to be successful, the members have to fall of the monetary discipline and fiscal discipline. and as a precondition for getting the year rose an ongoing, countries have to lower their inflation rates and bring their fiscal policies and line. and what happened? what happened is they created an institution, the euro and the european central bank to ensure the time consistency of the monetary discipline, and as a result, 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 of the order of liquidation authority since the idea of what constitutes a living will is still open to interpretation one could eliminate a lot of the discretion and timing buy not only ordering all of the beneficiaries and their priorities and that will but by building into the capitol structure, the orderly recapitalization of the firm allowing it to continue as a growing concern and michael talked about the enthusiasm for these kinds of approaches that is rapidly gaining support and in europe and elsewhere. this is what lies -- this is the spirit of what people call the convertible bonds and so on. of course with the solutions as well, there are debates the these are sick and order issues of discretion compared to the

first order. at the end of the day, the dodd-frank act is going to be the most successful as it is implemented in the way that leaves less room for interpretation of the rules of the game. let's focus on the traditional organizational forms and more on identifying banking and maturity transformation wherever they occur in a seceding the capitol requirements. a final note, call at the current stage of implementation there's a lot of hand-wringing about offsetting the capitol requirements so why to encourage the capitol flight and discourage lending and financial intermediation. this seems to me exactly the wrong to debate to be having. the expertise of our capital markets and the quality and the stability of our institutions are of the greatest assets. 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 the reputation for the transparency and nondiscretionary rule with the game. thank you. [applause] >> there's a lot of their for michael to respond to and i will give you an opportunity to do it. i will note before hand that i see some contradiction in the critiques we got to be on the one hand, martin talks about a dodd-frank bill but merely constrains the ability of the authority to respond to a crisis, particularly as said in the treasury and tom says there is too much discretion in the hands of authority commesso questions also raised about how the orderly liquidation process will work. i will let you decide which of these issues we want to hit on and then we will open up for more conversation.

>> thanks. christa i want to thank martin and, for the gracious comments and i think quite helpful in sight about the act. so i might just take two or three minutes to highlight some issues and then we can open up or john can lead through conversation. i think i agree with an aspect of martin's, and with respect to resolution authority that is if there is an error in the dodd-frank act on the crisis tools which undoubtedly there will be, it is in the direction as 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 -- often in the public debate people suggest it is in the other direction. i think martin is correct that we have the limiting

authorities, not being tough about them. on a tom's comments i do think that there's always this debate in the regulatory structure. it's impossible to the escape the train rolls and discretion. it's a debate that's been around for hundreds of thousands of years, and the question is not to we have an only rules based regime or in only description based regime, the question is where on a very complicated continuum the excess of trade-offs on the particular policy questions, and the dodd-frank act i think overall moves the spectrum on most of the policy issues addressed more towards rules than it had been, not in a revolutionary way, but in a modest way.

in terms of the 1930's issues, i don't think that the glass-stegall act or the gramm-leach-bliley act universal banking issues were central to the crisis or the path of reform i do think that the shadow banking system and innovation are 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 that 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. last, on the resolution of 40i think people can argue both ways about rather the resolution authority should be pre-from the proposed funded. i actually don't think that that is cementer cool question to the

resolution. i think that the question about resolution is effective in the crisis management, and the proposed funding i don't view it as a timing consistency issue because the firm that has gone into the resolution is not paying for insurance for depositors, it is the financial system as a whole that is benefiting from the ability to resolve that firm to having the rest of the firms in the system pay strikes me as not backwards or time consistent with this is an incredibly rich area and one that i think is easy for reasonable people to think opposite things about so i'm anxious for the conversation to begin. >> i'm when to ask a few questions and then we will open it up and give people in the audience i shall have a lot of questions they would like to ask, too. i want to start out with the

king upon interesting debate that jamie dimond and ben bernanke had on a conference that the american bankers association was holding it a week or so ago. dimond asked whether regulators have considered the cumulus effect of dodd-frank and the efforts to raise capital standards across the globe and posed a 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 cumulative affects of the reforms of the financial system, and are they hurting bad economy? >> i do think it's important to look across the range of reforms happening in the capitol rules and dodd-frank act supervision of authority in the derivatives reform and consumer protection and the like and to make sure they make sense together.

so i guess i agree with that, but there is no avoiding the fact you have to implement the law so the congress passed a set of walls and you have to implement them, and i do think that financial industry as a whole i don't want to paint with too broad a brush tops out of both sides of its mouth. the financial industries as we need certainty and these industries say we don't want that certainty, we want a different certainty. so there is, you know, a desire for example to delay the derivatives reform in the interest of worrying about the european competitors in the like. i just think that that card is to continue to mix my metaphors overplayed. whether it is affecting the current accentuation martin and tom may have a lot more to say

that i do, i am skeptical of that argument i think that there is some amount of uncertainty that businesses have about the business environment and some uncertainty that financial institutions have about the regulatory environment but they're very different concerns. uncertainty in the financial environment i don't think is inhibiting major financial institutions from lending right now. the refuge capital cushion and sufficient funds to lend. i think the economic uncertainty for the regular businesses is in having their ability to hire workers, and i think that is harming the economy. >> what do you have to say about this? i'm sure that you are in frequent contact with the business executives. >> yes, i am also mostly mckinsey says larger businesses and they 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 that they are borrowing costs are of a particular concern for them. i am aware of its -- it's harder to get a reading on small business and one reads conflicting stories about it. i think there are small businesses who would like to expand the or having difficulty getting funds. there's a couple of reasons if you're talking about small businesses or start-ups that is because traditionally the have relied on the family and friends and equity in parnes which they don't have to say that is a fallout from the crisis. >> for the larger businesses there are some that would like to expand five think many don't want to expand because they don't have to demand.

not so much because the banks can't lend to them as the premium has gone up. i even hear the baker giver does have become rather more cautious so they're looking over their shoulders of the bank's saying i'm not sure you can make that loan so we do have a problem. i'm not sure it's associate at this time with your requirements. i want to make one quick comment on the earlier discussion. wiley think it is certainly true the shadow banking system played a huge role in this crisis there are banks that front of trouble, too. wachovia, citibank 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 housing related crisis, a lot of the moral hazard occurred because the small banks that

initiated the loans and sold them off to someone so they mixture of the non-bank and the banking sector in this crisis. >> i would like to paint a scenario and hear how you respond to this. imagine a moment which doesn't seem unimaginable to me which europe loses the political will to continue to fund an unbearable debt, increased defaults this negative effect on european banks which remains undercapitalized, a big bank or to fail. this causes a run on american money market funds which have exposure of about a trillion dollars to the european banks, and we find ourselves very

quickly backed at a moment very much like 2008. do you find a scenario like this to be plausible, and if so, what has dodd-frank accomplished? >> first of all, i think it is 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 right now that the crisis in europe hurts not just the european banking sector but also the u.s. banking sector and financial sector. the money market system is still not fully resolved. that is the changes under rule 287 that improve the liquidity

position of money market funds is good. the basel liquidity rules will kick into place are good and will help. the regulations of capital martinet collateral requirements in the sector will also help significantly, but there's still weaknesses, lastly i would point out the significant capital cushion that is built in the u.s. financial system rather remarkably will help a lot. so in all of those senses the system is more resilient and savor and then it was just a short time ago. i do think that we have not yet fully reformed if you will or fully solve the problem of the money market mutual fund system, and you have seen proposals

across-the-board for different approaches including either private sector capitalization of a liquidity fund or floating requirements or split hybrid requirements for the floating stable products. i think we are going to have to continue to make reform in that area to bring more resiliency into that aspect of the system. >> i think -- i agree with michael. i think that in the future we are going to have to see some reform of the money-market industry to bring it more on to 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 am less worried about the effect of the scenario you describe for money market funds per say on more concerned about

the contagion effect would be for the european economy because right now it is kind of a knife's edge and it really has a view about greece and i don't know of any positive ones. there are mixed opinions about portugal to have a better program in place. but the big worry is spain and then >> comes under the microscope and italy and there's the potential for major sovereign debt crises, and those can easily trigger an event like the one that we experienced a few months ago. >> i agree with that i don't think that there is a prayer that greece can avoid in some form of default, there is a question of whether that triggers. i think increased defaults by itself it is stopped their it

wouldn't be so bad. what ever we do in the united states i think germany and france bailout their banks. they would bail them out, and brought them out to be allowed to greece which has i think it would be a bad idea or they are going to bail out the banks. it's a bad idea because i just don't think greece can repay the debt in order to service of a foreign debt. has to become a net exporter and it's going to be weigel before they get that part of things in shape and competitive with the euro but if the other dominoes start going down, and watch out, it may be a good time to put one's money under the mattress. [laughter] >> everyone on the panel talked about the disparity between what good policy looks like on paper

and what policy gets created given the political constraints policymakers faced i would like to hear what lessons you learned about how to manage the political constraints that one faces when trying to construct the 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 laughed i was looking over a amy's crème who joined us here and we had lots of conversations that were about that very topic and she was right more than i was.

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

that is to say the most liberal republican is more conservative than most conservative democrats. so working out agreements in that environment is the difficult. to take a slightly more positive tone we do pass legislation. we find out how it works there is in a process. it's not ideal and it's got a lot of lobbying but it's also got a lot of politics in and and hopefully things do get better. i'm a big fan of senator sarbanes. he helped me get confirmed twice. the first round that leads to sarbanes oxley was not great. it was extremely expensive to administer and it's not clear to me that it added to the safety or accounting practices of companies, but it's been modified and it is 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 interest process and hope that it gets us eventually we find out where the problems are in the legislation and then we make changes. >> and slightly more optimistic. i think in spite of my criticism it really has its heart in the right place and has a lot of important ingredients we need to make the system sound and safe and it is structured in a way that is open to interpretation and improvement and i think it is a remarkable accomplishment. it took the 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 doesn't require such enormous

cost to drive us forward. >> we have about 20 minutes i guess for questions from the audience. does anybody want to -- >> i agree there is a lot of positive -- let me make a general comment about dodd-frank. there's much to admire. dodd-frank into 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 is admirable. but the fundamental problem was there was too much borrowing in the united states, and a very lacked lending standards and it wasn't just housing, it was credit cards, commercial real

estate, it was everything. we were enormously over borrowed, and i would like a little bit of the analysis from michael and others about what do we do to avoid that 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 heaven sakes 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 as well not all poor people should own houses. one of course, but it wasn't poor people doing most of the borrowing. it was everybody. so, what are we going to do about that and how does it help? >> i think 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 the reforms being accomplished apparel for the basel process. in dodd-frank itself it focuses on a looking across the financial system not just the banks but looking at improving the resiliency of the system through use of central clearing parties and derivative contracts, the imposition of margin and collateral requirements for the derivatives trade, via devotee to require risk retention and securitization are all eight samples of that kind of focus. >> it wouldn't have all of the derivatives if it didn't [inaudible] >> yes, i'm working my way down the chain. [laughter] starting with the big numbers. and then if you look at -- if

