental benefit of retaining supervision appears limited. my suggestion is that after the next financial crisis -- and

there will be a next one -- legislation should eliminate the underlying encouragements to complexity. the requirement of simpler and more transparent balance sheets would restore effective supervision, market discipline and tighten internal controls. it would also make officials more comfort that an individual firm could fail without bringing down the entire financial system with it. and finally, it would also let pat get to retire. [laughter] >> okay. our next, our next speaker is kermit, although i know him as kim. he teaches courses on money, banking and financial markets at nyu and was citigroup's chief economist from 1997 until 2005. >> thank you very much. thanks, jon. pat, i think we'll keep you employed for a while. i'm going to focus in the brief time on two simple questions.

one, has dodd-frank diminished the independence of the fed? i'll answer that one quickly. and a bit more, has dodd-frank enhanced the fed's ability to handle or manage a future crisis? with regard to monetary independence, i doubt that dodd-frank significantly compromises it. in contrast to some of vince's suggestions. doubts about the fed independence seem an inevitable consequence of its extraordinary actions to contain the crisis. important concerns include the fed's interaction with treasury during the crisis and the unprecedented scale and composition of the fed's balance sheet. however, dodd-frank per se is not a key driver of these concerns. i should note that earlier versions of dodd-frank did threaten fed independence. for example, the house bill included provisions that could have fostered politically-motivated scrutiny of monetary policy decisions. it also could have politicized senior appointments to the federal reserve district banks.

fortunately, the final dodd-frank act shed most of these expressions of populist revolt. by delaying the release of details about fed crisis operations, the final dodd-frank act also achieved a better balance between the need for fed transparency and accountability and the need to insure central bank effectiveness as a lender of last resort. even so, concerns linger whether intermediaries will be willing to participate in future extraordinary fed liquidity operations knowing that their activities will be made public. how about the fed's ability to manage a future crisis? on balance dodd-frank better equips the fed to prevent the crisis but clips its authority to manage one. this policy shift combined with uncertainties about the complex, untested dodd-frank rules for resolving failing sifis should further encourage policymakers to act aggressively and

preemptively to reduce the probability of a future crisis. how does dodd-frank better equip the fed to prevent one? dodd-frank highlights the importance of limiting systemic risks. its requirements and regular stress tests lay key foundations for a comprehensive macroprudential framework. the structural changes introduced by dodd-frank such as the creation of a fed vice chair for supervision, a treasury office of financial research and the financial system oversight council should help to institutionally and sustain the fed's heightened attention to financial stability. i am assuming heroically, or at least hoping, that the new financial stability oversight council will identify any systemic nonbanks and place them under enhanced supervision by the fed in a timely fashion. no less heroically, i assume that the fsoc will prompt the fed and other regulators to contain the systemic risks still inherent in key markets and

institutions such as the market for repo and the world of money market funds. ultimately, it will be up to the fsoc, the fed and other regulators to limit systemic risks in a world where manufacturing pell risk is profitable. the financial industry as a whole, its individual participants and its political representatives will continue to resist rules that constrain profit. these rules include heightened capital margin or liquidity requirements. indeed, these requirements will incentivize even greater regulatory arbitrage and the expansion of shadow finance. activities also will tend to shift internationally to the regulator of least resistance. at this early date, the signs are mixed about how effective u.s. regulators will be. even if we limited our analysis to the behavior of the fed. consider, for example, the fed's two stress tests. the 2009 test that began at the depth of the crisis offers a textbook example of applied

macroprudential principles that lent that exercise great credibility. these include the availability of a clear public backstop mechanism for supplying capital in the absence of a private source, the application of common standards across institutions for asset valuation at a point in time, the use of plausible asset loss assumptions and, finally, the designation of increased capital needs in dollar terms rather than as a capital ratio. thus, limiting the incentive to deleverage. the successful test marked the return of u.s. intermediaries to the capital markets in a wave of new private capital raising. in contrast, the method and outcome of the fed's second stress test completed this year pose some concerns. in particular, it is questionable that the u.s. financial system as a whole is sufficiently healthy to warrant the capital depletion that the fed authorized on the basis of the second stress test. if you're interested in seeing more details about why, i refer

you to this year's u.s. monetary policy forum report which i co-authored entitled, "stressed out: macroprudential principles for stress testing." what if, as seems virtually inevitable, another crisis occurs? this dodd-frank blesses broad access liquidity production for nonbanks. the new requirement of prior treasury approval under dodd-frank may be an obstacle, but it would mostly appear to formalize actual practice. would the fed have undertaken in the crisis its extraordinary liquidity positions in the face of opposition? more important, dodd-frank prevents the fed from lending to individual nonbanks outside of a program of broad access. in some instances such regulation of form over function could be sidestepped. the crisis conversions into bank holding companies of goldman and

morgan stanley come to mind. yet the new dodd-frank rules seem aimed at preventing a future fed intervention in a bear or aig-like instance. the thrust of dodd-frank is to force such challenged nonbanks into the new fdic-led resolution process. on this front i am meaningfully less optimistic than the fdic about limiting systemic disruptions if creditors face uncertain losses. in its recent assessment of how the dodd-frank resolution mechanism might have worked in the case of lehman, the fdic estimated that creditors could have been quickly compensated and the healthy portion of lehman sustained only with small losses. however, this rosy scenario depends on several doubtful assumptions including a long period for assessing the condition of a fragile sifi, confidence about asset valuations during the a crisis and lack of international

jurisdictional bankruptcy complications. ultimately, policymakers can't have it both ways. enhancing market discipline by letting creditors take a hit in a crisis will raise the probability of a contagious run. the alternative of protecting creditors to keep a future lehman in operation fosters moral hazard. the worry is that dodd-frank does both. uncertainty about the untested resolution process and the soabted risk to creditors may encourage a run in an episode when the financial system's capital has been depleted. conversely, the possible imposition by the fed, by the fdic of an ex post levy on survivor banks to fill the hole from an insolvent, possibly nonbank intermediary encourages systemic risk taking and a race to the bottom. let me close then by endorsing the recent comments of fed governor tarullo. in his words, quote, the special rule mechanism of dodd-frank and

