house of commons live wednesday mornings here on c-span2. we invite your participation via twitter using hashtag pmq. prior to question time members are finishing up other business. >> [inaudible conversations] could we not have a system that is sensible? >> i sorely take note of what the honorable gentleman says and i would be happy to meet with him to discuss it further. >> order. questions to the prime minister. >> number one, mr. speaker. >> thank you, mr. speaker. this morning i had meetings with ministerial colleagues and

others, and in addition to my duties in this house, i shall have further such meetings later today. and. >> welcome economic growth, investments in new commercial project. does my friend agree a key part -- not only achieving in the southwest, for the housing, business growth and rail for infrastructure plant and will he do all they can to hasten the completeness of this? >> well, having visited my honorable friend's constituency recently i now passionately she feels about this important to build the. i know she will be delighted that the judge in question has to dismiss the judicial review so we can now hope that this paves the way for the supermarket and the stadium to be built and i hope they will press ahead with it. not only will this mean a new home for bristol rovers but more jobs, more growth and better

infrastructure. >> ed miliband. [shouting] >> mr. speaker, it's for your since the prime minister announced his top down nhs reorganization. since then can he tell us with a number of people having to wait more than they guaranteed two months for cancer treatment has got better or worse? >> the number of people treated for cancer i has gone up by 15% and we are meeting the key waiting time targets, particularly the waiting time target for actual emergency which we met for april even though once again he predicted a crisis. >> mr. speaker, that was a very specific question i asked about cancer treatment. i asked whether things got better or worse. the prime minister said things would get better. cancer support -- more lives are being put at risk.

cancer research uk said and i quote this isn't just a missed target. some patients are being felt they missed the target for the first time ever on access to cancer treatment. easy really telling two of the most respected cancer charities they are wrong about the target and things we getting better, not worst? >> we introduced for the first time ever a cancer drugs fund which is intriguing 15,000 people. that is what is happening. the number of people being treated for cancer is up 15% and this is all in stark contrast with wales where labour are in charge -- they all shake their heads but the fact is labour is in charge of the nhs in wales and they haven't met a cancer target of their since 2009. >> actually his wrong about that. in wales, more patients sought cancer treatment within 62 days than in england. and we know why he wants to talk

about wales because he cannot defend his record in england. and wasn't it interesting that on the cancer treatment target he couldn't pretend things were getting better but he couldn't admit things are getting worse. in the four years since his reorganization, have the number of people -- got better or worse? >> we have met our waiting time target for actual emergencies. let me tell him exactly how long people are waiting. the average waiting time when the shadow secretar secretary oe with secretary of state, the average waiting time was 77 minutes or under this government it is 30 minutes. that is what's happening under this government. but let me come let me admit to a mistake, mr. speaker. let me admit to a mistake. i just said that labour have a met a cancer treatment target in wales since 2009. i'm afraid i was wrong. they haven't met a cancer

treatment in wales since 2008. and, of course, in wales and there is no cancer drugs fund. there's been an 8% cut to the budget. people are dying on waiting lists, and labour are responsible. he asks me to defend my record over the last four years, i will. there are 7000 more doctors. [shouting] there are 4000 more nurses. [shouting] there's over 1000 more midwives shot back we are treating over 1 million more patients a year, and were as the nhs under labour has a disgrace of made step commute can now see the nhs being properly invested in improperly improving. [shouting] >> i'll tell him about our record on the nhs. the shortest waiting times ever. [shouting] more doctors and nurses than ever before. [shouting] and the highest satisfaction ever. that's at labour's record on the nhs. it was a long time ago but he didn't answer the question but he didn't answer the question.

it's a target that he set in a and b. litigators -- let me give them the figures big for his reorganization, the number of people's weight more than four hours was 353,000, and after his reorganization it has risen to 939,000. that's an increase of 300%. is that better or worse a? >> average waiting time is down by more than half. that is better. he doesn't have to listen to me. he can listen to the shadow health secretary who said this. he said this is the best health service in the world. that's what he said. he was quoting, he was quoting the commonwealth report which is an independent organization which ranked the united kingdom for the first time under this government as having the best health service anywhere in the world. better than america, better than

germany, better than france, better than australia. he says it was his record, this would only happen under this government. [shouting] >> and i can tell him, i can tell them why it's happen under this government. mixed sex wards virtually abolished. a cancer drug on for the first time ever. more doctors, more nurses, more people being treated and it's official, the best nhs in the world. >> into this party that created the nhs and every time we have -- [inaudible] and once again he didn't answer the question. more people are waiting more than four hours in a&e. what about those people who are so serious they need a bed in hospital? can he tell us since his reorganization, has the number of people waiting more than four hours on trolleys something he said he would get rid of that better or worst?

>> the number of people waiting to get into a&e, people waiting less time than they waiting under the last labour government. we remember what the last labour government gave us. they gave us the disgrace of -- for which they have never properly apologized. what they said about our plan, we have put wellpoint 7 billion pounds extra into the nhs. interview was it was irresponsible. they oppose reform to the nhs and you can see the effect in wales. no reform, no money, longer waiting list, no targets met. people dying on waiting lists under a labour government. >> he can't answer the basic question by his own target in the nhs. i can tell him the number of people waiting on trolleys for more than four hours has gone up from 61,000, to 157,000 on his watch. mr. speaker, he promised the reorganization in the nhs would make things better.

it made things worse. worse on access to cancer treatment or worse on a&e wait, worse on gp access. the nhs is getting worse on his watch and there's only one person to blame and it seem a. >> honestly if they can't do better than that, even on the nhs, he really is in trouble. what's happening under this government millions more patients treated, cancer drugs fund for the first time ever. our health service rank officially the best in the world, and we know what he would do because we've heard from the director of policy who said this. it will be no interesting ideas will emerge from labour's policy review. that is official. his gurus come out and said he has no vision. yesterday he misquote statistics, it's been completely wrong and the factory he speaks in, the factory he speaks in, the managing director says that labour's policy would be a bureaucratic nightmare. i would say to the people

looking glum behind it, cheer up, folks. it's only wednesday. [cheers and applause] >> good to be back, mr. speaker. a 40 year old mother was murdered -- in rotting tail on the 17th of march. the introduction of claire's law, or the right to know, to find out if your partner has a history of violence in this case, surely did note of his history of violence, must be faster by support by both the police and the probation service to those in this situation know the potential dangers they face so we will not see another

tragedy like the death of sharon lee. >> can i say it is good is an honorable friend i can displace and make an important point which is introduction of claire's law. i think has made a real difference because it gives people the right to the information about potential dangers from a partner and i'm proud of the fact that it's now been rolled out across the country. he's right, we did to do more with the police and the probation service and the prison service to make sure more warnings are given in more cas cases. >> the prime minister will be a where of housing crisis in london. but is he aware of his colleagues -- jus this think of contribution? to his 110 million family pound family firm, he has brought up new -- [inaudible] >> order. the question will be heard. what people think of it is neither here nor there. this is supposed to be a bastion

of free speech and the honorable lady will be heard, however long it takes. >> families are facing eviction being put on the street. on the activities of the members -- the prime minister's idea of compassionate conservatism? >> what i say is we all know we need to see more houses being built and we've seen 41,000 affordable stars over the last year, over one-fifth in london. we need more housebuilding, more houses providing and, therefore, we'll see more affordable rent both in the social sector and in the private sector as well. >> one in three of our nuclear test veterans descendents have been born with a serious medical condition. given our cross party campaign recognition not compensation, including a government payment to a general fund to help those in need, will the prime minister