you look at the basel process reducing leverage in the system and international leverage ratio, liquidity requirements and capital requirements are all building more resiliency in the system so that is one end of the spectrum. i'm going to jump now to the other end of the spectrum. so, title xiv there's a fundamental reform of the mortgage market and one of the provisions in which you'd think would not be required that instead we would use common sense the there is a rule that says the lenders have to look at the ability to repay ha. it is now a requirement under the act you get documentation of loans and half an assessment on the ability to pay and you can't pay a loan broker to pay a borrower in a much worse mortgage than a better mortgage. and a number of other changes like that that are designed to go to the front end and a set of

rules in between. so the act does get at this fundamental question. >> i agree on the basic sentiment that you expressed which is the promise of borrowing that led to the housing bubble which then got us into trouble and once housing prices fell system was extremely vulnerable. i will stick by my statement saying i don't want to constrain lending too much to the low-income folks precisely because the reason you gave which is they were not the ones that were doing so much access borrowing. obviously there were some subprimal loans that shouldn't have been made, but the big lending was not to them, it was the alt-a getting boats and that kind of thing. so we do need a policy that ramps back the amount of

borrowing that we do as an economy and the obvious way to do that in our current situation would be to gradually limit the tax deductible even trust and make borrowing less attractive because after all, that creates i don't know if it is exactly a subsidy, but it creates a very favorable circumstance for upper income people to borrow and it does nothing for low-income folks who buy houses and don't get much benefit from that deductible the. so i would do that. that's in the real domenici proposal isn't it? >> so then i got it right. >> question for michael and the other panelists. we see the unintended consequence which is concentration within the banking system and part driven by

dodd-frank. they just announced the moving of its retail branches. i guess the theory being with revenue challenges, commercially it's all under the regulatory framework. expense reduction is a principal driver behind many of these capital deployment, of the capitol to meet the historical levels is also potentially treating more risk into the system, so could you address those banks increasing the risk to get the borrowing levels that have been chopped and secondly concentration within the banking industry that perhaps is leading to the big desk you're so eagerly willing to curtail? >> on the question on the capitol requirements leading to the greater risk-taking, there is this fundamental 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 state of the views and i will tell you which side i'm on. viewed number one is the capitol requirements increase the resiliency and risk-taking and the system by putting the firm's on the capital press and creating the the failure. the alternative view is higher capital requirements just cause firms to only undertake risky projects in order to maintain the previous roe dever able to obtain the market and so the people that have the second view say the roe don't adjust and have the first view and they say that they adjust to the capitol requirement. you know, this is an empirical question that is tested over time.

i think that somewhat better view but not perfectly so is the capitol requirement increased resilience in the system and the ever trivial view as i said lots of smart people have picked. the basic approach was taken into dodd-frank that basel has taken and we are likely to take in the future and the view i think is a better view suggests roe and the sector will go down as a result, and that risks will go down as well. in terms of concentration, i would not have viewed that as a cause a consequence of dodd-frank. there was concentration built in the system as the firm's dillinger each other's arms of the financial crisis and we are dealing with that. >> there were pushed into each other.

>> i think the search for yield has something to do with that as well. >> so michael, [inaudible] one of the members involved in dhaka project where we try to hold these other professors to do an analysis of dodd-frank and one of the things about the whole process is they kept on changing the act coming to know, during 2009, so the professor would write something and have to e-mail them saying that doesn't hold any more can you read right to that. >> should we get a very small

violin for you? [laughter] >> i'm getting to my point. there's a large change in the act. my question to you this during that process what things were you sort of not happy about being removed and about being put in given that you were involved in them? >> there were lots of moving pieces over time. i think at the end of the day i would give 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. some things got 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

worse they actually got much better so at the very end of the process siphoned the bill was strengthened in important ways especially in the derivatives title, title vii, and the reaper title, title viii, in part of strengthening provisions for personal clearing and transparency come price transparency, for capital and marginal rules, cleaning out some problems that had built up in title vii along the way there were sort of knocked out and then the introduction of title viii, the backbone provision for the markets we had lost early in the process we were able to get back in the end. so i think that -- i mean, i could go through a list -- i had gone through a list many times of the provisions that changed along the way, but they are not as i think mostly not at the

level of the top 30 things most people in the country would stay awake worrying about. they are things that kept me awake. >> why do you think things got better late in the process? obviously we are seeing this now in the fiscal debate, a lot of policy gets made on the brink, and do you think was luck that things got better at the end of the process or do you think there was something about the process that helped get hard decisions made at the very end? >> first i would say look is always important to have on your side. you can't do anything without it. obviously can't plan for it. ..

it was on c-span or c-span 35 or something late at night so people could actually watch it. i think that helps a little bit. the mood of the country changes all the time. you may have noticed in the mood of the country at that particular time was really focused on financial reform and that helped i think having the sense that the country was watching improved things. we had a very -- i'm not only saying this to up to jon but we had a very educated press corps who has 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 helped as well.

and then, you know as i mentioned at the outset line block. >> let me just make a quick comment. i do think the leadership particularly arnie frank ran a very strong conference and you may agree or disagree with all of his causes but he is a very smart guy and really understands the system and i think that made a difference in the other thing i would mention is that they were trying braley right up to the end to try to make it a bipartisan process so i think there was an asset to really listen to all sides and pull it together and i think that was helpful. >> just to highlight the points marked them as making and this is what i was alluding to before that on the senate side in particular, chairman dodd had a very tight bipartisan process for the entire time, and the way we fixed the derivatives bill in and was in a bipartisan bill, a bipartisan set of amendments. >> we have time for one or two more questions and then i think

you might take a five-minute right before we get started on the next panel. >> the institute for international economics. one thing that hasn't been much commented on in the discussion so far is the temptation of the regulations that have been adopted or are in greater volume is being drafted. and my question is why is that? is the limitation regulation the second order of 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 no 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

what armor levy expect did. i just may normally in our domestic implementation process, and i think that the concerns i have had has been on not moving in the same direction as those expressed by the head of chase. they have been mostly in the opposite direction. that is to say there are some concern that budget constraints imposed by the congress on the sec and cftc in particular have slowed the process of implementation in dura for this 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 worrisome to me. but, if you look at the overall

picture, both on i would say the fossil process and on fee rule-writing it has gone faster and better than i would have anticipated. >> okay last question and then we will take a break. >> dennis kelleher from better markets. this may relate more to the next panel than this one but i wanted to ask kind of a macroquestion which is you bring up the limitations of the fed under 13.3 and how it air made him impair its ability to future. that really flowed from the feds lack of information to everybody including the congress. you have to remember the sanders amendment passed 96-0 the senate. unanimity is not common in the senate and bernie sanders will never in his lifetime get 96 posts in the senate i assume so it tells you the depth of which the lack of information and difficultly with that in terms of its bailouts for its actions as the 13 and three and people didn't understand them. that is yesterday but in the future whether not.frankel work

will depend on market discipline. market discipline depends on information. the fed in the treasury have a history and a few in the culture and 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 would like to know a particular what michael thinks about this. how in the features dodd-frank going to work unless we have substantially more quality information disclosed from the fed, treasury and other bank regulators who have a history and 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 on 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. annual transparent stress test i think is a huge change for the

financial industry and for regulators and will be a good thing in the future. similarly, the ability to gather and collect information and make it available through the office of financial research i think it's a big change and there are 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 is not to be so i think it is good for, good for the system for the public, for reporters and for the congress through oversight to insist on regular disclosure. >> go ahead. >> i was going to say that perhaps there has been in excess of caution in the past on the part of fed about what it reveals. it has often been for very good

reasons and 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, sort of fearful of the assaults on their independence and unwillingness to reveal a lot of the data and i think what you are going to see is a more, slightly more transparent as long as independence doesn't get threatened and certainly the treasury. i think michael is right that ofr is going to be a very positive addition to the institutional regulatory framework in terms of improving transparency. >> i do think ben bernanke has tried to be more transparent in general and fed policy, and has made that one of his keystone

things of reviewing the economy and monetary policy. having said that i agree that you didn't get all the transparency around the time of the crisis and i can see the problems with that and the reaction of congress which said hey we control the pursestrings and you guys are doing all the stuff on we don't know about it. i understand that. i think there was a concern that revealing too much information at the wrong time actually worsened the crisis or that congress would get in their 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 dependents and give them the authority to manage crises when they happen? i mean we don't go back and say

you know that general eisenhower should have done omaha beach differently even though one could look back and say omaha beach was a disaster. thousands and thousands of troops died in the sort of say he won the war, he got it done, so it is a tricky trade-off i think. but, i do understand congress' concerned that the fed had this tremendous power over the purse and used it without always revealing 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 -- so there was a lot of sensitivity about that and i think probably an excess of caution about transparency parsley because they had to get through this period and deal with all of these assets, even though that is not part of their normal. >> i'm going to make one final

observation and then we can take a break. i think it is important and instructive that the fed was forced to disclose the name of our worst to its various facilities by not only the sanders amendment but also abide the -- and there are names and details that have all come out in the world didn't end. we know more about what happened during the financial crisis and the financial crisis -- system is still functioning. i think that is instructive and helpful and hopefully will help push the fed towards continuing to move towards more transparency. we have a whole panel coming up on the set so we can talk more about that

>> and these special entities can be see -- which hold

mortgages alone and issue commercial paper against the mortgages alone. the key to these that they have 100% backup plan of credit from commercial bank, so prior to dodd-frank there was, abc yielded kind of capital savings mechanism from the point of view of the bank as they could move assets off-balance-sheet and write a credit line to the congress and get typically a lower capital charge on this credit line than on the outright procession of these mortgages on balance sheet.

and so basically the dodd-frank act is also requiring risk retention for the abc congress, so it's again a 5% horizontal tranche, the first of these of the sbe. this actually turns out to be strongly intertwined with another section of dodd-frank which is 165 which has standards for sifis. in the case of sifis, dodd-frank is a sting -- is asking for enhanced prudential standards, including the off-balance-sheet of the sifis. so what used to be an off-balance-sheet activity now has to be subject to new capital requirements which were developed in conjunction with

the basel committee. and so the basel committee came out with new rules, new capital rules, that include different treatment of these off-balance-sheet exposures. and so essentially what the capital rules in conjunction was accounting rules are making off-balance-sheet vehicles such as abc converts a lot more capital intensive from financial institutions. so in particular the degree to which off-balance-sheet vehicles can be used to achieve low capital requirements has a chance only been called by the combination of the dodd-frank rules and the accounting rules. and i guess i will implement

the. >> can i just ask you to touch on one other thing which is repost. i think there's a lot of discussion, a lot of talk in the market. what do we see happening on the regulatory front entrance of from the safety net or actually some regulatory network around repost? >> so, i went to the dodd-frank act and i don't think there is some direct contention for contention for repose. under the auspices of the federal reserve bank of new york, which is a initiative, which is working on reforming the way that the repo market works. but it's not directly related to dodd-frank, and the primary objective of the ricoh markets task force is to solve kind of

technical issue that arises in the repo market. so basically the repo market there is secured credit overnight between 5:30 p.m. and 8:30 a.m., then between 8:30 a.m. at 5:30 p.m. this on unsecured exposures of cash and the repo markets. and this unsecured exposure can give incentives to run in triparty. so the task force is actually working on solutions to the. this is one of the factors that was often, you know, has often been blamed to have contributed to some of the instabilities. >> it strikes me as when the leftover pieces of business we still haven't grappled with?