the enhanced capital requirements called for by that law should be regarded as complementary rather than as substitutes. indeed, additional capital requirements would relieve some pressure on the insolvency regime. end quote. in fact, the causality also goes in the other way. in my terms, we need an array of macroprudential policies to help avoid a tryout of the dodd-frank resolution regime. thank you. >> patrick, before we get into questions, i'd like to give you an opportunity to respond to some of the comments that you heard from vince and kim. >> hard to know where to start. well, let's see. i think with respect to vincent and the key point about financial stability or responsibilities, i think kim made a key point. while early versions of the administration's plans would have, essentially, given very

substantial and sort of unique responsibility for financial stability to the federal reserve, as things came on -- as i mentioned in my remarks -- each and every prudential regulator has been given the objective and then, importantly, rather than the fed being given unique responsibilities for financial stability, the new financial services oversight council has been given that role with the treasury and the chair. so i don't see that particular compromising the fed's independence. i think, in fact, one of the respects in which we're much better off under dodd-frank as has been mentioned, we during the crisis with respect to the single firm, 13-3 facilities did, as i said, we only entered into those transactions because there was no other way to prevent a disorderly failure of those firms. but we're never comfortable with that, understand that it is a

fiscal policy function did get the consent of the treasury before doing so. but i think there's no question given the aftermath and all the heat we took that having that kind of responsibility really did pose a risk to our independence. so we're much better off post-dodd-frank with an arrangement in which the fiscal policy authority and consultation with the president is, ultimately, the one making decisions of those sorts, not us. with respect to kim, maybe one thing i'd like to address. um, he mentioned his concerns about the comprehensive capital analysis and review or ccar program that we completed earlier this year and said that we were allowing capital depletion by at least some firms. i don't think that's exactly right. we did allow some firms to increase their capital districts, either to increase their dividends or to increase their share buyback activity. but we did so only after going

through an extensive analysis that convinced us that notwithstanding, um, those increased capital distributions, they would continue to acrete substantial amounts of capital at least in the baseline scenario. an important aspect, then someone might ask, well, what if economy weakens, what if we get a bad macroeconomic scenario? i think the answer to that is, and it's been made quite clear in a proposed rulemaking that we issued for public comment a couple weeks ago, is that we regard the ccar exercise as a permanent part of provision, an exercise that will be repeated at least annually in terms of requiring the firms to submit capital plans, and in some circumstances if their capital plan hasn't been approved, getting our prior approval to increase capital distribution. so that's going to be subject to routine oversight by the fed in

a way that capital distributions, regrettably, were not subject to oversight in 2007 and 2008. and further, um, there's an expectation that's made clear in the proposed rulemaking that if either the firm's risk profile changes or there's a change in the broad macroeconomic circumstances that would have a material effect on the firm, that they're going to be expected to submit a new capital plan, and we would have another opportunity to object in particular, i think, it relatively easy for these firms to turn on and off their share buyback programs. and i think the first thing that would go if we had doubts about their ability to acrete capital would be the share buyback programs. so i think, again, very thoughtful comments from both, raised a lot of issues i might comment on, but i'll just for now make comments on those two things, and we'll leave it to

the q&a to bring up the other things. >> well, i'd like to follow on a couple things that vince and kim both raised. vince asked whether the fed needs to be a supervisor of banks and poses the question of whether that could megaly effect its -- negatively effect its reputation. the fed has responded during the dodd-frank debate that its bank supervision responsibilities of inform its ability to carry out monetary policy functions and to act as the lender of last resort. could you explain to us the role that you play in informing monetary policy and the role that you play in particular at fmoc meetings where monetary policy's formulated? >> relate me rephrase -- let me rephrase those questions. [laughter] i think the question is, number one, if bar is set at needs to

be, that there's no alternative way for the fed to meet its informational needs or that, um, or that looking at the ore way that is an absolutely essential that the monetary policy authority be a bank supervisor. that's a hard bar to me. but i think the better question is and the argument i think we've been making is that, first, our involvement in bank supervision does assist us significantly in undertaking our monetary policy responsibilities and, second, what i can speak to more directly, i think the fact that a central bank has not only monetary policy responsibilities, but its responsibilities for monitoring markets, for having expertise on payment and settlement systems. all of that is enormously valuable to the supervision function in conducting bank supervision. so, and that is an argument i deeply believe in. with respect to my role at mfoc meetings -- fmoc meetings, i'm

available to answer questions if any arise, but it would be overstating my role in the process. on the other hand, i think especially of late with a number of governors on the board and a number of reserve bank presidents who are deeply knowledgeable about and interested in banking supervision, more and more of the insights garnered in supervision are being share with the the fmoc and, therefore, come into play in be making monetary decisions. so i guess the way i'd rephrase the question is to take the focus away from me where the answer would not be particularly favorable to the supervision function as a whole really is a much better case to be made. >> so there's a debate that's been going on inside the fed and out for some time about the role that monetary policy should play in preserving financial stability. should monetary policy lean against the wind when it sees financial excess, for instance, in housing markets? what would you advise the

chairman of the fed or the fmoc in a situation where there was some question about whether financial stability was being threatened by some new, some new area of excess? should monetary policy lean against the wind? is. >> maybe i'll just sit back and see what vip sent and kim -- vincent and kim have to say about that. [laughter] at the outset, i said i'm not the one the board looks to on advice of how to conduct monetary policy, and for good reason. >> all right. he's throwing it to vince and kim. should monetary policy live against the wind? >> you can't have lived through the last couple of years without concluding that the prior -- [inaudible] that you trust to markets and then trust that you can clean up the failures works, that there's got to be some role for volatility in the monetary policy decisions. i think that has changed. i think it's just a couple other

points. one is if you looked at the transcripts of fmoc meetings that are published, you will find very little evidence that it was informed by a discussion of supervision. maybe that was a problem and, therefore, you headed in the -- you're headed in the right direction. but the evidence is not strongly supportive. the second thing i want to just say there's this presumption that if fed is the lender of last resort, therefore, it has to know the financial institutions it lends to. however, in every discussion of its lender of last resort function, it invokes and says we always take collateral. if it contains risk, it's not obvious why you need a firsthand understanding of the institution if you've already gotten a sign off as primary regulator.