now clear the logjam, recognize that veterans and unresolved this shameful chapter in our nuclear history? >> first of all let me pay tribute to my friend. his campaign consistently on this issue in the house and outside it. he and i have discussed it and i'm happy to tell the house that this government absolutely recognizes and it's extremely grateful to all the service personnel who participated in the nuclear testing program. we should be no doubt their selfless contribution help to make sure the uk is equipped with a deterrent that we need. following our meeting of house but officials to look at the specific points he has made and i'll come back to him as soon as possible. >> mr. speaker, last saturday i spoke with my 93 year-old constituent who serve as a merchant seamen throughout the second world war. he said to me he never thought he would live to see the day in this country when people in work would still not have enough money to live on. what does the prime minister

say? is it simply this authority government make the rich richer and everyone else for? or the just the inevitable consequence of his long-term economic -- >> obviously the first thing i would say is i'm proud to lead a government that is in the basic state pension increase by 15,000 under this government helping his constituents are in terms of how we help people in work, we need to great more jobs and we've seen 2 million new private-sector jobs under this government and the second thing we need to do is cut people's taxes and under this government you can now burn over 10,000 pounds before you pay any income tax. that is at the heart of our long-term economic plan and it is working for britain. >> thank you, mr. speaker. as the world has seen the tragic and brutal murders of three israeli youngsters most probably by hamas. will my honorable friend to the israeli government every support

at this time and does he not agree with me that far from showing constraint we will do everything possible to take out hamas terrorist network and will he give the israeli government support of this? >> what i would say to my honorable friend who i know is passionate about these issues, and to a vote i in the south, ts was an appalling and inexcusable act of terror. one can only imagine the effects of the family and friends of these for teenagers and what happened to them. i think it's important that britain will stand with israel as it seeks to bring to justice those who are responsible. we also welcome the fact that president abbas has firmly condemned the abduction and try to help find these people. it is important as my friend said also today operations are conducted with care so for the escalation is avoided. the people responsible for this should be found and brought to justice. >> mr. speaker, in 2011 the prime minister said waiting lists really matter. so why then are the nearly

3 million on ever lengthening waiting list, the highest in six years? what does the prime minister have to say to catherine singler, a constituent of mine, 33 weeks she's been waiting in vain for a hip operation? doesn't she really matter? >> what i would say to the honorable gentleman is he needs to look at the figures and the figures show that the numbers waiting longer than 18 weeks, 26 weeks and 50 weeks, 52 weeks to start treatment -- the shadow chancellor's are getting worse. they are lower today than they ever were when he was sitting in government. lower than at any time. look, we have the record yesterday of the leader of the opposition using dodgy statistics. yesterday, yesterday he claimed, yesterday claimed that three quarters of the jobs in our country were created in london. that is totally wrong. how we heard an apology? how we heard a correction? does he want to correct the

record? he will do anything to talk on the british economy. >> the prime minister is aware of the issue -- long-standing campaign for series investment -- [inaudible] will be my mr. visit my constituency with his checkbook and a veritable announcement? >> i tend to visit a lot of time between now and the next election, and i will be bringing i with all sorts of good news for the people. >> thank you, mr. speaker. germany has three times as many apprentices as the uk. the number of young apprentices has fallen to youth unemployment, long-term

unemployment is twice the national average and we're only going to track secure and better paid jobs it would make education and skills our number one priority. will be prime minister make a start by ensuring every public sector provides apprenticeship places of? >> i have to say to the honorable gentleman if you looks at the figures for dudley north he will find the claimant count is down by 20% in the last year. people find the you've claimant count is down by 21% in the last year. the long-term you've claimant count is down a 28% in the last year. the fact is in the west midlands things are getting better, more people in work, more jobs being created. he should be celebrating a dudley rather than running it down. >> and prime minister will be a winner of the tragic death of my three year-old constituent sam

morris concept is while under nhs care. he was failed by his gps, services, the hospital, primary care and the ombuds been. this must not happen again. will be prime minister a sure that the ombuds bound recordation are implemented in full and that the system of review within the nhs and but ombuds bound are radically overhauled to deliver proper transparency and accountability in a timely way? this family waited two years for justice. >> i -- the honorable lady is right to raise this tragic case but all of our dots should be with sam's parents who i know that a meeting with the second two. it is sagging and she said to see the whole secession of health service still does them anyone who's lost a child and lost a child that young knows how harrowing and a dreadful this experience is. she's a right, we must learn the lessons from this case, make sure they're acted on the make sure they can't happen again. and just as last week we

launched a major safety campaign to prevent these sort of sad and tragic death. [inaudible] can the prime minister tell us whether -- [inaudible] >> what if it will be discussed is the fact the labour party just have to get one trade union to write one check for 14 million pounds. and when you look at the candidates that the labour party has got, when you take out of the next the fact we've got some of blair, son of star, son of prescott, son of grow become when you take out that come you will take out 80% of the candidates our union sponsored. they bought the candidates, bought the leader. we must never let them near the country. [shouting] >> thank you, mr. speaker.

the number of -- has fallen from 4500 in march 2012 to 2006 and 45 now your thanks to a joint project. would be prime minister congratulate those responsible or that success and have more mps get involved? recognizing their great value is constituted correctly and targeted wisely. >> i think my honorable friend is right, and this is something where there's interest right across this house because all parties are not committed to making the local enterprise partnerships work, not to go back to the old regions the government agencies. i think it's important local enterprise partnerships are business lead. it is important they are strong in every part of the country and members of parliament i think and play a real role in

encouraging comment businessmen and women to get involved and make sure they deliver for local areas. >> can i take the premise are back to the question of the private rent sector in britain. across london there are thousands and thousands of families, people on benefits who are frightened of the rent increases, frightened of the short term, and friend of the consequences for themselves and their children being evicted are forced to move out of the air which they live. if social cleansing is happening and it's coming to the rest of the country. can he give me an assurance that in addition to any regulation of the agencies there will be serious consideration about the need to bring back rent control in this country to protect people to ensure that somewhere secure and decent deliver a? >> whether i would agree with the honorable gentleman is i think there is a need for greater transparency for the work of leading agencies in terms of these but i think there is a need for longer-term, which

we put forward options for longer-term but in the end we must allow the customer to choose what they want. where i part company with is the idea of introducing full on rent control but every time they have been tried, wherever they been tried in the world they failed and that's not just my view. that is also the view of labour's own shadow housing ministers on the record saying that she doesn't think rent controls would work in actress so perhaps he might want to have a word with her before coming on to me. >> him in the 83 general election, a 13 year old boy delivered leaflets around my constituency touching that michael foot would take labour out of the european union. does my right honorable friend find it strange that same boy, now leader of the labour party, isn't willing either support the renegotiating of britain's firms to britain ship -- or to pledge

to support to trash the people of britain on a referendum on our membership? >> i've always thought it terribly unfair to hold against people things they might have done in their youth. you know, i really -- [laughter] as a 14 year old if those whose idea of fun, then obviously, you know, we have to make room, you know, we have to make room for everybody. [laughter] the point is this. it's in the interest -- is the interest of the british people to have a renegotiation -- it is not hanging out with the shadow chancellor. [shouting] and so i feel sorry for the leader of the opposition because he has to hang out with him all of the time. what a miserable existence it must be to have him sitting next to the person directed the