>> i think they have to grapple with inspect thanks very much. i'd like to call on bob on the far left. bob is the associate director of the division investment management and he's in the thick of a lot of these issues right now, especially with respect to the regulation of money market fund. ah, i like to draw you out where you are on that, the implications of which are working on, perhaps other parts like hedge funds and dts that might relate as well. >> thank you. thank you very much before i start i often explain my thoughts this afternoon are my own and don't necessarily reflect those of the commission, commissioners or my colleagues on the staff. >> you guys are no fun. >> my wife wanted me to take they don't like -- [inaudible] was the most significant events of the financial crisis didn't involve hedge funds, the maximum risktakers and the asset

management space. what possibly could go wrong there? rhetorical question, please. september 2008 run on money market breaking a dollar as you know and ended only after intervention by the treasury and federal reserve board, massive intervention unprecedented nature. both the fed and treasury ended up making money on the deal, and so the taxpayer came off rather well but these interventions i think raise troubling questions about a moral hazard i think everyone knows the money market fund industry will never be the same begin, nor the way regulators look at money market funds will be the same. but interesting shortly after these events occurred, to narratives in marriage as to what happened and why it happened. they are fascinating and very

important because as you look into here the commission weighs options to address money market funds. the theories underlying what happened emerge in different ways. first analogize the events of september doubt -- 2008 the bank run. including deposit insurance and access to the federal reserve board, discount window. some articles suggest money market funds are not regulated. they are very heavily regulated by the ftc in the ways it could only be compared to prudential regulation. but the second narratives suggests that weaknesses in the financial sector during 2007-2008 contributed to uncertainty about the ability of issuers in the short-term market to make good on an obligation. investors and money market funds particularly the growing number of institutional investors of money market funds were looking through portfolios and lost

confidence. beginning of course with lehman brothers when it collapsed but thereafter aig and a number of other major players, commercial paper issuers who appeared to be in play at the time. they simply lost confidence in the short-term market. this narratives suggests if they weren't money market funds, folks have been holding the commercial paper where the obligation of the underlying issuers they would have rolled over into have had the same crisis. the first narrative best articulate i think by paul volcker, holds money market funds as the culprit part of the shadow banking system. that's what that term is used. the other narrative articulated by paul stevens, president of the ici holds money market as victims. beginning with the subprime crisis and moving on to lehman brothers. and again, which inherited you hold, and there's some truth to

both, on where you are, if you're narrative of the first and your first as paul volcker, let's turn these things if the bank obligations, issued by banks, that, of course, involves extraordinary extension of the federal safety net, deposit protection system, to cover practically $3 trillion of assets in money market funds, and that would be a substantial change from the way money market funds are currently managed. the second, they're simply a liquidity crisis created by an economic short-term markets that occurs once every generation or so, suggest the issue is liquidity. we need a way to inject liquidity into the markets that would provide liquidity to money market fund. the ici's suggestion was formed a liquidity bank, that is a special-purpose bank that would exist in order to find liquidity for money market funds in times of stress only, the bank would

operate and only if of course it had access to the federal reserve window which raises questions whether that window should be available other than thanks to fund during times of crisis, a significant part of the cash market. so again, depending upon what your theory of what happened, is very different outcomes. they both contain truths. but from ours but practice of policymakers perspective, very interesting to have these two narratives. and their helpful to understand different points of view. but regulators am let me go back to my original disclaimer. i'm speaking for myself here. we are on everybody. with a $3 trillion money market fund industry and it's starting over, that's something that seems -- in times of optional at this time. if i get a we understood at the

sec today potential systemic implications of money market funds we would've done things differ in 1971 rulemaking came into play can of money market funds to exist, that is what the stable nav to compete with banks in saving departments and cds for the consumers dollars. we would have done things differently. but back then it was simply a pool of cds, pool of commercial paper, and it was silent, very small part of the market to which the dealers, much larger commercial paper market provided ready liquidity very simple. the commercial paper issuers, banks always paid in full on time. certainly the money market fund industry today is such a large part of our cash on the market looks very different than it was then. turning back the clock of some suggest, battles fought in 1970s, it doesn't seem like an option, doesn't seem like a

path, white house. first of all we have $3 trillion industry comprises significant funding. if that funding was cut off you would see certainly dislocation. secondly, we have a large investor community that depends upon money maket funds today. retail as well as institutional investors. the question is why are money maket funds' exist today? we know why they existed in 1970, a way to avoid limitation of the bank deposit, a deposit, but today that certainly isn't the case. in fact, i think -- i've got a money market fund to permit banks to pay some interest on net deposits. money maket funds are paying just a few basis points, yet large institutional holdings, $1.8 trillion. the institutional market uses

money maket funds to diversify risk, moving to a bank is not an alternative to most investors because the concentration in risk in certain banks which in some cases they've already maximize in terms of the balance sheet. they seek in institutional area for a diversification. in the retail area there's the convenience of money maket funds today which are combined with a large number of investment products such as cass management accounts, brittle insurance products, other things people use that allow, keep money and money maket funds even if there a a basis point. but money market funds are susceptible to run, that's a problem. when shareholders perceive risk the fund will suffer loss. everybody is getting out at a dollar, the first movers do not pay the cost of their liquidity. instead, it's socialized and the

last folks out losses in the funds are concentrated to the last movers, or at least aware of the situation. strategic redemptions by knowledgeable shareholders can lead to panic by others. in october 2010 the president report articulate and identified, explained this panic that ensued in 2008. the commission in 2009 proposed rules, which even before dodd-frank statute, and was put on paper on the dodd-frank action, rules were much more resilient. give you some examples of a large number of rules, money maket funds required to maintain 10% overnight liquidity, 30% 70 liquidity. this liquidity is not dependent on secondary markets which as we saw in 2008 froze but that is contractual either treasury obligations or securities maturing overnight, or within

seven days. added a huge amount of liquidity. second, directors of funds are able to redemptions, something the directors and the reserve fund didn't have the authority to do before they break a dollar. this is important. damage to shareholders in the fund but it prevents what we saw in 2008 from a money market fund having problems of dumping in portfolios, securities into the market which begins the panic and affects the prices of all the other money maket funds. or prices our security. but we still have basically the same structure of money maket funds and the same problems that can lead to a run, even though we're more resilient today than we were two or three years ago. the commission identified that concern, and i knew that the rules weren't going to address all of the issues. there was going to be a phase two of rulemaking which we would rethink the structures of money

maket funds. that would be followed by the presence working group report which laid out the dynamics that i discussed about, and just last month a roundtable here in washington which many of the players, stay close got together and talked, what are the options? one option continues to be requiring money maket funds to flow to nav. is essentially an assumption that the net asset by of money market flows, investors will behave differently, treat them instead of cash items which they can expect like bank accounts to get their money back, dollar for dollar, that they would develop, treated more like short-term bond, essentially there are risks here. so what if they don't change their behavior? what if the behavior stays the same and, in fact, interest rates are raised? there are other options that are being, and perhaps we can say that for question time but there's a range of options being considered right now by the commission, and in the months to

come you will see further out of the commission detailing what approaches we're going to take. >> thanks very much. i'd like to turn to viral no. he needs no introduction because he helped organize the event. he has two terrific books out a deal with all the topics that we are talking about right now. you're going to do some of the other issues on shadow banking that we haven't gotten to yet, derivatives, insurance. >> thank you for being here. i have a bit of a long tour to take across the remaining parts of shadow banking, and it's getting larger as we talk, or as we keep talking. so i wanted to just offer a few high level thoughts and then sort of give my main punchline concern. many thought of shadow banking, i think of some of it as perhaps good or useful financial innovation. but what i think of the word

shadow banking, i'm used to thinking about it as what's supposed to be banking but isn't treated like banking. and i think that's probably in some ways a useful definition, because it makes you look into areas where might be gaps. i think tom coolly touched upon in his remarks order today and till and unless we regulate at the level of the asset or an instrument, it will be very hard to get a good grip on the regulation of the shadow banking. there's this unstated area financial markets that risk will travel from balance sheet the balance sheet until it is found the balance sheet as well as capital requirement to avoid that risk. you see cds and transactions taking place because it makes sense for everyone along the chain to do that transaction

because that way the overall leverage in the financial sector is maximize in the process. so if it's the in part of that pipeline that is executing the lowest capital, they're willing to share some of the benefits of their leverage with the party that is originating the risk. however, several important -- that's what i want to highlight first. which is that i think this argument that if we regulate the capital stronger in some parts of the banking sector, the risks and activities will leave that part of the banking sector. i think this is not entirely true. in the following sense. which is that sometimes when the transactions take place to exploit leverage, the risk transfer is complete. you can think about something which is the gses which are tightly taking on the credit

risk of securitized. in this case contractually those were holding the mortgage-backed securities, banks and hedge funds, they actually don't bear any of the credit risk of the underlying securities. but then there are other parts with a risk transfer is not complete come its partial. that's because it's structured in the form of guaranteed. so for example, tobias mentioned about asset-backed commercial paper conduits which had lines of credit from the parent commercial banks. so now i'm the one hand of the transfer the out, but through the lines of credits the risk will travel back to the commercial banks. you can think about private mortgage bank, against the risk run was not complete because of the monoline defaults on the credit, the risk is going to stay with the holder of the original securities. and so, what this creates is not necessarily a shadow banking

system that completely is join from your existing banking system. it's actually interconnected, intertwined in very complex ways depending upon whether the full risk transfer was the efficient way of exploiting leverage or whether a partial risk transfer was actually the efficiency of transferring leverage. and, therefore, it suggests that the regulation of shadow banking is important, not just to contain the risk in certain parts of the system outside of the regulated banking system. it's important even to control the risk of the regulated banking system itself, because if the counterparty risk in a partial risk transfer is not managed that welcome the risk will come back as it did, for example, in case of citigroup which are provided huge lines of credit to conduits and liquidity insurance kicked in and came back to the balance sheet of citigroup.