to the specific question should bank supervision of inform monetary policy, i think understanding the markets should inform monetary policy, and the fed could get that even if it were not the supervisor. >> um, i think the question was ability whether financial stability should influence monetary policy, and i think it'd be hard to make the case against it these days. >> more specifically, should monetary policy lean against the wind? in other words, should the fed raise interest rates when it sees financial excess? >> that's a more specific question. i'm guessing that the three of us sitting here would now interpret monetary policy as going beyond interest rate policy whereas up until 2007 most people would not have thought of it that way. but the whole notion of creating a macroprudential framework outside of using interest rates, i think that's an important thrust of the fed, it's an important thrust of the chairman, and i would expect that macroprudential tools would be the first set of tools one

would use to address the kinds of imbalances that you're worried about. i doubt that anyone told -- today would say they would rule out financial policy to address financial stability issues. but they're still not likely to be the tools one would use at an early stage. >> one could only wonder what your headline would be when the federal reserve chairman says, he or she has raised the policy rate because house prices are going up too fast. >> it would certainly be on the front page, i'll tell you that. [laughter] patrick, kim and vince both made the argument that there will be another financial crisis. i think everybody agrees with that. if you had to ask oddsmakers what i was going to say in vegas you could say on wall street or if you could have a hard time distinguishing between the two, what is the most likely source of the next financial crisis today? a lot of people would say it's in europe, the risk of a sovereign default affecting

european banks and cascading back to us, potentially, through the shadow financial system. what is your assessment of the resilience of the u.s. financial system to a shock from europe, and what is your assessment of the resilience of the european financial system to a shock in europe? >> i'll probably stick with answering your first question. but i think, obviously, we've been taking a long, hard look at this, and the way it's usually framed i think one has to make a distinction between direct exposures and indirect exposures through contagion effects. if one looks at the direct exposures of u.s. banks, particularly to peripheral europe, those exposures are not large. they're not a deep concern in and of themselves. i think the real concern is that if there were a default by one of the peripheral countries, for example, that that could have much broader impact on financial

markets than on the global economy. at a minimum it might lead to a widening of credit spreads within europe, and undoubtedly to some extent it would lead to a widening of credit spreads globally. it would have an adverse effect on stock prices first in europe and to a lesser and still significant extent globally. all of that would mean weaker economic activity. ..

>> and to start with your first

point i certainly would agree we have not seen our last financial crisis. >> do you have thoughts on the risk that europe poses to the system? >> if you went back and red all the reports of the old financial stability forum, you would know that there was a palpable global threat to global financial stability, namingly hedge funds. if you listened to economists you knew there was a palpable threat to global financial stability would be a massive depreciation of the dollar because of our large current account deficit. so the fact that people have identified one particular threat doesn't make me confident that will be the source of the next financial crisis. i think the second issue goes back to your previous question. you know, a lot of the

discussion is old. that is with monetary policy taken into account financial stability. i think in any decade if the federal reserve was sitting there worried that there would be a default in europe, it would be very reluctant to change monetary policy and change to uncertainty. and so i think these issues have been part of the monetary policy decision-making for a while for a stretch. we got an unwanted confidence in the ability of the markets to absorb the financial risk but that confidence is long gone. >> jon, i would say that i thought your question about asking about whether money market funds in the united states are a potential means of transmission are a good one. and i think it's something we should be concerned about because the longer that it takes in europe to address the problems, the greater risk of some disruption. and it may simply be the decisions that are made

independently of the managers of those funds. if the corporate treasurer of the united states decide not to get exposed to european banks, they may make their own decisions. >> you anticipated my next question for patrick. i'm sorry for picking on you. the chairman did raise the issue of money market funds in his press conference the other day. what's your assessment of the risk that financial contagion could spread through that particular sector? >> well, we saw in september of 2008, there was a run on the money market mutual fund sector, which was staunched through a combination of an insurance program created by the treasury which by the way they don't have any authority any longer to do. and by federal liquidity authorities which we still would have the authority to do at least particular facilities that we introduced back in 2008. i'm not sure they would be in

the current markets. i think we still have a greater vulnerability in that area and that's why it's absolutely essential that public policymakers come to grips with this risk. there are a number of different proposals that are under debate. as far as i can tell there's not consensus on the current naiv or requiring capital by the parent management companies subjecting to the bank provision whatever it is. i think those are issues that deserve even greater attention than the beginning to this point because it is a vulnerability that nothing really -- i mean, the sec tightened up on the liquidity funds on the monetary funds but i don't think anybody thinks the fundamental vulnerability have been addressed by those issues and some people thinks something

more significant needs to be done but, unfortunately, to this point no consensus on what exactly that something is. but it is -- it is a vulnerability. >> let's open it up to any questions, if not, i'll keep grilling patrick. >> let's open it up to questions. [laughter] >> we have one in front and after that another one in the bac back. >> yes, a quick question, vince and for the rest of the panel actually on the risk of complexity that seems like a fundamental ones and one of the liquid days authority is the requirement for living wills and

the way that's written suggests that the fed and the fdic, if they had to had to, in fact, force some simplification some of institutions. are you optimistic, guardedly optimistic? is there any real potential of seeing things a little bit more transparent and straightforward? >> you said the key phrase. if they had the resolve, i think that would be extremely difficult to do so. and i think repeated has been the issues that if it's a complicated institution, it will have a living will but it will be unenforceable at the time of extremes. within the dodd-frank i'm more optimistic about the potential for the office of financial research that could push on market utilities, to push on disclosure, basically solve the collective action problem that

institutions find it -- find information very valuable to themselves and then can pit each regulator against each other. the ofr in principle could do tha that. >> morris goldstein, peterson institute for international economics. like charles taylor, i was also interested by vincent's comments about complexity. i wanted to push him a little bit critical of dodd-frank. what is it that you would propose to reduce complexity? do you want to prohibit, for example, large and complex financial institutions from having hundreds, sometimes thousands, of majority-owned subsidiaries? are there proposals for a charter that you would have to be a single entity with a home-based resolution? do you want to go back to glass-steagall? go beyond the volcker rule?