british economy and have to listen to them day after day, day after day as they say to the british people, we are the people who crashed the car. give us the keys back. >> mr. speaker, the uncertainties run the future of scotland and, indeed, the uk has resulted in many of the community in scotland withholding investments in the country. does the prime minister agree there is a model responsible on employers to inform their employees what the consequences if any of separation of scotland from the uk -- [inaudible] prior to the reverend? >> i think he makes a very important point which is a huge amount of pressure is put on businesses by the scottish government with all sorts of threats and warnings if they speak out and say what they believe is the truth. i come across business leader after business leader, large and small in scotland that want to

keep our united kingdom together think it would be crazy to have border controls, different currencies split up after successful united kingdom. so with him i would urge them to speak of, talk with their workforces, talk about the strength of our united kingdom and then vote to keep it together. >> thank you, mr. speaker. this weekend the cities, towns and villages will be a live with cries of -- the world's greatest annual sporting event passes through our county. will the prime minister join in the enthusiast them for people of the race taking place this weekend and agree and a wonderful way to fill the legacy of cycling and encourage more people to get on their bike? >> i outsold you agreed with my honorable friend. i think it is brilliant the tour de france is starting in yorkshire to a single be a fantastic event for our country but it's also going to be a

great advertisement for yorkshire and all that yorkshiryorkshir e has to offer. i'm looking for to going myself and seen some of the race and some of the preparations but i think will be a magnificent event and i will do everything to promote it apart from wearing lycra. >> thank you, mr. speaker. will the prime minister make it illegal for recruitment agencies to advertise overseas for jobs in this country unless they advertise locally? yes or no? >> the short answer to that is yes, that's exactly what we're doing. the employment agencies cannot be able to do that. they cannot merely advertise jobs abroad and we're doing every thing we can to stop that. >> we have a 12 billion tourism deficit in this country. the deficit between people who go overseas and people who come here. one of the reasons or that is believed to be a high vat rate on accommodation and on

attractions. will be prime minister look at that to ensure that that is not what is driving up that deficit? >> i think my honorable friend is right to promote the southwest as a holiday destination. we should do whatever we can do. the restoration of the transport link has been vital. i think it is difficult to of differential rates of vat on some of these things but everything we can do to promote the uk as a holiday destination including the brilliant fact that the tour de france is coming this weekend, we should do. >> cancer research uk has just launched a new strategy which is focus on -- [inaudible] >> i do think the cancer drugs fund has been a huge breakthrough not just in terms of making available drugs but also making available some

important treatment of the other parts of the united kingdom will take up what we're doing with the cancer drugs than. i think the other thing we can do is through genomics uk to make sure we're sentencing genomes as fast as we can so that we can carry out the research necessary to see which cancer drugs will be effective on which patients according to their dna. this will be the model way to do tailored medicine and the pleased to say britain is well ahead of the pack in terms of making sure we invest their universities and science-based as well as our nhs. two young constituents of mine own property. does the prime minister agreed they now enjoy their own home and made a start on housing demonstrated his government's support for those who want to work hard and get on with what? >> i join in congratulating, in

congratulating his constituents but to see it is working to get people of housing ladder because it's enabling people who don't have rich parents who can't afford a big deposit but you can afford a mortgage to go out and buy the flat or the house that they would. we have seen 30,000 people already taking advantage of this and it's also helped to kickstart investment in housing and to get the level of housing starts up in our country. >> is the prime minister aware that under question of the national health service and as an outpatient which i happened to visit on a regular basis, and do your from the front line about the problems in the health service, the nurses have lost quite a considerable amount into real pay. the a&e are bursting at the

seams. then there's the question of almost every hospital in britain that is running into financial difficulty. as a member of the club, is he proud to be surrounded by this wreckage? remember, it's his legacy, not ours. stop blaming the union. get it done or get out. [shouting] >> i just think the picture that the audible chip and paints is completely wrong. of course, there are more people going to a&e to over a million more people going to a&e intercountry but we are meeting our target and waiting times are down by half. he talks about nurses. there are 4000 more nurses in our nhs than when i first stood at this dispatch box. there are 7000 were doctors and what he ought to know about is that actually we've got the number of administrative staff, the bureaucrats were left with

by the party opposite 19,000 fewer of those. that's what we're able to treat more patients with more clinical staff, a record that we can all be proud of. >> thank you. our long-term economic plan -- [shouting] 200 million pounds has been allocated for fighting -- 3.3 million in north hampshire. much of that in my constituency. doesn't this infrastructure investment means that it's only conservative that have a plan that puts britain on the road to recovery whereas the labour party would try this countries economy off a cliff? >> i think my honorable friend is fully justified and taking a lot of credit for the work that is been done on potholes. partly because of that big a

3.3 million pounds specifically to spend on repairing roads and he will be pleased to note that is enough to fill than a staggering 62000 potholes. this is important because it damages peoples cars, motorbikes and cycles on the way to work. minting bottles is good for hard-working families. >> drama. a 73 year-old army veteran in my constituency -- he hasn't been seen since june 19. his family is frantic with worry. will be prime minister assured they continue the excellent work and cooperate with the greek government to make sure that he has found a? >> i will do everything i can tell the honorable gentleman with his constituents and have discussions with the foreign office about all the assistance that is being given anything else they can do. >> order. point of order. mr. ramsay burnham. >> the prime minister appears to

suggest that the number of people who waited longer than 18 weeks in operation have gone down since his real position. i have the figures are. april 2010, 20,662 waited longer than 18 weeks. april 2014, 29,470, the number has gone up. before the prime minister leaves the chamber, don't you think he might correct the record, mr. speaker? >> i will tell the house the numbers waiting longer than 18, 26 and 52 weeks to start treatment is lower than at any time under the last government. those are the facts. yesterday they were caught out dodging statistics. i think they have just done it again. [shouting] >> here on c-span2 we will now lealeave the british house of commons as members move onto other business. you have been watching prime

minister's question time aired live wednesdays at seven in eastern when parliament is in session. you can see this again sunday nights at nine eastern and pacific on c-span. and for more information go to c-span.org and click on series to get every program we've aired from the british house of commons since october of 1989. we invite your comments about prime minister is question via twitter using hashtag pmq. >> booktv sat down with former secretary of state hillary clinton in little rock to discuss her new book hard choices. >> getting to the point where you can make piece is never easy because you don't make piece with your friends. you make it with people who are your adversary, who have killed those you care about, your own people are those who you're trying to protect, and it's a psychological drama. you have to give in to those on

the other side. because you have to change their calculation enough to get into the table. talk about what we did in iran, a lot of economic pressure to try to get into the table. we will see what happens but that has to be the first step. i write about what we did in afghanistan and pakistan trying to get the taliban to the table for a comprehensive discussion with the government of afghanistan. in iraq today, i think what we have to understand is that it is primarily a political problem that has to be addressed. the ascension of the sunni extremist, so-called ices group, is taking advantage of the breakdown in political dialogue and the total lack of trust between the maliki government, the sunni leaders and the kurdish leaders.