now, coming back to dodd-frank and how it touches upon all this, i want to think about the shadow banking in some sense risk repositories, which is depending upon how fragmented the regulation is 40 particular asset class, certain risk but saw -- is great out there. in case of money market funds that paul just spoke about, i think about from the financial center. whatever risk remains in financial sector paper after you diversify it, the repository for that risk are the money maket funds because they're essentially diversified holders of these papers. gses you could call them fannie and freddie, basically broadly speaking credit mortgage, credit risk repositories of the economy. you could think about the new centralized clearinghouse is as the counterparty risk repositories of the system.

and you could broadly think about stuff that these other people are not willing to do, they will try to look out for some extra in the process. how should we think about dodd-frank and all fees risk repositories which are all in the financial system? the focus of my comments is going to be mainly on orderly liquidation of authority, which is what is not clear to me is whether in the next systemic crisis that we might witness, the problem is only going to be the too big to fail institutions which is really the primary focus of the orderly liquidation authority under dodd-frank. i wonder if outside of dodd-frank, or within it, we

start think about regulators, academics, practitioners should actually be thinking about devising ways in which we could build with resolution of money market fund run. they could do with resolution or failure of clearinghouse. we could deal with failures of insurance firms on monoline, and perhaps maybe that big is sort of elephant in the room, whether we can find someone deal with winding down fannie mae and freddie mac at some point of time. and when you look at the various options that are out there, you see that dodd-frank doesn't sort of push the envelope as far as one would ideally like. so, one possibility dashed let me just go through these and summarize my assessment of liquidation or resolution or orderly resolution possibly that might exist on these various risk repositories.

i've often, let's call it wishful thinking, that maybe if the european crisis took hold but didn't become so bad that it would affect the interbank markets and hit the banking sector directly, then maybe it will just -- what i had in mind was the risk crisis, the risk of breaking the buck of the money market funds, but you think that there are well capitalized banks out there, let's put our money back the deposits in our traditional banks. i think that is a good reason why this might happen. we are in a very low interest rate environment. i think if i'm right there's already a bit of flow out of money market funds back into the banking sector, and i'm sure that has picked up speed in the last two weeks as these problems have sort of -- but there are other reasons we don't have

anymore of the traditional deposits. i think dodd-frank act removes the restriction on banks to make deposits on corporate deposits, paying interest rates on corporate deposits. and so, it seems than sort of the capital regulation which is not yet been extended to money market funds, many other things are harmonized. i think it might actually reveal the systemic risk that they are taking, but if that doesn't happen i don't know if we have a solution right now to do with the resolution of next money market fund run. my counterfactual is that most likely we may have just come out of it. first we might try some suspension of redemptions, but if that scales up the problem beyond, we might have to use the authority of the federal reserve

again. it would have to be again a blanket money market fund assistance program because the fed cannot under the dodd-frank support any money to the regular money market for the future. going back to derivatives, i think as michael barr and some others suggested, there's a lot of good in the derivatives regulation of the dodd-frank act, much more than what one might have expected. primary concern here is of course they're putting all our eggs in one basket into this clearinghouses. and now the risk management standards of this clearinghouses will be very important. so advise clearinghouse either risked repository, because clearinghouses only going to fail when one or more of its dealer members fail. it's large enough that its current capital gets exhausted, initial capital contributions. and it wants to go and make

capital costs to other dealer banks or broker-dealers, but we are in a difficult situation. so inherently, clearinghouse most likely would fail on the wing it is a full-blown systemic crisis. what will we do at that point most likely treated as a utility, that way we can use the 13-3 exception of dodd-frank to provide emergency liquidity assistance, but also suggest that to ensure that therefore they don't gain this federal reserve board dramatically the risk management in good times will be quite important, what kind of standards and initial capital standards for the clearing members. what bothers me here is the issue of international confidence.

clearinghouses are not under laws or regulations, in spite of all its weaknesses, at least i would have liked them to be in there but they're not even in there. if anything, basel access the capital between clearinghouses. which is going to be another force which is of course the expectation that you want to force things to happen on clearinghouse but then you better ask the regulate these clearinghouses quite well. so i think is quite an important need for central banks internationally to come together and devise some minimum risk management standards here. if i could touch upon one thing i derivatives, one of the big problems in the derivatives space was just lack of information. when bear stearns failed and aig failed i don't think markets transparency as to how these were going to travel in the system. we knew aig was large. we knew bear stearns was a clearing agent for all practical

purposes, but we didn't have any way of knowing who was expose, how much to these risks. i suspect that the transfer in these situations have not changed much since then. if tomorrow a large dealer was to get into trouble, i'm not convinced the market knows enough about who's exposed to whom, who should pay primarily be concerned about our weather be a generalized uncertainty about this situation in a panic. so, perhaps even while the authorities getting in shape for my want to push on the transference he. the last thing i want to touch upon is fannie mae and freddie mac. dodd-frank act one sentence on gses, because the treasury should come out with a proposal by february 2011, as potentially the most systemic institutions of the country, one would have

thought perhaps made a role for them in there. nevertheless the treasury has a plan, but it has three plans. a private solution with an affordable housing program through fha, a private solution in good times but in the gse that takes internet crisis to suppose new lending, and three, a gse, create a new gse that takes on the risk. i don't know what they would call it, maybe humpty dumpty or something like that. the most important thing is they don't have a plan for rolling out one of these points to the political forces seem to suggest most likely this would be in march of 2013. i see this as a big problem for two reasons. one, the gses are currently

securitizing, helping securitize over 90% of the mortgage risk, of new mortgages that are originated. there sure was under 5% and has climbed to over 50%. if we don't get private sector in this market anytime soon, most likely the united states element will gradually own the entire mortgage credit risk. i think it is a scary thought in a time when the gse debt is technically not on balance sheet of the united states government. $75 billion has already been spent and form of taxpayer losses. there's a sense in which it could be a much bigger role from where it stands right now. so i think there are quite important resolution issues, some thoughts of how will we deal with the money market fund runs. investing immediate risk of how

we deal with ccp, under capitalization. maybe that's if i get risk potentially in expected term, five or 10 years. there's this huge 10 years on whiny program we need to put in place. i think none of these things are currently taking shape, so we need to think harder about these. >> thanks a lot, trim of a great survey of issue. i'd like to go to questions now. we have 1 10 minutes left. start back there with you. >> just to tie up a loose end, as the way peter falk would have said, it seems like if anyone should have known, given that the authorities claim that no one could have known about aig, there are two authorities that clearly were in a position to

get the information, to do something. and those would be a, the treasury, and the, the new york state insurance superintendent, if that's not a joke, or maybe treasury was the joke. what is your view of the which of those really deserving of the blame? because new york in a lot of respects is charged with knowing -- with being the series supervisor when it chooses to be. because it is the financial capital, and it tells washington what it needs when it needs a place to lay off the results. so how do you see that? >> conveniently need of those groups are represented on the panel. why do i start with you, viral. >> yes, to the best of my knowledge there was a -- aig

bought a small savings and loans and they were regulate but office of supervision pics i think the new york superintendent wanted to regulate this but, there was a lot of stuff that aig did to its london office because london had a very light treatment for creditor during that period, mainly to boost its financial sector. and that is exactly the concerned i am concerned on the clearinghouse part which is whether, rather than getting relatively high standard of regulation, regulating capital of clearinghouses, you get a race to the bottom because everyone wants to attract -- [inaudible] >> was broadly part of that, the one institution that could have dealt with the british

authorities, and even -- >> the transfer issue i was referring to, i sort of had in mind more of the market transfer issue which is -- let me just give an example. jpmorgan in its disclosures report how much collateral it imposed on its dispositions, up to six downgrades. goldman sachs started doing this since the last quarter of 2007. aig until august 2008 had overstated its collateral, likely collateral for one notch. so no one in the system actually knew what would be the collateral caused aig if there was a notch downgrade. there were two and a half trillion dollars of cash. one notch downgrade was less than two and a half billion

dollars. they were fined for one notch. it was actually $20 billion. this is the kind of thing us talk about where we could no more, even in a market transfer standpoint about these entities that we don't know as of yet. [inaudible] >> the hunt for red october i guess. i believe in 2002 pmc and aig were called offsides for off-balance sheet transactions and they got in m.o.u. from i believe the fed and/or occ. these are like precursors to the big aig trade. so there was a way to figure it out but the question was, you know, what material, what significant, and it depends on how much at the contrary and you

are, or are you just going to go along with the joke to make money? i think besides the markets there were authorities that new things are going on but they chose not. yes? >> i just want to ask a question, maybe make a statement about the money market fund theory, and your two views of the world. there was research done by two professors, and it's a broad work but they have some startling figures on reserve prime fund. and if you look at when they loaded up on risk, they went from about 17 or 18 billion in

assets to about 60 billion. and if you look at what the spreads were, basis points come in and they're offering 40 basis points, and you look at the assets they shifted to, religious from august 2007 until after the crisis started until august to -- 2008, just one year, they loaded up on risky paper. it's pretty well thought what they were doing. and if you think currently about what is going on with european banks, and i recognize there's a safe european banks, but they are in it because of the spread fire. but it just seems is searching for yield is a problem, and it's a problem in the commercial banking sector, then you can debate about deposit insurance or premiums on deposit insurance. so we don't have the money market fund area. so century hard to fix that

problem without recognizing just what goes on about it always goes on, what goes on in greece and elsewhere. >> i think the analogy between what the reserve fund was doing which was assuming greater amounts of risk, it was a fundamental change in that money market fund that occur. money maket funds brought -- a core investment. about 50% of assets across the broad spectrum of money maket funds are in those banks because that money maket funds managers believe in those things. since we've been monitoring, we will have access to information by the way for the last six months. we been monitoring it pretty stable. if you had gone back or you're a or go in ireland, money market funds come and there's not a single fund that has any single

irish exposure today. what happened is the funds gradually rolled out of the ireland. there was an orderly exit out of commercial paper market. there has been in other markets. the fund managers feel that in the short run at least, it's a very strong investment. there's also a diversification obligations like any money manager does. the concentration of u.s. financial system naturally forced u.s. managers to go abroad where they get broad exposure. these are global banks. it's not simply a spanish bank, a global bank. there are global exposures. some of which have high ratings in u.s. banks. so, at least the measures i talk to say, and i don't think the analogy exactly works. but notwithstanding that the commission is concerned because while there's a good process by which participants in money market issue quarterly there's a

disorderly process. lehman brothers is obviously a disorderly process that we worry about. >> i think we have time for one more. >> just quickly, one subject, this is almost a question of you, greg. this weekend the economist, the exchange-traded fund and exchange traded, basically looking at synthetic side of the market as well as, let's call it the cache site. and it grows and its potential resemblance to some of the asset bank markets, caused us trouble in '07 and away. are any of you worried about it? >> broadened that question, what's the next source of the crisis, etf's or something else? >> etf come you got to a distant which are etf is a free letters that cover a broad swath of