do you want to go to narrow banking? do you want to go to your former boss' mantra about self-regulation. you need to offer us what it is that is behind your conception of less complexity. >> yeah. self-regulation works as long as you don't pair that with too big to fail, by the way, morris. and so i think the answer is i would point you to the testimony i gave for chairman dodd, before dodd-frank, and argued among other things that you needed consolidation of supervisory agencies so you wouldn't get that sort of regulatory arbitrage. you need better accounting rules that don't allow basically the splintering of balance sheets. since harry potter is back in the news for the three people who get the line, it's sivs that

allow you to sprinter your soul. so consolidation of regulators, simplification of charter of accounting consoles and simplification of tax treatment go a long way but if you're going to consolidate i would have an office of financial research who have to report regularly on opportunities for market utilities and simplification of contracts that would make living wills more credible. >> maybe i'll add something to that. i guess i would agree with vincent that resolution planning, the living will is exercised is actually critical to fully addressing too big to fail. in one sense dodd-frank ends it clearly and cleanly by

prohibiting any agency in government by engaging in open bank systems when you use the dodd-frank orderly lickization authority which is the only authority which exists post-restriction on 133 and the firm must go into receivership and if it goes into receivership it will fail and any holder of capital instrument can't essentially benefit from any of the orderly liquidation parts. but, yet, you see that the rating agency still have ratings uplift and the credit ratings, they're not convinced and i think the reason they're not convinced is that without extensive resolution planning, we still, i think, if we had one of the very largest institutions approaching failure the prospect of disorder. and i think when you talk to people in the marketplace, they understand what the law thinks. they think simply think the -- they think sometimes that i and the others are going to violate the law, no, no i'm not going to jail for financial stability. but i think they think that the

congress will change the law. and i think what's essential, what reasonable resolution planning is essential is to convince them that, in fact, we can burn the creditors of the bank while preserving stability and i think that's only going to be the case if we have a clear plan, essentially for moving the systemically critical functions into a bridge institution and i think when we start looking at how easy that's going to be in the short run, not so easy, i don't think it really requires, you know, getting the goal of thousands of subsidiaries to one or two because most of those don't have anything to do with critical functions. but there are certain critical functions that -- it's not easy -- the way banks manage themselves, business wise don't easily map themselves into legal entities and as long as that's the case, i think it would be very hard to move the critical functions into a bridge without moving lots of other things. and eroding the disciplinary effects so i think that really

is the critical task for the fed and the fdic and, yes, it is going to take well and critical to addressing too big to fail and i think in some instances it is going to impose significant costs on the banks if we -- if this, i hope, we exercise. we have the will to proceed along that path. >> you talk about punishing creditors, what will happen to creditors in particular short-term creditors and then other creditors in the event in the imminent failure of a large institution? >> well, i think there is an issue, for example, i think the fdic has proposed making a distinction on senior creditors over a year and under. i think there are problems that may be irresolvable with respect to the short-term creditors in terms of disciplining them and indeed i'm not sure personally that much effective market discipline comes from those short-term creditors. i think history has taught us

that they assume they can get out in a hurry and indeed they do get out in a hurry and that doesn't contribute to stability. that contributes often to a disorderly unwinding. but i still think in the context to where there would be significant requirements not only for capital but for long-term debt and indeed today, most of our large firms have a very substantial amounts of long-term debt outstanding, there is the potential for powerful effective discipline from those long-term creditors even if there continues to be problems credibly threatening to impose losses on creditors when that might lead to runs on all the other institutions. that is a dilemma one always faces in these situations. >> just add a note to thank our hosts in this regard because in your package there was a paper written by the pew reform institute about how to address resolution in particular. it's a very thoughtful 100 it actually highlights how remarkably complex it will be.

so in that sense it's very illuminating. but it sets out the challenge which is an enormous one. >> can i just say whenever i think of living wills and resolutionary authority i think of the federal reserve's at least three decades long anguish with the number of clearing banks for u.s. treasury securities. and the question -- if you only have two major ones, what would you do if one failed? and many, many meetings and private sector groups and working groups trying to figure out whether if you could create a new bank to lift out the clearing operations from one of the existing ones and the answer was, always the clearing operations were woven so inexplicably intricately into the life blood of the institution. that you couldn't lift it out without killing the body. that's the same sort of

incentives going on in writing your living will, in getting complex. and so it's possible that dodd-frank can be used as the engine through very aggressive pursuit of living wills, but this was a very clear example of self-interest that couldn't be solved given the industry pressures. >> i want to ask a question about disclosure and then we'll get back to the senator's question. the dodd-frank bill required the fed's to disclose its emergency lending during the crisis and the bloomberg lawsuit has additional disclosures. what is your assessment of the impact of those disclosures. has it been for the better? have there been costs to the

disclosures as well? >> well, i think the question is, it's hard to answer because the disclosures were made after the crisis and no terrible things happened. i guess i'm not terribly surprised by that and the real issue and i think martin bailey hinted at it and addressed it in the last panel is how would it affect the behavior in the next crisis and there's a big distinction to be made between contemporaneous disclosure of information about who's borrowing from the fed and disclosure after the fact is required under dodd-frank. with contemporaneous disclosures we already had problems during the crisis where so-called stigma even though there was no requirement for public disclosure of who was going to the window. firms reluctant to go to the window for fear that would get out and that they would come under funding pressures and the fact that firms were unwilling to borrow at the window meant

that we were unable to as effectively as we might have counter the adverse effects on the financial system and the economy and the pull-back by lending by banks who were concerned about their ability to fund themselves. so to the extent there was a contemporaneous disclosure requirement and that indeed did make institutions reluctant to borrow from the window and in turn that meant them reluctant -- even more reluctant than they were to extend credit and meet the financial needs of the economy, that sounds like a post-cyclical implication of that and that would be a bad thing. but that's quite different it seems to me than disclosure ex post as to who was borrowing as to what the law requires and so i think in that instance that was an important distinction to congress and obviously appreciated. >> just one thing to add there, it will matter how the recent disclosures affect future bank behavior in the next crisis.