>> more with hillary clinton saturday at 7 p.m. eastern and sunday morning at 915 on c-span2's booktv. >> the office of the comptroller of the currency is a federal agency that charters and regulates national banks. at an event to mark its 150th anniversary, panelists including former chair sheila bair discusses regulations and safeguarding the financial system. this part of the event includes boston university law professor cornelius hurley. >> we welcome our first panel. i'd like to introduce you to suzanne duncan, the moderator of the panel. suzanne is the head of global

research at state street bank. she's the author of scores of white papers and manuscripts, particularly in the area of investment management. you will see her commentary on almost every major media outlet throughout the globe. but the thing that we are most proud of is that she is a member of the board of advisors of our center for finance law and policy. suzanne will introduce sheila bair, gerry corrigan and ray natter. >> actually. thank you very much, con. things that opportunity. i'm honored to be moderating a panel that really needs no introduction. we have with us today gerry corrigan was the chairman of goldman sachs bank u.s.a., and the former president of the federal reserve bank of new york at the federal reserve bank of minneapolis. we also have sheila bair, who is

the former chairman of the fdic, and curtl cursors as a senior ar to pew charitable trust. and finally we have ray natter was a partner at his law firm, and former served as a deputy chief counsel of the occ. so i'd like to kick off the discussion by asking each of our panelists to provide 10 minutes, that is a very brief amount of time, to minister opening remarks and the remainder will be devoted to a discussion followed by two questions from our audience. the backdrop to this bill is a seminal paper that gerry corrigan penned in 1982 titled "are banks still special." so jerry, of course it makes sense to kick off with you and we welcome your views. >> thank you very much. thank you all for joining us today. we have a very full and i think somewhat provocative agenda over the course of the day so i will deviate from my usual pattern and try not to be provocative.

but i probably will not succeed. first of all let me say that i have made copies of the full text of "are banks still special," after someplace but i also made available a follow-up paper that i wrote in 2010 i think it was. asked me to write a sequel, how does the world look now compared to when it wrote the original piece in 1981-82. i think that i can summarize and maybe a minute and a half with the essential philosophy of the

"are banks still special?" as it was, and what it basically came down, first of all, trying to come up with a really coherent and tight definition of banking. and i deliberately did that myself without any help from anybody but myself. and essentially the concept, of course was straightforward in that it started out with the proposition that banks, as part of their larger role of mobilizing, saving, and devoting those savings to the most efficient possible uses, was directly tied to the proposition of a very tight, narrow definition of deposit taking. what that implied in terms of

the lending side and the investing side of banking institutions. it seemed to me then, and it still seems to me to be the case now, that if you follow the suggestions that were made in that context in terms of what banks were and then why they were special, it led me to the conclusion that banks, because of those special functions, should be and largely our unique in the sense that they are subject to the so-called federal safety net, deposit insurance supervisory provisions, and very importantly, access to liquidity and payment facilities of the

central bank. one of the things that irritates me still to this day is people still pay very little attention to the importance of the payment facilities of the central bank, not just in the united states, but all over the world. and that was kind of the hypothesis. and then i set out to try to put humpty dumpty together. and i quickly came to the conclusion that getting the definition in the philosophy of approximately right gave rise to another whole series of questions of what power should banking organizations have, how much emphasis should we put on subsidiaries of banks as opposed to subsidiaries of bank holding companies. and that list goes on. i'm not going to go into any

detail. it ended up that when the thing was put together, i felt pretty good about it at the time. but i have to admit that quickly after the first version of the essay was put together, the banking system went through a pretty rough patch in the 1980s. the fact of the matter is, starting with the failure of continental and the thrift crisis, the southwest banking crisis, the new england banking crisis, this was not a good time. and i began to ask myself the question, what did i miss? because certainly the experience of the '80s was i thought pretty lousy. a few of you may remember, john reed it probably is some who remembers quite well, that when

we got to 1980, 81, 82, we came pretty close to a really serious situation that involved not just banks but insurance companies, investment banks. this was, turned out to be too close to call. one of the things, one of the doctrines that i had left out of the original essay is a doctrine that a think still is important today, maybe even more important, is the so-called doctrine of corrective action, getting ahead of problems when they began to emerge as opposed to wait until it's too late. and i began to feel a little bit better that we did a pretty good job of dealing with that situation. i was surprised, as we went

along, that a lot of people are still reading that essay. as a matter of fact, they are still reading it to this day, which is really remarkable. so what i tried to do, which i will get to very quickly here, is to revisit the question over the past three or four weeks. now, our banks as a suggested 30 years ago so special, or have events simply outpaced us? as you look at the period of the last decade or so, clearly between legislative changes to say nothing of the financial crisis itself, at first blush i think a case could be made that banks being special had run its

course, that so much had changed and the changes were so radical in many respects, that the specialists of banks as i said has run its course. the more i thought about that, the more i came, believe it or not, to the opposite conclusion that indeed i could make a case that the specialness of banks today is more important, not less important, when i wrote that first essay in 1981-82. may be sad, maybe glad, i'm not sure but i kind of decided it's time now to write the sequel again, to revisit the thought process and the principles that were tied up in the 1982 essay.

i'm not sure how long that will take, but it's going to be very difficult. because while i think the principles are still essentially right, i also know that the experience of the last 30 years with particular emphasis on the last 10 years is going to be extremely difficult to rationalize in the current setting and looking to the future of why i believe that banks still our special. the challenges that lie ahead for the banking industry and for the financial industry more generally are going to be a major subject of our discussion throughout the day today. and i look forward to listening and learning to what people have to say about that.

but the bottom line of my conclusion for the day, and in my 38 seconds left to finish, is i, for one, still very much believe that banks are special. i think the functions that they perform and the context of the 1982 principles are still essentially right. but the world has changed radically. and how you square the circle with 30 year old principles and contemporary realities is not going to be easy. so thank you very much for your patience. >> thank you. exactly on time. sheila, let's not hear your perspective. >> so i would agree that the banks are still special. i think for all the reasons that jerry articulated in his landmark paper.

the three functions that the identified in the paper were transaction accounts, provider of liquidity as well as the transmission pilfer monetary policy. of those three i think the first two corner of the most important to an effectively functioning economy. and with transaction accounts in particular, both households and businesses need to know they have a safe place where they can keep money that they need to be really available, that will be there when they need it. and the banks are uniquely equipped to provide that but we learned through many hard lessons that government intervention is necessary to provide stability in the form of central bank lending as well as fdic insurance. but with those government supports comes moral hazards. so that is the basic framework and i think it is still highly relevant. i think the problem is we've deviated from come we started

letting entities that are not banks and not subject to revelation, things like to have a requirement, to perform a banking function. the 2008 crisis i think has been rightly called a run on the shadow sector. and that is what was going on. but we really don't have clarity of purpose in moving forward to try to define those functions that are essential to the economy and need to be part of the safety net from those and make sure that those entities are regulated appropriately with others who want in good times to provide the services. and, of course, in good times anything works. so we have this model now. money market funds is a climb -- prime example, in my view is there not a bank, their mutual funds and they should act like a mutual fund. but there's tremendous resistance. it's proved itself to be unstable during the crisis but there's tremendous resistance to