different types of issues. there are u.s. dts regulated as in mutual funds. they're limited in terms of what they can do. the europeans and the etf's, the entire index is exposure to a single counterpart that could be an affiliate your that type of situation can happen at least with the securities. etf. so we are concerned about those issues that i don't think the intensity of this issues here are quite with our and other places. i'm not sure quite how concerned to be at least in our market. >> i guarantee as an economist you should be concerned. [laughter] >> again, another rhetorical question. >> if not etf, what else? what else do we need to perhaps lie awake at night thinking about? >> the federal reserve is --

spent nobody there ever sleeps. thanks very much. it's been a very good panel discussion. [applause] >> are we all sat? good. so, take your seats, please. international coordination. there are enough weeds to wander around you when you think of these problems domestically, one is obliged to think about the international because we live in a global financial system your so coordination without which nothing, how do we make sense of

it? pleased to introduce steve weisman, our last panel and marris and nicholas. over to you. >> thank you very much, charles. and thank you to all of you diehard for being here. my name is steve weisman and i'm at the peterson institute after a long career as a journalist, so i get to be the moderator and act like a journalist, like the journalist i used to be. and that's a pleasure for me to appear with two colleagues, marris goldstein of the peterson institute, and a member of the pew commission. marris has held many positions at the imf and was deputy director of its research department. and then nicolas bruegel is also here. is a visiting fellow at the peterson institute and also a

senior fellow at brutal which is sometimes pronounced brueghel but nicolas pronounces it in brueghel. which is the brussels based economic policy think tank. both of these gentlemen have done a lot of work on the international aspect of the regulation that we've all been talking about today. i'm going to call first on nicolas to give us the state of play on the international cooperation on preventing banks are too big to fail and shoring up the international banking system so that all major institutions in the countries where they reside can make sure that, to minimize the holes and lapses in the system. nicolas will bring us up-to-date on the process and where it stands. and then marris will talk a

little bit about his sense of whether or not these steps have been adequate and up to the task that lies ahead. we wouldn't have a conversation and open it up for questions, at first it's a pleasure to introduce you to nicolas veron. >> thank you very much. thanks a lot to the pew center for inviting me to this discussion. and i feel privileged being, about being invited to discussion which is basically about domestic financial reform in the u.s. now, i think the news of the last few days may perhaps help me make a point of why this last panel is actually relevant to the general discussion. in 2008 there was a sense that europe was a victim of something

that was happening in the u.s. out of lax regulation in the u.s. and lax oversight of the financial sector, and europe was hit by contingent your so europeans to take an active role in the sequence of discussions and have higher level of financial oversight generally. but now the reverse is happening of course, and we mentioned what's happening in money maket funds out of concern for contagion in european banking sector, because of what's happening in greece. so basically the point here is that interdependent schools or ways u.s. to europe, europe to u.s. and also the rest of the world. so, let me be very brief in getting an update as steve has suggested of what's happened in other jurisdictions outside of the u.s., at a global level and this will be of course almost by

sifi. and europe the big difference is the financial crisis and the banking crisis to the extent that the u.s. has not been for the last two years. generally speaking i think it's fair to say the four institutions of the u.s. banking system have been source we tested in the stress test in the spring of 2009, and then those who have been found to be recapitalized a certain extent, and there's no longer a sense of banking trust. said he is of course may have some other issues to solve. in the european union and especially in the euro zone, the banking crisis has been lingering since basically 2007 and has never been resolved. there have been different stress test, not entirely successful, we're in the midst of the third round last night. the results will be announced somewhere in july probably. but we are still in the midst of

a crisis which has not been resolved. so you may think that is is slightly different perhaps in u.k. perhaps in central and eastern europe, but certainly at the core of the continental eurozone the crisis is there. you can cover everything that's been discussed. so to the credit of the europeans, they have made significant progress in one area which the u.s. has preferred not to touch much in this round of performance, as has been noted before today the dodd-frank act has not touched too much, the question of overlap between federal regulation agency in the u.s., office of supervision has been want up, that's basically it. in europe there's been a significant, which you may call federal supervisory authority,

and this is really a gap in the case of the e.u. because the e.u. had sort of a federal legislative framework for financial revelation but no supervisor authority at the e.u. level. they have not been created. -- have now been created. they exist now and they have a pretty strong mandate, i think, compared to what was seen as not possible as recently as two years ago. in terms of the rest of the agenda, europe is far behind the u.s. there have been some pieces of the e.u. legislative process much more fragmented than in the u.s. in that u.s. you of one big 2000 pages plus bill, in the e.u. we have several little

pieces of legislation on each of the chapters. so legislation has been passed on credit rating agencies, retention of securitization, hedge funds. but the really big pieces, derivatives, market infrastructure, resolution and capital requirements are still work in progress at best. some of these aspects actually don't even have a draft legislation proposed by the european commission. so basically far behind the curve compared with the u.s. in asia, and the rest of the world, i'm not going to have huge complexity of this geographical area, let me just say that asia has two main features at this point, first of course the feeling that they have not been in a financial crisis. there has been a trait crisis.

they refer what we call the global financial crisis, they refer to as the north atlantic financial crisis, and actually more accurate as a matter-of-fact. but also they have tremendous competition between financial centers vying for the title of being the hub of asia, none of which probably will be the hub of asia because asia has the same level of financial integration as exists in the u.s. or in europe, but also the financial crisis, too much financial innovation or even too much financial involvement in this grants, kept the markets development may not be such a good thing. so there's a sense of conservatism, if i may call it so, in terms of financial regulation, and keeping most banking days system rather than developing capital markets, released that is the temptation which as you can imagine,

somewhat contradictory with the notion of developing international financial centers, but is very much there at this point. at global level, the title of this section refers to that eric so i don't think the problem is that there are many global bodies. it's rather a weakness of these bodies which are generally working on intergovernmental basis that makes it very difficult for them to take firm positions. and i think marris will expand on this so i'm not going to delve much into this. so let me just mention, the financial harmonization of financial rules, there's been a very ambitious rhetoric at the level of the g20, especially in the first few meetings of the g20 summit in washington, london and pittsburgh. but the truth is that harmonization of financial rules is actually more difficult with the financial crisis that it was before. and the reason for the is that

very simply is easier to harmonize rules where you are generally liberalizing and new regulations and where your re-regulating the financial system. this is because we regulation is going to be by local political factors, whereby deregulation converge on the common law. additionally, to increase the importance of a lot of emerging countries like china and india and others which tend to have a more focused view of their sovereignty and less instinctive adherence to international rules, let's put it that way, then certainly europe or the trent eight out to be less practice of standard making at international level, make it more difficult to reach effective harmonization in the context were as they have a much bigger profile as a consequence

of the crisis, and where it has lost a lot of whatever moral authority it may have had in the financial state before. nevertheless, there has been progress at the basel committee, most racially this weekend with the surcharge, and also in terms of international accounting accommodations, certainly less fast than summer hoping for before the crisis, but i think they are still making progress in terms of global endorsement and adoption. but also concerns, let me mention two, one is central clearinghouses, central counterparties for clearing of derivatives, especially otc derivatives, charles made mention of this, future wants to have its own clearinghouse, for understandable safety reasons but the result may be a fragmentation of those markets which tended to be largely integrated globally.

and the same is true for credit clearing agencies which were almost like a u.s. now they're basically regulated in all important jurisdictions. and it's difficult to imagine this regulation will not in some kind of way affect the rates. so we may have a fragmentation of these, whatever they're worth and rating agencies obvious they have not covered them. but we may have a fragmentation issue that didn't exist before the crisis because there was not this much. let me finish with the case of sifis. obviously, this is one of the biggest unresolved issues of the entire crisis. i mean, even very senior regulators, a couple of weeks ago in holy -- high profile speech indicated basically no solution on hand as to how to do with systemically important

financial institutions on a cross-border basis. we don't have the formula for cross-border resolution, sort of second best option is to increase the requirements, and that's good but it's not sufficient. because even an increase of several points of percentage points of capital requirements will not preclude the cross-border sifi going bust in the future. i guess we are going to come back to the question in q&a so i will stop here. thank you. >> good afternoon. it's a great pleasure to be here, and i want to thank pew and nyu stern, and in particular charles taylor for inviting me. this session deals with international constraints on the effectiveness of dodd-frank. in my remarks i'm going to argue that the problem for dodd-frank is not that we have many multilateral institutions

getting with financial regulatory reform, and that these institutions are issuing rules or guidelines that conflict with one another or conflict with dodd-frank. the problem instead is that some key aspects of financial regulatory reform are set by international standard setting bodies, and that in order to get agreement within those bodies you have to settle for standards that are inadequate. put nor do you have to settle for half a loaf it does many members of the g20 or the basel committee on banking supervision will not go along for a full loaf. i'm going to illustrate my argument by discussing two elements of reform. one did with financial regular reform, namely basel iii on men and capital standards, including the sifi surcharge that was announced this weekend. and the second one getting with

reform of the international monetary system, namely what's being done about global payments and balances and exide neighbor exchange rates but in both cases kashmir while dodd-frank imposes a number of stringent cap requirements on companies, it was always recognize, since the late 1980s that minimum capital requirements for banks would have to be determined by international agreements. ..

>> why would one say that? well, some of the reasons have been mentioned earlier. let me just mention some of the studies that point one in a different direction. there was a 2010 study by hanson and steven that noted as recently as the first quarter of 2010 the four largest banks at the lower end of the cycle were holding one capital ratio of about 1% of risk-weighted assets. that was four times the

regulatory minimum. the market was presumably pressuring them to do so. so from this authors concluded that 8% is the market-induced minimum near the bottom of the cycle. according to the imf, u.s. banks lost about 7% of assets during the last crisis and a little bit more if you would do it in terms of risk-weighted as is sets. hence, if large banks are to meet the market-imposed my mum at the bottom of the cycle after losing 7% of assets, you would need about 15% at the top of the cycle to do that. if you use not the 8% capital for the largest banks, but the 10% at the same time for a larger sample of u.s. banks, then you would get, you'd get an answer closer to 17%. if you wanted to use the loss for the weighted average credit loss for all banks instead of

u.s. banks, then it would be sort of 4%, and you'd get 12%. so you'd be somewhere between 12, 17% that was kind of using that methodology, that's kind of what you would come up with. well, it's reasonable to say that's a lot deferent than 7%. different than 7%. if you lost 5% during the next crisis, you'd be down to 2%. you don't have a lot, and you're not going to get a lot of lending when the banks have got 2%. a 2011 bank of england study by miles and others came to a very similar conclusion, capital requirements ought to be much higher than in basel iii. a 2011 study that was mentioned by others at stanford business school, i think, shows persuasively that increased equity capital would not force banks to reduce lending, it would not increase funding costs

for banks. bank debt did not provide market discipline during the crisis, and unlike liquidity requirements, increased equity requirements do not force banks to set aside or hold and reserve funds that could otherwise be used for lending. so, basically, they conclude if we had much higher capital requirements than was agreed under basel iii, we'd have very big benefits and big social costs. so you could have done it in this once in a lifetime opportunity due to the crisis, but you didn't do it. so what you got with seven was half a loaf. in addition, when basel iii was announced, it was agreed that the countersuckly call buffer -- countercyclical buffer was going to be not mandatory, but would be put in according to national circumstances. you could do it if you wanted to do it, and if you didn't want to do it, you didn't have to do it. well, then you have to say,