if it turns out that this increases stigma the next time around, we may look back and say that there have been costs we didn't measure yet. >> but doesn't the fed charge a penalty rate when it makes loans, for instance, through some of the these 13-3 facilities and isn't delayed disclosure just another version of a kind of penalty rate? if it doesn't -- if it doesn't require -- if it doesn't induce a short-term run, how is delayed disclosure -- >> your question is how large a penalty and it's much more difficult to measure. we know how to measure on lending rates but we don't know what to be the implicit shadow costs of future revolution of their borrowing behavior. >> but the other part is, with penalty discount rate is, it may be a penalty in normal times but at a time in crisis when there's

no access to funds it is a subsidy. i want to turn the issue around and i agree around contemporaneous disclosure and anything that adds to the stigma of the window would be unhelpful but after the fact disclosure is something for important for investor investments. if a fed was lending to a particular institution for its financial well-being, i kind of think that's material to investor decision-making and should be released and i always wondered when the sec was in all this. >> i think we had some more questions from the audience. we have one up front here. >> i wondered if pat or somebody would say a little bit more about the tools of

macro-prudential regulation. as you might see them used in the run-up to a crisis in a housing bubble, for instance. it is as jon pointed out hard to imagine the headline of fed raises interest rate in face of housing bubble. but what -- what is it not hard to imagine the headline with respect to your macro-prudential tools in that situation? >> well, i think the macro-prudential tools that are most useable and perhaps most effective are simply making supervision and regulation more afford-looking. in other words, in setting requirements for firms. and asking, for example, in the case of our capital distribution policies whether they can afford to make those distributions to not be looking at simply the effects of those distributions might have on their current capital ratios but looking at

what their capital ratios might be in a stressed scenario, where there's more adverse environment. and in general, there are any number of policies, whether it's, say, margin requirements, for example, where it's helpful in thinking about those margin requirements to set them in a way that's sustainable even in a crisis rather than setting them in a rather low level and when market volatility increases in a crisis saying oh, my god we have to raise the capital requirements and again it has this procyclical requirements and it's setting policies at a minimum avoid exacerbating in some sense the inherent p procyclicalality -- >> we had that tool in the 90s and we didn't use it. >> well, we didn't use it in the '90s and actually maybe it's instructive in some ways. it was a different situation. if you're referring to the runoff in the stock prices, i

don't think that was driven by a leveraged borrowing and, therefore, raising margin requirements wouldn't have had the direct sort of mechanical effect people might have thought. not only because not very many people were financing their acquisitions the stock with margin borrowing. it was mainly people pumping money into mutual funds and directly into stocks. but also i remember at the time, if you looked at the amount of equity that people had in their margin accounts, it was so far in excess of margin requirements that it wouldn't be much difference and, therefore, the only effect would have been a psychological effect and troubled psychological effects that is gauging just what an effect in policy would have. and again, i remember thinking well, there's a lot of efforts. there's a publicly. we would like -- we'd like to let the air out of that balloon slowly but it wasn't clear that raising margin requirements wasn't a way to let it out

quickly and it's, in effect, the most dangerous thing for a financial system is not a large adjustment of asset prices over a long period of time and a very sudden especially with respect to the payment and settlement systems an abrupt crisis would be and one to be avoided if one can. >> if you have more missions you definitely want more tools but i remember going to a a lot of international meetings five years ago or so, hearing about the fact that the spanish have dynamic provisioning would help insulate their macroeconomy from asset market excesses. sometimes the wave is really really high. and the sorts of policies we're talking about only build the levee a certain height. >> well, i don't think that means you should build a levee but it is true. it goes back to the point someone made, are we ever going to eliminate crisis?

no that's not a realistic objective. i think the objective is decreasing their frequency and severity. and some of these tools may be helpful in that regard. >> jamie diamond argued to ben bernanke the other day that the cumulative effect of not only dodd-frank but also basel iii is hurting the financial system and slowing the return of a fully functioning banks and markets. i would like to hear from everyone on the panel what they think of the cumulative effects of this regulatory reform? >> we do it every time, right? carmen and i wrote a paper called "after the fall" for the jackson hole symposium last august and the main regulator is if you look at the 15 most severe financial crisis of the second half of the 20th century,

economies grow 1.5 percentage points slower each year than in the decade before. and in 10 out of 15 cases, the unemployment rate never gets back to the precrisis level. and that really has -- relates to three things. one is there's unfinished business. we don't deal with the problematic assets and that impairs the intermediation in households. the crisis was importantly about leverage, big buildup of leverage in the advance of the crisis. we have to deleverage after but third we always make sure that it will never happen again, whatever it was. and the problem is it never happens again, something else does. but we add to the cost of intermediation. we raise capital. we create an environment of uncertainty. that has good longer term prospects but it can be a head wind for a macro economy. i think the prayer financial

regulators should say in the lord augustin one, lord make me prosperous but a virtuous. >> i didn't get that in my 13 years of catholic education. [laughter] >> i didn't complete those judgment skills. i guess i would just remind everyone of how we got here. we got here because we had a financial system that was highly efficient but not terribly stable. and i think inevitably the policies that we're adopting which is designed to make the system more stable may make it less self-efficient and the average growth rate is somewhat lower but ideally, achieving that, along with coming the benefit that we avoid some of the tail events that we have been suffering from and this is challenging. there have been tail events for a long, long time.

we have to be sober in assessing our ability to address that. in the particular context of the sifi surcharges i can only say number 1 in terms of basel iii the surcharges have gone into gauging what the macroeconomic of those will be. and i'll admit our economic models, rather, underdeveloped when it comes to the financial sector but nonetheless using the best tools we have available our estimates at least in the regulatory sector those effects will not be all that large. with respect to the sifi surcharges, i think the point has to be made that unlike basel iii, which will be broadly applicable, the sifi surcharges will be applied differentially to different firms and will apply to only a subset of the banks in the system so that whatever the effects will be for those firms, one can't extrapolate automatically the effects on credit markets and

the economy as a whole. in other words, i probably shouldn't say what may not -- it may be true that some of this is bad for the very largest banks in the country and what's bad for the largest banks isn't necessarily bad for the united states. >> i guess let me put on the academic hat for just a moment and suggest that at least in the purest form, theory tells us that enhancing capital at a firm should not alter its ultimate value in the absence of all kinds of -- we are assuming in saying that a lot of -- a lot of variety -- many important assumptions. however, if you make that assumption, or make that statement, it's not obvious why increasing capital requirements at banks or particularly at a few large banks should do long-lasting damage to the economy. especially, if you do it over a long period of time. and i guess i would just endorse chairman bernanke's comments at

his press conference recently and namely that it still seems that we're not on the side of capital requirements that is that they are too high. we're more likely to be on the side that they're too low. >> we have time for maybe one question, if anyone wants to pose one. if not, we'll wrap up and take a break. thank you. [applause] >> this is a real break. [laughter] [inaudible conversations]