making that kind of significant change. and so we have a model and i think will end up with a model if published reports are right with some tepid reforms, perhaps included, barring mutual fund, money market fund investors from getting the money or having to pay more. that's an easy way, so i don't think that's a helpful to investors and that could be disruptive to the payment system. in a crisis or the are also other areas that are not traditional banking functions that are not in the safety net like climbing houses. i must say i don't get that. dodd-frank opened for the first time, it allowed clearinghouse is to be able to access the fed lending facility but did not provide the same regulation that the banks get. the oversight continues. so i see the safety net

expanding and, frankly, didn't perform that badly. that's what we're trying to push more derivatives into centralized clearing because they worked pretty well but with this new source of moral hazard and underfunded regulars i fear where that may take us. the second function, backup providers of liquidity. a banking system ended up being a disrupter of liquidity. not a provider and a crisis. i think that was very unfortunate and the reason that the grid was because we had too many banks as well as the shadow banks relying on short-term funding, not traditional, more stable sources of funding. they used that to find a very risky, oh page investments that were hard for investors to value and understand their solvency. they had a thin capital level as well. they ended up pulling back and that's what we had the recession. they withdrew liquidity as opposed to performing their function of providing that

liquidity in times of economic distress. the regulators i think recognize this and are moving forward with tougher capital requirements but they'rthere's still so much wor. courageously they proposed a tougher leverage ratio. in 2010 and basel committee we also agreed to capital surcharges for the largest systemic institutions. that hasn't even been proposed yet. most of the studies i've seen, most of the banks have increased their capital levels by one to 2%. a lot of that was through merger acquisition. i know people disagree with me. they need more capital. i think that is really the key to making sure they are not liquidity disruptors when the next downturn comes and we know at some point will. the focus has been more on requiring banks to hold a lot of liquid assets on the balance sheets as opposed to getting significantly higher capital levels. and i think that approach and

the emphasis on that approach troubles me for a couple of reasons. one is you advantage banks with large trading operations to loans which are not liquid. the financial institutions are the ones i was saying that were the most likely to get in trouble and were most in need of bailout assistance. but he also think regulars are making assumptions that these assets on the quit when i don't think they are liquid. they are putting significant haircuts on the. will they be able to sell those and a crisis? if you have enough capital to absorb losses? that's not clear to me. no amount of so-called liquid assets on the balance sheet -- i think getting the capital levels of israel to import and more transparency. what's on the balance sheet as will so investors don't panic. they concede better what the heck they've got on their books and have a better sense of what the values are. but we didn't have that kind of

transparency during the crisis. it was the same for regulated bank holding companies like citi. banks the next time, -- finally monetary policy i would defer to gerry and others are much more knowledgeable on this and i but it seems to me and said become less relevant as a transmission for monetary policy, direct market interventions have really become the tool of choice for the fed. whether that's good or bad i've had my concerns, expressed them before. i do need to go through that again but i do think it's a significant switch in how monetary policy is performed. and again i think history will tell whether this is the right move or not. i've had my own concerns. i would just say in conclusion i do think banks are special, but i think the answer is to recognize that the backup providers of liquidity in times of economic and market stress, absolute need to have a reliable

payments assistance. those are the core functions come at a safety net but the rest of it i don't think this. if you give them that safety net access, especially if you give it to them without the corresponding increased regulation and capital requirements, we are asking for trouble. my view is both a bail out the genie back in the bottle but don't ratify the bail outs as a tool of choice going forward. i'm not sure i see that clarity of purpose in reform efforts going on our special with climbing houses, and again money funds -- i think that's troubling and some the people who care about a safe stable banking system should also be worried about. thank you. >> the bailout the genie back in the bottle, that's a good one. ray, we welcome your views on a related theme, preemption in the wake of dodd-frank. >> thank you very much. the subjects that are being discussed are much broader than

perhaps more interesting but i'll try to limit my remark's so we can get on to the discussion of the broader policy issues which are fascinating and make for a lively discussion. so let me begin by saying that i worked at the occ 10 years, and i'm very proud of the time i spent at the agency and i'm very proud of the occ, and the work done by comptroller hawke, ludwig, do been and walsh were first rate. they were terrific comptrollers and made wonderful policy decisions and discerning contribute to the resolution of the problem when the financial crisis hit. in that regard i also want to complement sheila and tim geithner and secretary paulson and the others who i think were extremely courageous, sometimes

taking actions that were needed when, to be diplomatic, the statutory authority may not have been entirely clear, but they stepped up to the plate and did things that took quite a bit of courage to do. and i think we all owe a debt of gratitude to the leadership we had, both in the administration and in the regulatory agency. one of the concerns or criticisms i would make of the, immediately following the crisis, was the lack of attempts to educate the american public about what exactly was happening, what caused it and why we needed to take extraordinary steps. as a result i think there's a lot of popular misunderstanding about the function of the banking system, the role of the banking system and why allowing

the banking system to collapse would have been a catastrophe for not only the united states but the whole world. and that type of educational effort should be made, was not made, well, could do been made, unless it is made i'm afraid it could have negative implications for policy decisions going forward. ..

is it may take a while to have the studies done. they're starting to come out. there was a very good study recently by the federal reserve bank of boston, which i highly recommend. chris cook was the primary author of that. it is a good paper coming out of nyu by barry white. the literature actually coming out now often diseye degrees with the -- disagrees with the perceptions we had in 2008 and 2009. so preemption might be a good way of illustrating that. there was a lot of concern and conventional wisdom was preemption which directly related to the housing crisis. that national bank preemption

allowed the response to be made. the fact are, first irc took the lead, first agency to grow back to 2000 when he began' lerting otc examiners to watch out for lending standards and tighten up on predatory practices, to look for equity stripping, too look for loans being made not in the best interests of consumers. and that went forward in 2003, 2004, by regulation. the otc said that national banks can not make a loan based on asset value of collateral but had been making consumers loans based on analysis of the ability of borrower to repay. then when you look at the data shows, the data shows that the overwhelming majority, just

about all loans considered predatory were made outside of the national banking system. if the loans that are considered subprime, national banks had a very low percentage of those loans. some reports 15% of the subprime loans were originated in national banks. and those loans performed better and were less costly than subprime loans originated by others. now i think the proof of effectiveness of occ supervision, i want to add other banking regulators took similar steps. fdic and fed in certain way had similar variations in price. if you look at bank holding companies that were originating subprime loans, they were not being originated in the depository institutions. prime example might be countrywide. the largest originator of subprime loans at both national

bank and later a thrift, the loans were originated in a nonbank, state-regulated affiliate, holding company level. now i'm not criticizing my good friends in the state banking system because these were not banks. they were being state regulated. at the time there was very little authority to state banking regulators to regulate these activities. now there is a lot of authority and we'll see improvements but at time the loans were being originated it was being originated in state institutions that had very little regulatory authority. now why is it important to have preemption? we've heard the controller state of national standards, more effective, less costly, they're beneficial but there is also an important factor involving safety and soundness.