well, there's all this talk about macroprudential and what does that mean. well finish some of the -- well, in some of the original work on that one of the tools was going on the countercyclical requirements but that's not part of the package anymore. and you have to say, well, a number of members of the g20 including most of the e.u. members, if they weren't willing to go along with a higher minimum capital requirement, why are they going to put in the countercyclical buffer? so you're probably not going to have that either, and then what are you going to have to do the countercyclical macroprudential? loan to value maybe, some other things, but you've lost one of the, one of the elements. um, so if this was a disappointment, you might ask, well, why couldn't we get a more

ambitious outcome? and for most of the published reports as well as the commentary, it looks like the u.s., the u.k. and switzerland would have been in favor of something closer to what i talk about as the optimum, but european members of the g20 or e.u. members anyway perhaps thinking about perspective credit losses associated with the ongoing european sovereign debt crisis were opposed. in addition, there were other g20 members like canada and australia that were not very hard hit during the crisis, hence, they didn't have the same motivation to ask for wholesale reform. the large emerging markets were not hit as hard, so they weren't for it either, and there was enormous pressure from private sector financial institutions exerted in various ways including early studies showing that the effects on the early economy would be disastrous. some people say, well, you're

really too pessimistic. it really wasn't that bad. first, most of the credit losses during the crisis were borne by the largest institutions with, let's say, $100 billion in assets each, and we're going to get the sifi surcharge that's going to make up for it. second, you could say, well, if you want higher capital requirements as a way to discourage too big to take and you don't get them, there are other ways to do that, and we can still get them anyway. well, some of them may have seen the dan tarullo speech that nicholas just mentioned. he was originally talking about a sifi surcharge 1% at the low end, 7% at the high end. seven plus seven, we'd get up somewhere close to the 14. but as announced over the weekend, at the high end it looks like you're going to have 2.5%. so you didn't get anywhere near that. what about the other tools for discouraging too big to fail?

um, there are a number of them. orderly resolution -- liquidation regimes at the national level like the one in dodd-frank, i'm a big supporter of that. but the problem is, again, as has been mentioned many times we haven't gotten very far on cross-border resolution, and if you look at these institutions, they all have a huge number of majority-owned subsidiaries. citigroup had 2400 of them. so you're not there. now, you could, you know, envision some kind of charter that would deal with that problem, and as i think i mentioned earlier in a question from the floor, cummings has a sort of prototype regime that could do that, but i think nobody thinks that's going to happen soon unless, you know, we have some other disaster. a lot of people have mentioned winddown plans and live wills -- living wills, and those could, indeed, be helpful, but the

question is are supervisors really going to simplify these institutions, shrink them, what is really going to happen with these wills? and so far, again, i think that's a long shot. then there are size caps, and my peterson colleague, simon johnson, has been a big fan of those. but they were voted down in the, recall, in the brown-kaufman amendment to dodd-frank, rather decisively in the senate. and if you think of those as nicholas and i showed in a recent paper, they would have to be vastly different for europe and for the u.s. if you take the combined assets to the three largest banks in the u.s. to gdp, 2009 it's about 40%. if we take that same computation for european countries, it's somewhere normally between about 140% to over 400%. so you couldn't have that.

the only bright spot i would say is basel iii is men mum standards -- minimum standards, and you could impose much more than the minimum on a national basis. some people say that's just not possible because of competitive factors. but then i say, well, look at switzerland, you know? they came in with a report recently. they had motivation. ubs lost 12% of risk-weighted assets during the crisis. they're in for 19% capital including 10% equity, common equity and the other 9% in contingent bonds. so i'd like to see the u.s. follow the swiss example and do that. do i think that's going to happen? don't think so, but i'd like it. let me now move quickly to the other area a little more briefly. another area where international constraints may impact the effectiveness of dodd-frank on

crisis prevention has to do with global payments and balances and exchange rate policies, particularly in emerging economies with large current account surpluses, china being the classic case really, exhibit a. a 2010 study in the imf found that financial imbalances in oecd countries in the runup to the crisis has measured by variables like the ratio of bank credits to deposits were larger in countries that also experienced large capital inflows. so you get more instability, you get more of a credit boom when you have these large capital inflows. several other studies found that large current account deficits were associated with large increases in real housing prices and real equity prices. if you look at the empirical work work at the bis, what's the best warning of economic crises in economies? it's a large runup in either housing or equity prices.

that does the best including projecting the u.s. banking crisis of 2007 to 2009. and if you're talking about capital inflows coming into the u.s., your counterpart to that is these large current account surpluses in emerging economies. take an example, china's global current account surplus went from 2% of gdp in 2002 to 10% of gdp in 2007 before declining to about 5% recently. and a key factor in that is the evolution of what happens to real exchange rates. during the 2002 to 2007 period, china was engaged in protracted large scale intervention and exchange markets, sometimes up to 10% of gdp. they were sterilizing the effect of that on the money supply, so you don't get an appreciation of the real exchange rate from that. studies of misalignment found that the rnb was undervalued by

20% or so on average for 2000-2007. at the peak it was probably 30, 40%. so you might ask, well, isn't what china was doing currency manipulation? doesn't the fund have rules against that, and shouldn't the imf have imposed a penalty or sanks on china -- sanctions on china for doing that? the answer to those questions would be yes, yes, and yes. the reality, however, is different. the fund was slow to recognize the presence and size of undervaluation, they imposed no penalties on china. china blocked publication of its reports. meanwhile, the g20 has been engaged in the all these exercises to reduce payments and balances over the past four or five years. those have had no effect. i mean, in the sense that they've caused no changes in the behavior of any of the major players, nor have there, there have been no codes of conduct

outlawing those policies. so what we need instead is an agreement by all irk mf members -- imf members that countries that fail to correct currency manipulation after it's been identified by the fund would be subject to wto-approved trade policy retaliation. the problem is so far you can't get anybody to agree on that, or at least not enough countries to agree on that in the g20 to make that go. it's been recommended by academics, myself included, you know, paul volcker, a bunch of other wise men but hasn't happened. so to sum up, on the two key problems directly relevant to the effect dodd-frank can have on promoting banking stability, we are still a long way away from where we need to be. so the problem is not an alphabet soup of financial regulation, it is instead that the international soup we have

is too thin to make a meal of financial regulatory reform. and that's where we are. thank you. >> thank you, morris. before we go to the floor if you don't mind, let me just ask a couple of clarifying questions of both of you. first of all, you hear in the united states echoing that since europe and financial institutions and governments in particular are resisting some of these capital requirements that are considered essential that dan tarullo mentioned, cited, and since on an international basis the results have been disappointing, does that provide a further impediment to the united states going it alone to strengthen its own financial regulations? and is the -- are regulators more likely to heed american financial institutions over

their concerns that they've expressed that for competitive reasons they can't adopt these more stringent requirements? >> well, the short answer had to be yes because, yes, different environments in europe and the u.s. and a number of european banks compete in the u.s. with u.s. banks, then you get a competitive distortion. so i think the distortion exists. the question is how serious is it, and how much of concern it should be to u.s. authorities. and, clearly, here we have different shaded response whether you consider different segments of financial activity. in retail banking the distortion is, i think, not very material in terms of the u.s. market. in wholesale and investment banking, it is very material,

but it's not happening only in the u.s. because these activities tend to be tradeable and tend to travel a lot when there are regulatory arbitrage opportunities, so you cannot look at the u.s. in isolation. the bottom line is that it's not the only way to look at this issue. morris had mentioned switzerland. switzerland has decided to impose what some would call punitive capital requirements on its two largest banks because it felt too much was at stake for its own financial stability, so it's an example which shows that the rate to the -- race to the bottom in terms of cap until requirement -- capital requirements is not something that had to happen, but i can't understand why u.s. authorities would like the europeans to be a bit more ambitious in terms of the basel discussion and capital requirements. now, as i've mentioned, this is very much link inside the case of europe to the fact that we haven't sold our banking crisis and that, clearly, it's a

concern of the european leaders to manage the crisis and not to, basically, make, build a sound financial system that would come in the postcrisis period. let's prevent the next crisis, but their actions are about managing this one. >> isn't that pretty common in crises, morris, as you address this question? i mean -- >> yeah, i think it is common. i mean, i think the banking industry, in particular the u.s. industry, you know, hammers on the argument that if we have any requirements that are stricter than our competitors have, it's a great disadvantage for us and, therefore, we can't have it. despite the fact that there's lots of arguments that, well, these institutions would be safer, and that would not be a disadvantage. but that doesn't seem to sell. i mean, lobbyists go to congressmen, and they tell them,

well, you're throwing away american jobs, giving them away, making our institutions smaller, less competitive. it's a little bit like the argument that you hear from children when they come home from summer camp and you say how was it, and they say, oh, the food was awful, and they give you such small portions. they want the business. good or bad, they want the business. and that's just, you know, what it is. and i think so far efforts to say, well, you know, if they're not going to do et, we should do it anyway because it makes sense, and we'll not be at much of a disadvantage because market participants will recognize that our institutions are better capitalized and they'll be safer, and we won't have to pay much higher cost of funds if at all. but i don't see any evidence that that argument is flying. so, unfortunately, then what happens is whoever is sizable and holds out and causes the bond committee or the g20 to

say, well, that's, you know, yes, we've heard the arguments as to why it needs to be 15%, but we're already going to go for seven, so far it's carried the day. and treasury which had argued that this was the most important thing of reform, capital, capital, capital, when push came to should shove they decided tor the agreement in the g20, that is the lesser or agreement rather than to say, well, we'll hold up agreement and try and fight for another year for a higher one, for a stronger agreement. see if we can carry it along. they decided, no, let's take the half a loaf. half a loaf is better than no loaf. and that's, i think that's where we are. >> i'm going to ask a deliberately naive and, if that's possible, cynical question if you can be cynical and naive at the same time. nicholas, you mentioned that at the outset of the crisis in 2007 and '8 there was a lot of

shodden freud in europe that, oh, this is an american crisis, and you off heard from the europeans -- you often heard from the europeans that you need to regulate more and a lot of finger pointing and finger wagging at the u.s. now that the tables have turned and the u.s. financial institutions seem stronger -- seem -- than many of the major european ones, why aren't we hearing the same thing from the u.s. side toward the europeans, that you should get your house in order? >> well, i think we're starting to, we certainly will be starting to hear that if greek situation gets worse. that would be the short answer. the other short answer is that the u.s. and with all due respect i hope you'll forgive me for this proposition, but the u.s. tends to be looking more at the u.s. whereby europe is also very inward-looking but tend to look at the u.s. too, and this