>> and they're taking a short break at the pew financial reform conference being held in downtown washington, d.c. and we'll be bringing you one more of the upcoming panels here on c-span2. the next panel with a look at systemic risk. it's expected to start in about 15 minutes. later today, after the pew group breaks for lunch, our coverage is going to shift over to our companion network c-span. also, i want to let you know a quick news update on this break on the supreme court's last scheduled day for this session the court has ruled in a case involving the sale of violent video games to minors saying that the state of california cannot ban the rental or sale of those games. you can check out more details on our website, c-span.org. you could also find there a link to remarks from chief justice ron roberts who spoke at a conference this past weekend. during this break at the pew center we'll take a look back at the keynote address from earlier this morning outlining the dodd-frank financial reform bill

one year on. >> thank you very much, charles, for having me here and all of you for coming this morning. i'm going to give some formal remarks to open this up and then the panel has promised me to savaging ly dispute everything that i say which should provide a lot of entertainment to you. if you go back over two years ago the united states and the global economy faced the worst economic crisis since the great depression. the crisis was rooted in many years of unconstrained excess and prolonged conplasentcj and the crisis made painfully clear what we've known that finance cannot regulate itself that consumers to profit on tricks and traps rather than to compete on the basis of price and quality will ultimately put us all at risk. that financial markets function best when there are clear rules,

transparency and accountability. and that markets break down sometimes catastrophically where there are not. for many years the core strength of the u.s. financial system had been a regulatory structure that sought a careful ambulance that saw ininnovation and competition on one hand and excessive risk-taking on the other. over time those great strengths were undermined. the careful mix of protections we evaluated eroded with a variety of new products and markets for which those protections had not been designed and our regulatory system found itself outgrown and outmaneuvered by the very institutions and markets it was designed to regulate. in particular, the growth of the shadow banking system permitted financial institutions to engage in maturity transformation with too little transparency, capital or oversight. the years leading up to the crisis saw the growth of large shorts-funded and substantially

interconnected financial firms. huge amount of risk moved outside of the more regulated parts of the banking system to where it was easier to increase leverage. legal loopholes and regulatory gaps allowed large parts of the financial industry to operate without sufficient oversight. and entities performing the same market functions as banks escaped meaningful regulation on the basis of their corporate form. moreover, banks could move activities off balance sheet and off the reach of more stringent regulation. derivatives were tom brady in the shadow with insufficient capital. repo markets became riskier as collateral shifted from treasuries to poorer quality asset-backed securities. the lack of transparency and securitization hid the growing wedge and incentives facing different players in the system. and failed to require sufficient responsibility from those who made loans or packaged them into complex instruments to be sold to investors. synthetic products merely

multiplied risk in the securitization system. the financial sector as a whole under the guise of innovation piled ill considered risk upon ill considered risk. as the shadow banking system grew, our system failed to require real transparency, sufficient capital or meaningful oversight. rapid growth in key markets often hid misaligned ininventoritives and hid risk. it outpaced of managers regulators and markets to understand these risks and to adjust. and throughout our system, we had increasingly inadequate capital buffers as both market participants and regulators failed to account for the new risks appropriately. short-term rewards in new financial products and rapidly growing markets overwhelmed or blinded private sector gatekeepers and swamped those parts of the system that were supposed to mitigate risk. consumer investor protections were weakened and households took on risks that they did not

fully understand and could ill afford. rising home and asset prices had helped to feed the financial system's rapid growth and to high declining underwriting standards and other underlying problems in the origination and securitization in particular of mortgage loans. when home prices began to flatten and into decline, these fault lines were revealed. the asset implosion in housing led to cascades throughout the financial system and then to contagionon from weaker firms to stronger ones. failures in the shadow banking system fed failures in the more regulated parts of the banking system. and then in the fall of 2008, the credit markets froze. the overreliance on short-term funding, opaque markets and excessive risk-taking that had been the source of significant profit on wall street and in financial capitals globally fanned a panic that nearly collapsed the global financial system. in my view, comprehensive reform was essential and one year ago,

president obama signed into law the dodd-frank act. the act provides for supervision of major firms based on what they do rather than their corporate form. shadow banking is brought into the regulatory daylight. the larger financial firms were required to build up their capital and liquidity buffers, constrain their relative size and place restrictions on the riskiest financial activities. the act comprehensively regulates derivative markets for new realize for exchange trading, central clearing, transparency, and margin requirements. the act provides for data collection and transparency so then no corner of the financial market can risk go unnoticed. the act creates an essential mechanism for the government to orderly liquidate financial firms without putting taxpayers at risk and it creates a new consumer financial protection bureau with important consumer and investor protections. in sum, the act provides a strong foundation on which the u.s. must now carefully build a more stable and balanced

regulatory system. let's look at each of these in turn. before dodd-frank, if an entity were a bank, then it had tougher regulation, more stringent capital requirements and more robust supervision. but if an entity were an investment bank engaged in the same activities, then it had to only abide by a different set of rules. for example, when u.s. investment banks needed to find a consolidated holding company regulator in order to meet european standards for doing business in europe, the sec set up a voluntary consolidated supervised entity. the sec was not established as a prudential regulator. it did not have clear oversight for bank-holding companies and had little experience with future-end companioners. moreover the leverage that was a backstop requirement for banks were not applied to investment banks. in effect, this system allowed large financial institutions to choose the regulator that would

offer the least restrictive supervision. the fed did not have authority to set and enforce capital requirements on these major institutions that operated outside of bank-holding companies. that meant that it had no supervision over investment banks, diversified financial institutions like aig or the nonbank financial companies competing with banks in a mortgage consumer credit and business lending markets. the office of thrift supervision viewed its role as supervising thrift not their holding companies such as aig. and regulators permitted banks and thrifts themselves to engage in riskier mortgage lending, stepping in with guidance on the subprime mortgage only when it was too late. today the dodd-frank act has provided authority for clear strong and consolidated supervision and regulation by the federal reserve of any financial firm regardless of legal firm whose failure could pose a threat to financial stability. we will have a single point of accountability for tougher and more consistent supervision of

the largest and most interconnected financial firms. all bank-holding companies will be supervised by the fed and the largest ones will be subject to heightened standards. the office of thrift supervision has been abolished and all savings and loan holding companies will be supervised by the fed. nonbank financial institutions designated by the financial stability oversight council will also be fed supervised and the investment holding bank regime has ended. dodd-frank also provides for more stringent prudential standards for these major bank and nonbank firms. the fed is charged with putting in place stronger requirements for capital and liquidity, annual stress tests will be conducted. their enhanced rules on affiliate transactions on lending limits and on counter-party exposures. the fed is required to use macro-prudential examination. and the risk that this institution poses to the financial system as a whole. major firms will be subject to a concentration limit that