the individual states in the name of consumer protection can take actions which are contrary to safe and sound operations of the depository institutions. good example was in the early '90s, when interest rates as you recall were 13, 14% for moment mortgages. there were states which prohibited the enforcement of clauses and mortgages due and payable when the home is sold. so depository institutions, primarily thrift institutions had 30-year mortgages on their books, thinking they would have an average life of seven years which is statistically how often a home would turn over fronted by short-term deposits. when you prohibited those loans in the name of consumer protection from being called when the house was sold you

transformed those loans into 30-year low yielding assets being funded by high cost deposits. hundreds of millions which now would be billions of losses were caused by that. these are just one example i have. certainly give you many examples where you've got state laws designed to protect particular consumers in particular states without the strong ability to have national laws that seem to hurt one group of consumers and actually are necessary to protect national banks and the national banking system. in my one minute that's left i would conclude by saying consumer protection is important. we now have a cfpb to issue national standards on consumer protection. it's necessary. there certainly were preemption rules which people can disagree

with but the standards and the ability to preempt state law is critical to national banking act and important to safe and sound operation of all depository institutions. >> thank you. so you have each listened to one another's remarks. what did you agree with, and what did you disagree with? ray, i will ask, put you on the spot to answer that one first. >> well, i'll be glad to take a stab at that. with respect to gerry's remarks i agreed with very much almost everything he said. i think banks are special. i think they serve a unique function which no other financial intermediary can provide some of the services that banks provide including transferring long-term assets into short-term liability which is critical to our system.

the one point and it was really sort of an aside which i would disagree with was his reference to the benefits of prompt corrective action. i think prompt corrective action is certainly a worthwhile goal but i don't think it is a realistic provision. which i worked on the senate banking committee, in a way criticizing something that i was possibly an author of the prompt corrective action requires, requiring a bank when its capital is 2%. when a bank fails somewhere between 20, more typically closer to 40% of its assets value is wiped out by seizing that institution. if you were to seize institutions when they had 2% capital the losses would put on the fdic system if they could stand it and we've seen in the crisis institutions that were

marked to market probably would not have met 2% but they were not closed. they were able to be revived at tremendous savings to the american economy. so theory of prompt corrective action is great. i don't think it works in practice. with respect to sheila i agreed with much of what she said and i respect her views tremendously. i agree that it was a bank, it was a run on the banks. i disagree with her solution and i disagree with the philosophy that to make banks a source of liquidity we have to make them hold liquid assets. in 1913, prior to 1913 there was a run on the banking system. we did not have a federal reserve. we had a bank called jpmorgan in

new york city which got together with other money center banks and said we need to provide liquidity to the banks in this country to prevent the run. and they provided that liquidity. out of that experience we developed the federal reserve system. one of the primary purposes of the federal reserve system is to provide liquidity when you have a panic in the marketplace. when assets are good, when you have a panic causing a run, the federal reserve and federal home loan bank system are there to provide liquidity. if you say that banks have to hold $2 trillion in government bonds in order to provide the liquidity in case of an emergency you are taking that fund out of the economy and since this leverage, that $2 trillion could be, 5, 6,

trillion dollars of lending and you're not really helping safety and soundness because the way the proposal is you are going to be encouraging banks to be holding long-term treasury bonds and if there is a liquidity crisis and interest rates are up, those bonds are going to have to take a big haircut. and you're encouraging banks to acquire foreign debt and under the proposal italian debt and greek, italian debt and spanish debt and portuguese debt and french debt all count 100% towards liquidity but you get a much bigger return. so a rational institution is going to say, rather than holding short-term treasury debt to meet this requirement i'm going to either go long on treasurys and i'm going to mix it in with some foreign debt and therefore you're creating the next crisis. in my view.

>> great. so sheila, maybe you can go next. what did you agree with, what did you disagree with? >> let me just make a few comments on ray's comments. maybe you miss understood what i was say about the liquidity rules. i don't like emphasis on banks requiring to hold a lot of liquid assets. we might agree on that. no, i think we need, i think capital, the best protection against a run on any bank is to make sure they say solvent and you do that with higher capital requirements. i think you need more transparency too. some investors get a better sense whether the financial institution is solvent. there is little focus on greater transparency for those large, complex, financial institutions and making reduce reliance on short-term debt. the market has done that a bit. you've seen short-term financing come down significantly, and that is a significant trend. no, i think it creates very funny incentives, advantages banks with large trading books,

and disadvantages banks with a lot of loans because the loans are not viewed as liquid assets. on the outline i'm not sure we do disagree. on pca, you know it is a perfect no but i will tell you as the former chair of the entity that was resolving for the failed institutions, having some type of statutorily prescribed process to reach the trigger point was extremely helpful to us. it is never happy a thing to close a bank. and there is a lot of pressure from politicians, from stakeholders, from you know, sometimes from regulate, to who don't want, the primary regulator. they don't want to own up to the fact that the bank is trouble. having type of statutorily prescribed process was helpful. the lawsuits you cite were significant. i don't think they were quite as high as numbers you were articulating. that is a problem. when you resolving a bank, times of market distress, so you're

not going to get very good pricing. i think something that could make pca better is better methodologies around reserving and determining when you hit the 2% trigger point. i think banks, examiners were saying, you know, perhaps a month before we thought we got to that 2% that their capital had declined to that level. so i think there are ways to improve pca but i think you need some type of objective method that the, especially the closing entity like fdic can point to say, sorry, our hand are tied by statute. this institution has to be closed. longer you wait, that was certainly lesson of the s&l crisis. bankers say, your first loss is your best loss. when they're cookerred they're cooked you need to move ahead. on preemption we're going to disagree on that. i think in era of consumer protection preempting states their ability to protect their own citizens as a matter of policy is ill-advised.

i do think, you're right, the occ did have an ability to repay, supervisory standard. wasn't clear how that was applied to the adjustable rate mortgages. i remember having very row put discussions about regulators whether you underwrite it at fully indexed rate. ability to pay first two or three years of hideous hybrid loans is it ability to pay throughout the life of the loan or first several years ahead and through the reset period. also national banks were funding these loans. i think those standards applied to mortgage originations but not to the loans that the national banks and others were funding. so that was another i think hole in the approach we were trying to take. so more importantly there was some really ugly stuff going on in the states. they were right, they were right to want to move forward and i think, you know, just more generally you shouldn't interfere with states desire to protect their own citizens. there are market factors that

can tamper, tamper, temper the state's ability to go too far. you know, the business will leave and states know that. so they try to calibrate it right. but you know, state experimentation with state consumer laws can be helpful to national regular regulators and they are laboratories, important laboratories. i don't agree with that decision. i regret the occ did that. i think it hurt its reputation. i think it did result in many states of consumers not having protections they should have had. we'll have to agree to disagree on that. >> what are your thoughts on sheila and -- >> two things i want to comment on briefly. first i'm not prepared to accept the suggestion that prompt corrective action can't work. in fact, i would argue that based on the experience of 1980

to 1982 it worked quite well and indeed because it worked quite well, we were able to get through an extraordinarily difficult situation that, that was involved banks and investment banks and insurance companies, domestically and internationally. that was not an accident we got through that without spending one nickel of taxpayer money. that's what it's all about. and if you contrast that experience with the fall of 2007 where industry leaders, central banking leaders, and other leaders were basically saying,

don't worry, the mortgage thing is manageable. well, that was obviously quite wrong, to put it mildly. beyond that, you know, if we really are committed to the proposition that we can fix too big to fail, resolution authority and other related techniques by, by definition resolution authority, orderly winddown of seriously troubled financial institutions, seems to me to be bound together with a framework of much more prompt corrective action. so i understand some of the nuances that you were referring to. and they're valid. i mean to make it work is not going to be easy but we've got

to get there. secondly thing, sheila, like to clarify a little bit if i can. and that is, this liquidity concept. let me say, first of all, that i believe that, on a very, very short list of enhancements to regularrer to agenda he postcrisis, that one of the important steps in that process has been putting into place through the basil committee side by side standards of capital

adequacy and liquidity adequacy and these two things, capital and liquidity, these are a single discipline. these are not opposite sides of the same coin. that's the unified approach. and when we think of that, we have to also keep in mind that the definitions of liquidity that are to be used and not being used in that context, speak about unencumbered liquidity. it is not repod. it is not, it is, it is unencumbered. if you look at the way that the framework for this single discipline of liquidity and capital adequacy is playing out, it is unusual to find emerging

situations where the amount of unencumbered liquidity is now often well up into well up high teens of major banks. 1, 18%, is not unusual and again it is unencumbered. i think that your concern, sheila, about other aspects of the liquidity world remain very important. i do think we've also made progress in terms of reducing, through a variety of devices, you know, the, absolute amount and relative amount of other forms of liquidity including repos and all of those things.