is for a number of historical reasons that i'm not going to go deep into. but i don't think the u.s. has a natural tendency to look at the rest of the world for inspiration when it comes to financial regulation and, actually, that may be very justified by the fact that the u.s. for so long at least has had the most advanced capital market in the world. >> but how, just one final question before we go to the floor. i mean, for both of you. the european concern is that their financial system is so weak right now that they can't undertake these reforms as you just mentioned, morris. how seriously must we take that argument? is nicholas, you've studied the stress test, the impact of the sovereign debt crisis, how weak are european financial institutions right now, and shouldn't we be concerned about pressing them too hard until the greek crisis is resolved? >> i think the u.s. government

is concerned. i think the u.s. administration is concerned, the treasury has been constantly hammering this message to its european counterparts. two years ago last year, this year. as long as you don't -- >> if hammering is going on, t pretty -- >> well, they don't have the -- >> [inaudible] >> yeah, their leverage is limited in a way that's perhaps a good thing depending on your point of view, but the u.s. cannot impose this sort of major decision to restructure its banking system on europe if europeans don't want it. so then you have to ask why do the europeans not want it, and, you know, the political economy is not very different in european countries from what it is in the u.s., it's just a different of degree, so i'm not going to enter the discussion which i think is not very constructive on which country has more capture of it process by the financial sector -- >> it may not be constructive,

but it would be interesting. [laughter] it may not be construct i, but it would be interesting. >> you know, i think the official line in europe is, you know, we just can't have default. so for now various efforts are being made to persuade the banks into, quote, some voluntary rollover of this so that this doesn't have to get reflected, and we don't get the estimate of what it is going to be to recapitalize these institutions rather than to continue to put more money into greece and others. but that's kind of, you know, that' where they are -- that's where they are until that doesn't, until that doesn't work anymore, and then they'll have to move somewhere else, and my guess is the u.s. doesn't want to push the case that hard for early recognition because of some of the issues that we heard

earlier on. we got money market funds holding some of those instruments. if we have u.s. firms that were writing the credit default swaps, i don't know what those exposures are, but nobody's looking for more trouble. but clearly something is going to have to be done there because it's just very unlikely that you're going to be able to work that out without some kind of default in a number of those countries. and that's, ultimately, going to mean recapitalization of banking systems in the those countries. i'd rather see it done sooner rather than later, but that is not cutting much ice right now with the official line in europe. and, you know, given that the past crisis here is still a reasonably fresh memory, nobody

is eager to be lecturing from this side of the atlantic. i think correctly so. so -- >> okay. the gentleman here has been patiently waiting to ask a question. >> yeah, a lot of deep points and ideas. i heard an e.u. commissioner for finance at brookings a couple of weeks ago talk about, um, you know, the issues the e.u. zone has with financial regulation, you know? some of them, you know, the u.s. isn't harmonizing with the rest of europe, acts unilaterally, doesn't play well in the financial sand box, you know, a lot of holy grail, like, level playing fields and how come the u.s. banks haven't gotten the basel ii, we're there. you know, how do you think about

these things in terms of do they really matter? you know, is there such thing as a one size fits all capital requirement, or is there more of a nuanced, matrix approach that has to be taken? because we've seen 20-odd, 30 years of basels, and we still ended up many this big mess -- in this big mess. so if you could comment on some of those concepts. >> well, the you look at -- if you look at the european union and especially at the level of the commission, you're referring to commissioner barn yea, creating an internal market out of 27 countries is really what they're paid for. so harmonization is demanded in itself and for good reason. because that's a problem you no longer have in the u.s., but, you know, there was a time long ago when fragmentation was an issue in this part of the world, and that's why the constitution has provisions for interstate commerce. well, we have the same sort of

issues in europe, just we're a bit behind the curve. so i wouldn't criticize the european commission for being obsessed with harmonization. certainly, this obsession with intra-e.u. harmonization tends to be projected toward the rest of the world in ways that can be a bit surprising or exotic like those you describe, and i agree with your premise that maybe we don't need absolutely harmonization of full rules between and europe because it's the holy grail and it's not going to happen, so let's go for a more pragmatic compromise. but just consider where he comes from. it's a mandate of where harmonization features very high. >> you know, i think the europeans have some case. we didn't go very fast on basel ii. now, given what we found out about basel ii, i think it's hard to say that was a bad thing because, you know, basel ii

clearly got it wrong in a lot of fundamental respects. but, of course, that allows them to say, well, now you'd like a much more ambitious basel iii than we'd like. well, you were a little slow on basel ii, we'll go slow on basel iii. i think these thing matter. it would certainly be better given that we now have a basel iii to have a stronger one than a weaker one. that's, i'd say, the most important element of financial regulatory reform. if i had to pick one, i'd say ha's the most important one if you really did it right. and the fact that, you know, after all the huffing and puffing and all the work, we got one that was pretty modest, i think, is a disappointment. it would be nicer to have a stronger one. could we make up for it? yes, we could if we felt strongly enough, and we could get people to do so.

but the industry is certainly against it. i saw comments of john walsh, the acting controller of the currency, not for stronger capital and liquidity requirements apparently. so, you know, even within the u.s. team there are some that are saying, well, you know, isn't this -- wouldn't this be too much? so then, you know, you get what you get. >> yes. >> [inaudible] morris, you discussed switzerland, u.k. and u.s. as being three that might have preferred higher capital requirements. just a hypothesis. given that switzerland's already active, if u.k. and the u.s. were able to agree among themselves to impose significantly higher capital requirements, wouldn't that be much more effective in overcoming the domestic arguments given how important both centers are as international financial centers? >> i think it would be helpful if we could get the u.k. to line up.

i mean, you you know, it would l leave out some, some big players. you'll recall that basel i came about because the u.s. and the u.k. really were at the lead at that. you know, i think that's not, that's not quite enough, but, you know, the u.s., the u.k. and switzerland would at least be a start, a leading that lance to say, well, let's go for more than the basel iii and get somebody along. you'll notice in the vickers report where they push 10% common equity for the retail operations they leave the wholesale operations to be determined by the basel process. so they're, clearly, not willing, not willing to go sort of unilateral on the wholesale operations. again, probably because of their own banks screaming and yelling about being subjected to tougher

requirements than those elsewhere. so, you know, we could get the u.k. and switzerland with us, it'd be better than going it alone, but i don't know if it's going to be enough. >> just a word on this. i think switzerland is special. it's only about two banks, one of which had to be not exactly bailed out because the swiss government actually made a profit on it, but certainly helped during the crisis. and the conclusions that the swiss have drawn from this is, basically, we don't want these huge banks on our charter. this is not a conclusion that the u.k. had made, this is not the conclusion that the u.s. had made. so basically one way to look at the swiss decision which, by the way, is not yet confirmed because there is a debate in parliament, but it's likely that they will go for something that looks like the proposal, um, is a way to say, well, let's go back to small banking in

switzerland. i don't think that's a choice for the u.s. or even the u.k. is ready. >> i agree. [inaudible] >> sir. >> hi. sort of one hypothesis on why switzerland is pushing for the highest capital requirement, and i think all of you have implicitly touched about this. i think that they have the greatest ratio of the size of banking sector balance sheet to their own size. and i think, therefore, a good example of where you might want the capital requirements to be because if their banks really go bust, they cannot be bailed out by switzerland. and, therefore, in a way this is sort of like a private capital requirement because it says that if i don't have money to give you in the end game, let's figure out what capital requirement i want to charge you. and i think my sense is the reason why other countries are not getting pushed to that limit is because i think the banking

sector implicitly exploited the fiscal strength of the governments related to their own size. because they can't be bailed out. even today in unite, even if -- even today in united states it's conceivable that there could be $250 billion or some other package. it doesn't seem sort of out of the scope of what the united states balance sheet is. there is, the moment you talk about a $3 trillion sector, say, in switzerland or something that seems relatively hard for them to manage. >> well, we also have the iceland and we have the ireland. the ireland case as well, right? where also they did the, they took on all the bank debt onto the government's balance sheet. so now they have huge fiscal problem. and you've got, you know, a spectrum of, you know, switzerland is clearly closer to one end as is iceland and ireland, and you've got, you've

got others. but, you know, i think a relevant question in all these issues is, you know, what can you afford? what can you afford to pay? and that's why those ratios of bank assets for the three or five large to gdp where gdp is a proxy for ability to pay or instructive. you know, but the question is, you know, if you're talking about, you know, three or four very big ones even in the u.s., 40 or 50% of gdp isn't chicken feed. it's not, it's not 200% of gdp, it's not like in the u.k. and others, but it's not a trivial number. >> i think a big factor throughout the crisis, and this is perhaps more i've just seen from europe than seen from the u.s., is the search for national champions in banking. and you have that in the u.s. as well. i mean, if this was a concern in

the u.s., the u.s. would not be bothered by taxpayers in europe supporting deutsche bank and barclays, and barclays and deutsche bank taking market share from goldman sachs or jpmorgan because that would be a bonus. the u.s. wants to have their banks in the playing field at least on the u.s. territory and also globally. so switzerland has made a very unusual choice out of necessity for the reason you mentioned which is, okay, over with national champions because we can't afford it, and let's be reasonable and leave other countries build huge banks. i'm sure the swiss would agree with this depiction, and it's simplistic on my part, but basically that's what we've seen with credit suisse. so the question is in the future we'll have large banks in this

large countries. switzerland is a large country with -- small country with large banks. so now you have u.s., japan, germany and u.k., and china, of course, and probably even france, germany, u.k. are two small countries -- or countries which are too small to support the huge banks they're supporting right now. so we're seeing this very disturbing evolution where in banking and like in other industries because of the relationship between banks and governments and the externalities and the implicit guarantees actually the only institutions that can compete on a global scale with large economies of scale will be those headquarter inside the largest countries which is deeply dissing. and -- disturbing. switzerland had huge companies which don't create a threat for the swiss taxpayer but no longer

in banking. >> yes. in the back. >> um, the national champion model has been invoked and appears to be official policy because it's been mentioned by both jamie dimon and tim geithner. so, and probably the best analogy is in in the u.s. the airframe industry where we have boeing which is backed by the export/import bank and the e.u. has airbus which is also backed by subsidies. the question is, why do we pick as our champion probably the worst-run and least well capitalized companies, perhaps, in the whole economy? this would be like sending in the bantamweights to the heavy

weight championship fight. and yet this, there's hardly any questioning of it. a related question is why are, why are our biggest institutions the worst run? that's a corollary question. any thoughts on this? because it seem to be taken for granted that it's in our interest to make sure that we're out there losing the most money. >> you're referring to financial institutions or just in general? >> financial institutions. banks. >> oh, okay. >> too big to fail banks of which we now have five instead of four. >> right. >> plus another layer of aspirational too big to fail banks. >> well, would that be your narrative of choice? >> well, i think, you know, there are a number of flawed