generally prohibits a financial company from engaging in mergers and acquisition that would result in the firm's liabilities including wholesale funding and off balance sheet exposures exceeding 10% of the financial system as a whole. these enhanced prudential measures for major financial firms are likely to reduce risk in the financial system. and to reduce big -- too big to fail distortions. but before dodd-frank no regulator or supervisor had legal authority or the responsibility to look across the full sweep of the financial system and to take action where there's a threat. today, while the regulatory infrastructure is undoubtedly far from ideal, with too many divided responsibilities, the financial stability oversight council is accountable to identify these threats to financial stability and to address them. they have have access to information across the financial services marketplace and a new office of financial research is empowered to collect data from any financial firm and to

develop and enforce standard days for such data collection. before dodd-frank, the derivatives market grew up in the shadows with little oversight. credit derivatives which were supposed to diffuse risk instead concentrated it. synthetic credit authorization with embedded derivatives magnified failures in the market and the major financial market used derivatives to increase their credit exposure to each other rather than to decrease it. we should never again face a situation where the potential failure of a virtually unregulated capital deficient major player in the derivatives market such as aig can impose devastating risks on the entire financial system. the opacity of this market meant that the government and market participants did not have enough information about the lotion of risk exposures in the system or extent of mutual interconnectedness among large firms. so when the crisis began regulators, financial firms and investors had an insufficient

understanding of the degree to which trouble at one firm spelled trouble for another. this lack of information magnified contagion as the crisis intensified causing a damaging wave of margin increases, deleveraging and credit market breakdowns. the lack of transparency, insufficient supervision and inadequate capital left our financial system vulnerable to concentrations of risk. today, regulators are putting in place the tools to comprehensively regulate the derivatives market for the first time. the act provides for regulation and for transparency for transactions. it provides for strong prudential capital and business conduct regulation of all dealers and other major swap participants in the derivatives markets. and it provides for regulatory and enforcement tools to go after manipulation fraud and other abuses in the market. the act requires standardized drives to be centrally cleared which will substantially reduce the buildup of bilateral counter-party credit risks between major financial firms.

central clearing parties themselves will be subject to strong capital supervision. such derivatives would also be on changes and swap execution facilities which will improve pre post-trade transparency. exchange trading will help to improve price competition as well as to improve safety and soundness in the derivative system as market participants and regulators will have full access to current prices in the event of system disruption. even noncentrally cleared otc derivatives would be reported to a trade repository making the market far more transparent. the act provides for prudential regulations of all otc dealers and major swap participants including business conduct rules, capital rules and prudential supervision. the act provides for robust capital in initial margin requirements for derivatives transactions that are not centrally cleared providing a strong incentive to use central clearing and a bigger buffer should problems arise in the otc

markets. at the same time as the act reforms derivatives market it also provides a new framework of regulation for financial market utilities and for critical payment credit and civil penalties including not only those in the derivatives markets but also in the wholesale funding repo markets that are critical to the shadow banking system. in the leadup to the financial crisis major financial firms became increasingly funded not by traditional banking deposits or longer term funding in the commercial markets but rather by overnight funding in the repo markets and these markets became increasingly concentrated in only two major clearing banks. as the market became more concentrated, it also became riskier because counter-parties came to accept not only treasury securities as collateral but also highly rated asset-backed securities. and these securities in turn became riskier as credit rating agencies became increasingly willing to label as safe assets that were lower quality. including pools of securities backed only by poorly

underwritten subprime and mortgages. when the financial crisis hit, the repo markets froze causing a massive contraction in available credit. the dodd-frank act fundamentally reforms the wholesale funding markets by providing strong authority for the federal reserve to regulate financial market utilities and critical payments clearing and settlement activities, to set new rules for capital, collateral and margin requirements and to establish uniformed prudential standards for the market. they are coupled with basic changes for liquidity markets for major financial institutions for basel iii rules. constant liquidity to the market and reforms to the deposit insurance firms. these reforms will have the effect of taxing short-term liabilities, and forcing forms to internalize more of the costs of this funding system. at the same time, sec changes to the regulation of money market mutual funds under rule 2a-7 will means such funds have somewhat stronger liquidity

positions. the act also transforms regulation of the last major element of the shadow banking system securitization. the act requires deep transparency into the structure of securitization including information about assets and originators. securitization sponsors must generally retain risk in the securitization that is they sponsor so the incentives are better aligned among participants in the market. capital rules are better account for actual risk, parallel changes in accounting rules will now bring the most common forms of securitization onto to the balance sheet and credit rating agencies will be subject to comprehensive oversight by the sec including policing of ratings and conflict of interests. ratings themselves will be more transparent including key information on rating methodology, compliance with methodology, underlying qualitative and quantative data, due diligence and other protections. now, in the consumer markets, before dodd-frank, consumer protection was fragmented over seven federal regulators, most

of which chose to focus their energies in other areas rather than protecting consumers. regulators mission on consolidated authority nonbanks could avoid federal supervision and banks could choose the least restrictive consumer approach amongst several different banking agencies. federal regulators preempted state consumer protection laws without adequately replacing these important safeguards. fragmentation of rule-writing, of supervision and enforcement led to finger pointing in place of effective action. today the consumer bureau has market-wide coverage. the bureau will focus on more effective regulation and supervision and can sit high in uniformed standards across the market. it can focus on improving financial literacy and it can help to set a level playing field for competition. before dodd-frank, the government did not have the authority to unwind large highly leveraged and substantially interconnected financial firms that failed such as bear

stearns, lehman brothers and aig. today, major financial firms will now be subject to heightened prudential standards including higher capital and liquidity requirements and living whiz major firms will be required by these standards to internalize the costs that they impose on the system which will give them incentive to shrink and reduce their complexity and interconnection and should such a firm fail there will be a capital buffer -- >> we leave this now and you can find the rest of it on c-span.org to take you back to the financial reform conference underway here in downtown washington, d.c., with a look at systemic risk. >> interesting topics that have something to do with economics. and then we'll turn it over to nellie lange whose role of the fed is basically to keep an eye on the ofr but i could be wrong on that and the next comes dick whose role at treasury is to