i think we have made and are making a lot of progress there but that, that single discipline of capital adequacy and liquidity, i think when we look back 10 years from now or something, unless i'm dead wrong, which is possible, i think we may conclude that this is one of the best things we've done keeping in mind that at the end of the day all of us know this. the straw that breaks the camel's bank with regard to failing institutions typically is not capital, it's liquidity. it is runs on banks and thinks like that which now are just pushing a button on a computer. so again, i think that, if we get that right, and frankly, if we get prompt corrective action, at least close to right, those

two things alone i think would have a very, very beneficial effect not just on special banks but on other financial intermediaries as well. >> well, you know, i agree with the premise that prompt corrective action statute is a very useful supervisory tool and very effective. i disagree that prompt corrective action is a method of protecting the banking system in times of financial close laps. so prompt corrective action was not a tool that was helpful in preventing or viewing the financial collapse but more fundamentally, on liquidity, there's two-ways that one can look at the banking civil. you can take it from the perspective, i really want a system that is going to be 100% safe and not have failures.

and taking that to extreme you have a system that has 100% liquid assets. you don't have to worry about runs. it has very high capital ratios. the trouble with that type of bank which will never fail, it will never loan money to anybody. so that forever, it is a seesaw. it's a balance. if you want an absolute safe and sound banking system you have have system that is not working to provide credit to the economy. on the other hand if you don't have enough safety and soundness and prudential regulations you will have risky institutions. but banks by their nature are supposed to be risky. making a commercial loan or as we saw residential loan, can be a very risky indefer. banks are -- endeavor. banks are designed to take risks, designed to leverage their capital base. designed to perform an

intermediation service. they, the liquidity rules that are being proposed not only are excessive in my view but are counterproductive. why would a rule say that you can invest 100% in u.s. treasurys or italian debt but you can't invest and is liquidity credit for money market mutual fund that can only invest in u.s. government? got to be some rationality and some balance in what we do and the emphasis that safety and soundness is always going to be the predominant regulatory goal is not going to work in the long run. >> i would just say, i agree with gerri. you don't want to clarify what i was saying on liquidity. it think is helpful to the basil committee looked at liquidity and capital side by side.

my only point i think more emphasis on capital and more emphasis on reducing their reliance on short-term funding. because the centerpiece seems to be putting more liquid assets and, why not just raise reserve requirements? some day somebody will explain why the fed doesn't want reserve requirements that. is the thing most liquid is excess reserves. some of the stuff they're doing is counterintuitive, i think it is very good we're moving forward on liquidity rules. but this emphasis having a lot of sovereign debt and other types of supposedly liquid assets which i don't think will be always liquid in the crisis is what worries me. >> we may have a chance later to talk about fed policy a little bit but just one footnote i think is directly relevant to the point you're making so the audience understands it, if you look at the balance sheet of the fed today, yesterday, or last week or whatever, what you find is, there is something in the order of magnitude of two plus

trillion dollars of bank deposits in the federal reserve banks $2 trillion sitting there, return on excess reserve of 12 basis points or something like that. that by the way is not wholly independent of my suggestion in the essay that banks are part of the transmission mechanism for monetary policy. and let me tell you, the day is going to come, you and i have talked about this on other occasions, while we're going to have to figure out what the hell we're going to do with that $2 trillion. that is not going to be easy. >> no, it's not. >> so on the topic of are banks still special, here is a two-part question. how as the role of banks evolved over the last 30 years and has

bank supervision and risk management kept pace with this evolution? anyone can have a crack. >> i can't resist. >> go for it. of course. >> first of all, now, by any standard that you can think of including looking back at history for you know multiple millenniums the last 30 years has been pretty damn tough in terms of, you know, the incidents of serious, if not systemic financial shocks both here in the united states and around the world. and if you do, as i have, some comparisons, you look, for example, at the number of serious financial crises that occurred in the 30 years leading up to the panic of 1907, the

fact of the matter is, we have had more in the last 30 years than they had in 30 years leading up to the panic of 2007, which by the way, it was that panic that ultimately created the federal reserve. so it's been, it has been a rough go. one of the things that nags at me is the following. did we do such a good job of managing all these crises that we created a false sense of security for market participants and others that we would always be able to pull a rabbit out of a hat until 2007 and 2008?

i guess, i'm not smart enough to know the answer to that question but it's something that nags at me a lot. . . the fact of the matter is that it is extremely difficult to anticipate and advance the

specific events that those contagion risk and systemic risks. it's very hard to do that. in fact, our track record of achieving that is pretty damn low. and so think about that, a lot of people say, well, they filled up the room with mathematicians and statisticians and models, and they start playing games with these things. well, my instinct tells me that if we want to understand more about systemic risk, we actually the models. we should get some very smart people engaging in aggressive brainstorming sessions, not quantitative studies, not our

squares and all that nonsense. just progressive thinking. how do these things happen, what are the triggers, why do we miss them? even when we get better at that, we are never going to be perfect. but i do think that those thoughts are extremely important in terms of our collective ability to come out of the mass, certainly the last five or six years, but even the last 30 years with a system that is safer and senator. a system that is able to absorb adversity but manage adversity at the same time. that's not going to be easy. >> we don't like to put them in the closet. >> i think most of them belong in the closet.

>> point taken. >> so anyway, that's a partial answer to your question. >> bears no reliance on models prior to the crisis. it continues to be a lot of -- i'm sorry, a lot of advanced approaches which are still being implemented and we encourage that. models are one bit of your toolkit. >> i understand. >> but you've got to use judgment, and the models, all of these mortgages were low risk, based on historical data that had nothing to do with the kinds of mortgages that were being originated. so if you don't have some human judgment in there, you get a system that runs amok. obviously technology has made markets more volatile, reaction times quicker. that's just reality. that's life. we have to live with that but i

think there are lots of things that we can still do and he knew prior to the crisis to reduce the risk of stress and volatility, a lease in the banking system, which we want to be stable. i do think increased concentration of the industry, the emergence of very, very large financial institutions with implied too big to fail status has created, could create part of the crisis and continues to create moral hazard. i will state again. i wanted bondholders to take some of the risk when we're having these -- i can't think there is an insurance program for bondholders and we're here cutting out uninsured deposito depositors. no offense to them but that just wasn't right. clearly the bondholders are the regulators felt that there was a risk tolerance taken even, 10%, make them take 10%. couldn't even do that. what kind of the system is that?