financial institutions in the u.s. as an american citizen, who am i to make a judgment on how they're run? my sense as an outsider is some are better run than others but, you know, there's a certain diversity there, let me put it that way. um, i think it is interesting that there is this national mentality in banking more than in other industries, and this is linked to the crucial sanction of credit that banks fulfill in national economies which makes it extremely difficult for a government to just let go and consider that it has nothing to do with their ownership structure. it's, to me, a big question for the future whether in the e.u. we will build a truly integrated banking market. there have been some steps in that direction, but it's far

from complete and, certainly, less advanced than in almost any other industry in the e.u. and even more so at global levels. so can we have a global economic integration in manufacturing and services without having it in finance? i'm getting slightly philosophical compared to your question, but to me that's one very big question for the future, and the crisis has certainly made this question less clear than before 2007 because before 2007 there was this general mood of deregulation which made it perfectly credible that we would have a global financial system with global financial institutions that would be mostly integrated at global level, and this looks much less the case now. >> maul -- [inaudible] i can't see you. >> i know you're there. a question about basel and

whether or not you will agree with, i think it was andy huldane who commented in one of his recent papers or speeches that he thought that the imposition of minimum standards and the harmonization of regulatory practices had helped make the large banking institutions of the world more alike. basically, reduced the diversity of the financial system and be, therefore, perhaps made it more vulnerable to systemic shocks. any comments on that? >> i had seen, i had seen some of andy's papers actually contrasting differences between european and u.s. institutions because we had a leverage requirement, and they didn't. there were some other -- so i guess i've been a little bit more aware of how some of the

differences have motivated behavior and how each of them have tried to get around some of the constraints that they've had due to sort of national legislation. >> [inaudible] >> um, you know, i think basel ii was slightly better than basel i, but basel ii was a disaster. [laughter] basel iii, i think, is just inadequate. so, i mean, i don't think it's going to be quite as -- i think the principles are sort of better. i mean, so are we progressing? i suppose. but it's not something that generates great, great enthusiasm. in contrast, i actually think all things considered dodd-frank was very good. so, you know, i give dodd-frank better marks than i expected when the whole process started.

i thought it would be much more watered down. on the other hand, after the crisis i thought basel iii would be much stronger, that we would, you know, that this would be the time where it would be much tougher on the banks generally and would help. so it's kind of worked out a bit in reverse for me. >> charles, let me in the last couple minutes amend or ask a related question to yours which is, which would circle back to morris and nicholas when you cited dan tarullo's almost throwing up his hands over the issue of cross-border resolution authority which, of course, the pew financial project really wrestled with. it was the one of the toughest issues that the members of that project wrestled with, i think.

so if we are moving toward these national champions that are looking more alike even though they retain differences that you mentioned that can be analyzed, would there be any hope, does that make this cross-border resolution authority more difficult if we're really talking about a limited number of behemoths in the world? >> well, we're starting from an institution of national champions, right? financial markets have integrated over the past decade, banks have internationalized. um, and we don't know yet whether the crisis will result in the reversal of this internationalization and integration or whether it will continue. we, frankly, don't know. and i'm slightly less negative than morris is on basel iii.

i think, actually, the negotiators did a pretty good job given the constraints they had. maybe that's just a difference of perspective. but i think we can agree that capital requirements are not going to prevent international banks from failing in some cases, and therefore, the issue you mentioned which is the question of cross-border bank resolution remains very prominent on the agenda, and it's one of the issues which really haven't been resolved at all. i mean, none of these basically senior policymakers like dan tarullo are speaking as if they don't have a clue how to resolve it, which is disturbing. >> right. >> the european experience has been that this is, indeed, very difficult to resolve because even in a geographical space which is fairly integrated not only economically, but also to a certain extent at political and legal level, we haven't really cracked that nut yet. i mean, there is a discussion

ongoing, but at this point resolution remains a national matter, and this remains a sentiment sentimental buyer. so it's not easy. my sense is that -- and this is, as you know, a research project we have at the peterson institute for the year ahead -- is that the vickers commission gives, perhaps, an indication of one possible way forward which is not the traditional glass-steigel separating retail banking from investment banking for domestic financial stability reasons, but rather making aty 2006 between -- distinction between tradeable versus nontradeable financial services. and it so happens that nontradeable financial services are mostly retail, financial services and tradeable are mostly wholesale and investment financial services, but that's a

very different way of looking at it. and here it's not about saying, you know, one has a guarantee, the other doesn't have a guarantee because i personally don't believe that to be the case. i think lehman brothers does have a guarantee or if you don't, you have a big problem. but it's a different framework of regulation because one is national, the other is international. so i think the vickers commission was entirely right to say, well, let's go as far as possible to regulate financial services in the u.k., but that means retail, and we have to leave wholesale to an international discussion. so now the question, of course, is what form does this international discussion take? and i think we are only at the very, very beginning of that conversation. >> i'd just add one word. i think the fact that we haven't gotten anywhere on cross-border resolution is very troubling. i'd even think about saying, well, the default regime then ought to be to ring fence. that is, everybody will have to

have subs, they will have to be highly capitalized, and that will be expensive to the industry. but since you're not getting anywhere on cross-border, this is a solution at least that insures that there's assets this to pay the liabilities, and it's not good for international efficiency, but it's better than chaos. and so, you know, if we don't get some loss-sharing agreements soon, there is an incentive to do that, let's go to ring fencing. it's something we know how to do, and it's better than, it's better than nothing. and maybe that will motivate a discussion about trying to get cross-border moving because it's not moving right now. >> nicholas and morris, thank you very much. charles, thanks for inviting me to moderate this discussion. thank you all for paying such close attention at the end of the day, and back to you. thank you, charles. >> thank you. [applause]

we have, i think, a 15-minute chance for me to give you a -- you may relax. i'm just planning on using one or two to thank you all for your attendance, to thank stern for a lot of scholarship, a lot of different positions represented during the day. i think it's been a rich discussion of some very pressing issues, very important issues. and, um, it's clear there's plenty for the regulators still to do domestically and internationally. the challenges are great. we, i think, collectively must figure on paying the price of freedom which is eternal vigilance and keep them to their task, but we must also wish them a lot of luck to get, to maintain their resolve and get done what needs to be done. so thank you again and godspeed.

[applause] [inaudible conversations] [inaudible conversations] [inaudible conversations]

>> the senate armed services committee holds a confirmation hearing this morning for lieutenant general john allen who's credited to guide the campaign to turn iraqi sunnies against al-qaeda. he was picked to replace general david petraeus in afghanistan. he's joined by the vice admiral who's been nominated to lead the special operations command. the third witness is general james thurman, nominated to lead u.s. forces in korea. you can watch live coverage at 9:30 a.m. eastern on c-span3. on c-span this morning, a senate foreign relations

committee hearing on u.s. military involvement in libya and whether president obama needs congressional approval under the war powers act. you can watch live coverage at 10 a.m. eastern on c-span. the supreme court is now available as a standard and enhanced e-book and tells the story of the court through the eyes of the justices themselves. eleven original c-span interviews with current and retired justices. this new edition e-book includes an interview with the newest supreme court justice, elena kagan, and add to your experience by watching multimedia clips from all the justices. c-span's "the supreme court," available now wherever e-books are sold. every weekend it's american history tv on c-span3 starting saturday mornings. 48 hours of people and events telling the american story, historic events on oral histories. our history book shelf features some of the best known history writers.

revisit battles and events, visit college classrooms across the country during lectures in history, go behind the scenes at museums and historic sites, and the presidency looks at the policies and legacies of past american presidents. get our complete schedule at c-span.org/history and sign up to have it e-mailed to you by pressing the c-span alert button. c-span has launched a new easy to navigate web site for politics and the 2012 presidential race with the latest c-span events from the campaign trail, twitter feeds and facebook updates from candidates and political reporters and links to c-span media partners in the early primary and caucus states. visit us at c-span.org/campaign 2012. u.s. and india are holding economic talks in washington this week with the goal of boosting trade and investment. [applause]

ahead of the talks india's finance minister joins treasury secretary tim geithner to discuss the economic partnership between the two countries. this is a little over an hour. [inaudible conversations] >> okay. good evening and a warm welcome. welcome to the final session of this great conference that we have had all day long. two global leader ors who have -- leaders who have really stood out, stood out in their aptitude handling of their respective economies. the entire day, ladies and gentlemen, we spent, we touched upon various issues which focused on the economic and thes

financial partnership opportunities between our two greatnc countries. while many industrial speakers, government speakers, regulators, institutions, think tanks add their views and debated several topics during the course of the day, i guess this was the session we have been waiting for to hear from our two leaders, and is cii and brookings are, indeed, extremely proud and honored to welcome them in thenh midst of this fantastic gathering we have had in washington today. and while we welcome very warmly our two leaders, what we have discussed over the course of the day has posed several issues ane those who identified many challenges that we have in taking this collaboration and partnership forward. we talked about the u.s./indiabt two-way trade which has grown exponentially, really, at the

rate of 30% since 2009 and standing to just short of 50 billion. and india really featuring high in the u.s. administration's goal of doubling u.s. exports by 2015. at the same time, we have also seen india's ambition of doubling its exports by 2014 to 500 billion. needless to say, of course, that india is also looking at the u.s. in this regard.ng the possibilities we listed wer limitless. and also when we talked aboutalo india wanting to sustain its economic growth to 8% plus in the coming years, we talked a lot about the massive infrastructure need for india. we said that in the five years, so to say, india estimates a total amount of investments to about 2.5 trillion within infrastructure alone, looking at a trillion dollars of investments.$2.5

and we looked at several modelsv and we talked about public/private partnership and saw several opportunities at emerging in how u.s. could participate in it. we saw new sectors where we could partner together. we talked about several emerging sectors in agriculture opportunities in agriculture, opportunities in health care, opportunities in education. and so on and so forth. and especially india's financial services sector. ladies and gentlemen, there iscl no one else who can really expand and talk and give us thoughts and ideas to take this relationship forward in the years to come. i present to you most proudly, secretary geithner and minister mukherjee. [applause] >> let me just start by thanking cii and brookings for bringing this group together.e th thanks to you for coming and for spending the day talking about what is our agenda too. um, and i want to welcome the

minister and thank him for the making this long trip and bringing such a good group of senior officials, and we're going toth have the chance over dinner tonight and tomorrow to meet and talk about all the great issues between our two countries.gr we view this relationship as having enormous potential. we think we're just at the very beginning of unlocking the greao potential of this economic relationship, and we're going to spend our time talking about a list of the most important challenges and opportunities between us. obviously, we, as we always do,y we'll start by talking about thl global economy, the risks and challenges ahead and talk a little bit about the economic developments in both the united states and india.nt but our main purpose, i think, is to look for ways to expandook and strengthen the economics, the trade, the investment relationship. i think from our perspective the key thing is the outlook for reform, for economic reform.ic r in the united states fiscal