make the ofr happen among other things i suspect. >> thank you, charles. you'll have to blame the typo to tom because that was when they gave the chair, that is what was available. wewritten three books on the financial crisis over the last few years. we've done a lot of op-eds and we've done a lot of media stuff and when i tell my 7-year-old and show him some of the things, he really doesn't show much interest much to my chagrin but i got to thank vince because now i can describe sivs as hall cruxes and i'm going to try that out tonight. i'm looking to that. so anyway, so i want to first start off -- if you look at the economic regulation it's very

clear on the approach. and that's you regulate where there's a market failure and i think it's a bit positive about the dodd-frank act that for the most part it does focused on the market failure that was on this crisis and that's systemic risk. associated with this risk is that private markets can't officially solve the problem so a natural outcome is for some type of government intervention. and if you look at the act for the first time, really, we've got a focus on macro-prudential regulation so we're going to analyze and develop tools in measuring systemic risk so we have dick here who's going to talk about that. and then we've also given these -- this analysis, we can then go ahead and think about how to designate which are systemic or sectors that is systemic and that's a positive and we take those firms and like market markets and then we do

enhanced regulation. i think that's all good about the act. obviously, some of this stuff is always in the purview anyway of central banks and regulators but it's a pretty good deal that it's written into the law, the biggest financial law over the last 75 years. and a testament to that is the fact that we have the topic quality people like nellie running systemic risk group of the fed, dick setting up the office of financial research, that can't be underestimated because i'm not sure that's been done two years ago, three years ago or five years ago. so i think if things go right on the activity level you look several years from now we will find out we have much better data, we'll have much more developed processes for dealing with systemic institutions and we'll have a much better understanding of how systemic risk emerges. so this is -- the cost of these activities, i think, are vastly outweighed by the benefits so dodd-frank observes a big plus

for that. that said, i'm now going to put on my academic hat and be somewhat critical of dodd-frank and i'm going to focus on two particular aspects of the law. the second one i'm going to talk about in a few minutes is the macro-prudential regulation and in particular the hot topic as of late in dealing with capital requirements. there's a handout on the -- in the middle of each table which is like a two-pager written with my colleague on -- called how to set cap requirements on a systemically risky world not a particularly exciting title. but there's a few formulas so when i'm going to refer to that i'm going to point in that direction. so let me put that aside for a second. and now talk about one aspect of dodd-frank and systemic risk which is troublesome and it's actually going to mirror quite

closely kim's comments that he gave before the break. so if you look at dodd-frank, it puts a very heavy reliance on the orderly liquidation authority. but resolution by its nature is a balancing act between two forces that really work against each other. on the other hand you want to mitigate moral hazard and bring back market discipline but on the other hand you want to deal with systemic risk if you go ahead and do that. so they're generally moving in opposite directions. [inaudible] >> on those two aspects. i think from our perspective, at least the perspective of the book, probably not that well. and the reason is, it really seems to us that the focus of the dodd-frank act is really on the liquidation of the liquid institutions and doesn't really deal with the system as a whole.

so what -- you think about what's unique about the financial's firm failure? what it's impact on the rest of the financial sector and the broader academy? so i like to give the following analogy that chairman bernanke gave during the whole bailout period of the financial crisis. he talked about living in a neighborhood -- and there's a guy in the neighborhood who's rude, obnoxious, no one likes him, big smoker. and one day he's looking outside his kitchen window and he sees a guy drinking a beer, falls asleep falling asleep with a cigarette and the cigarette falls on the sofa and it spreads around the house. he has to make a decision do i let the house burn down which is what i really like to do or do i call the fire company and put the house -- put the fire out? well, you got to call the fire company because the fire could spread to your house, the other neighbor's house, engulf the whole neighborhood so you call

the fire company and deal with the retribution of dodd-frank. it's the bailout view of the world. so what would a balancing act be? i think you should call the fire department but the fire department let's a guy house burns down and stands in protection of all the other houses in the neighborhood. and by the way, it's costly to pay for a fire department so you make all the smokers in the neighborhood pay for the fire department and over time you'll end up finding you'll have a lot less smokers in that neighborhood. that's the idea of sort of balancing between moral hazard and systemic risk. that's not what dodd-frank does. i think it's been discussed already today, but i think it's a little bit to letting the house burn down but not so much with managing the consequences of that. and there's one particular portion of the act that worries us quite a bit and michael got in a slight discussion about it earlier and ken brought it up

again and that's really the incentives that are created from the act dealing with who pays for systemic risk. so the way it's sort of written if a bunch of firms fail and those monies can't be recovered from creditors and i don't know how you would recover them from short-term creditors who have already fled, the surviving systematically important financial institutions are going to make up the difference ex post. so what's the problem with this? well, it increases moral hazard because it creates a free rider problem. so that's not good. and it also increases systemic risk. why is that? because prudent firms are going to be charged more so they're going to be less likely to be prudent. you get firms hurting and you get this race to the bottom that kim talked about. plus, even moreover, it's highly procyclical when the prudence, the ones who have lasted through the crisis and the ones who are struggling for capital are now

being asked to provide capital at the worst time. so that seems like a poor way to sort of manage the systemic risk and there are other examples, the 13-3, the one mentioned at the fed already. so that's one aspect. what about the macro-prudential side of things? so even though we have all this firepower at this table and you're going to hear about some of the more a little bit down the road, one fear is at the end of the day what we're going to end up doing is something that's very basel-like and i don't mean that as a compliment. so what do i mean by that, well, if you look the way -- you look at the choice of what new level of capital is required, you look at the surcharges that the function for systemic firms how

they're being set, you even think how there's a criteria they're choosing for which firms are systemic, you know, complexity, global activity, lack of substitutability, this all seems to me arbitrary and not really based on objective criteria. and then for sure when you think about how it's implemented, it's going to be implemented in a very coarse way not particularly fine. so it's going to be easily gained. you know, you're going to get half a percent for this, half a percent for that, half a percent for that and you come together and you get a number and that's how we know -- how it's going to end up working. so to make the point about objectivity, i have a little -- a little handout here some of you might have in front of you. so point 2 of the handout sort of asks how should capital requirements be designed in good times to prevent systemic risk? so i th