but they're big, sophisticated, can pay people a lot of money to push bank management to exert a market just went over, and regular snippet. regulators cannot do it all themselves. but again i fear we're going the opposite direction, giving up on market discipline and things we can replace that disciplined with more robust to provide a present and i'm all for a robust supervisory presence budgets don't think that is going to do the trick. we need more market discipline and when the bond to understand their on the hook, and if we get to that stage i think the market would correct and for some of these institutions to downsize. because if they knew they're going to be at risk, not the fed, not the taxpayer, they would do the homework a little better and be more cautious before investing in them. >> i basically agree with what i

heard. i've slightly different aspect to it. when i begin my remarks i said we really don't understand what caused the crisis. and the empirical data and information is just starting to come out. my concern is that the regulatory pendulum has swung to such an extent to be prescriptive that we don't know if it's the right answer. we don't know what it's going to do in terms of slowing the economy, and we don't know what it's going to do in terms of being the cause of the next crisis. and let me use an example, the capital placed tremendous emphasis on an award for

financial invitations to acquire mortgage-backed securities. it was a much less capital standard. >> mortgage-backed security. >> so your financial institutions which originate mortgages seldom, create a mortgage-backed security, and buyback of security with the same mortgage they originated. they got one-fifth the capital, slightly less mortgages. secondly, any examiner who looks at a bank in 2004-2005 and saw a concentration in aaa rated mortgage-backed securities is probably going to complement the management at the bank and say this is a very well-run organization. so you can go all the way to what you think is safe and sound operation today, but we don't know and you're absolutely correct, we have no idea of

knowing what the next bubble is going to be. is it going to be stocks? is it going to be farmland in the midwest? is it going to be bitcoins? wall street? we don't know. if we tamper down investments in everything that could possibly be a bubble pashtun first of all it's not going to be possible politically, and second of a we will wind up hurting the country in the process. robust capital, sufficient liquidity, stress test all make sense. but there has to be a balance. >> let's talk about a topic that each of you briefly touched on, the shadow system. three-part question year. given that some if not many financial i could are moving into the shadow system, how special is a shadow system in and of itself? what steps can be taken to mitigate the effects of potential risk? inviolate probing my favorite question in this section, on

their segments of the shadow system for which the risks outweigh the benefits to the financial system? anyone is interested in starting up a hedge fund, they attention to that last question. >> first of all, some of you may know i recently put together a piece on the shadow banking system and presented that to a group of 30 a couple of months ago. that think peace is available on the website for anybody wants to take a look at it. but following observations, first, this was one of the more difficult things i set out to put together by myself, and i'm

very old-fashioned. it's very, very complex. and i would just make two quick observations. first of all, one of the complexity that arises from the fact of the term we all use about shadow banking is wrong. because most of what is in the shadows is not banking. quite to the contrary. similarly, my experience in doing my work and my research was as follows, the hypothesis that has a lot of support is that the problem with the shadow banking or shadow financial system, whatever you call it, is a one way street. stuff going from the traditional banking or financial system to the shadow banking system. based on my work that does not

appear to me to be right. it's very much a two-way street, not a one way street. and if people get themselves seduced into thinking that they're going to get their arms around this with the hypothesis of a one way street, they're going to be very disappointed. but it is complex. it is big. and size, just give you one example. it's very hard to put this together, but you can get access to some useful data and the feds full of funds data which compiles liability levels for various classes of institutions, both the core system and the shadow system. and if you look at the data, one

of the really kind of shocking things is that in 2008, based on those data, the size of the shadow system was 20 trillion, give or take, whereas the size of the core system was 14.7 trillion. $5 trillion difference in 2008. by the middle of last year, 2013, the thing had reversed itself. the size of the shadow system had shrunk from 20 trillion back to 15 trillion, and the size of the core system was now

15.7 trillion. needless to say, you know, when we're talking about trillions, this is not small change. and i did put together some ideas about ways in which we can better get our arms around this thing, and i would want to make it clear in the paper which in get on the website the work that's being done by the financial stability board, which as you know is the cousin of the basel committee, and the work, particularly i want to acknowledge that is being done either fed, and especially my old colleague at 33 liberty street in new york, is really quite impressive. progress really is being made

and in getting to better understand this, and there are specific initiatives of the risk management, which one of the things that i thought was a pretty good argument in this space was the financial infrastructure stuff, including settlement sifis and all that. because right now when you move away from probably the five or six, or eight or nine best managed clearing systems, there are now dozens of them around the world. and i suspect that in many cases the discipline of being applied to wrist control, risk management for some of those clearinghouses and related organizations probably is not what it should be.

i suggest, for example, for all of those mechanisms there should be, among other things, minimal standards whereby using stress tests and related techniques you should have a standard that would say that any one of those organizations, anyplace in the world should, among other things, have the capacity that at a given business day they could survive for a simultaneous default of their two or three largest participants. so that's pretty draconian stuff, but i think it is symptomatic of the fact that we've got a lot of work to do to get our arms thoroughly a round the shadow system.

keeping in mind, above all else, that it is in my judgment a two-way street. >> i would agree with that. i think dodd-frank try to deal with issues of social, basically two things, under title i, it gave regulators the ability to give -- apply traditional banking sector. the ig type model problem, that, so-called title i designations, and they brought in to supervision by the fed. and then under title eight there's also a methodology for fsoc to make regulations on system activities, and that's money fund reform. this is one area where the fsoc has identified this as a particular problem and asked the sec to address the my view is a lot more activity than institution area. my sense is if an institution is

viewed as unable to fail without systemic disruptions, the best answer is to make them downsize until they can be, yeah, result in the bankruptcy process. i think the fed is doing a lot of good work already and you just move more and more to kind of accept that this is an systemic ramifications and put them under fed supervision under title i is not the right solution to also think a lot of the issues, for instance, the office of financial research we so laid in a report identified some issues that he did as potential systemic problems with the asset management industry. you know, there was a big overreaction i think to the report, but i do think the issues that they identified if they need to be addressed should be through activity regulation, and most of by the sec but again that requires the agency of the jurisdiction to move forward and get ahead of these two fix a

problem strict there are mechanisms to do with the shadow sector based on lessons we learned. i think they can work if they are used appropriately. the other thing i would say that about the shadow sector, the shadow sector works great in good times, and in bad times it kind of goes away. that's what they can we need that well-regulated banking system that has taken programs to keep it functioning. i do worry, peer-to-peer lending i think maybe one small example of where you're having a separate mechanism now for making loans, consumer, now we're getting into small business loans and a venue that is quite lightly regular. certainly compared to a bank or a community bank. so the competition is nice and the like to know there's been a problem with credit availability, the factors to be more credit out there at a lower cost but how much of that is

because they've developed, now strap, just regulatory arbitrage. as much as i'm happy for borrowers who have had good experience with those platforms, we know in the downturn they will disappear. once investors start seeing them, and that wanted to go to the platform and put the money in to make loans anymore. and hopefully you will have a robust banking sector, and particularly the committee banking sector which does more in the small business space, will still be there. so i do think not just systemic stability but also regulatory arbitrage has to very much be in the focus of regulators when they see these new types of mechanisms outside the banking sector develop and this is one area with consumer bureau i think, ability to repay standards and better disclosures could be helpful. but we want to make sure that the shadow sector doesn't -- regulate in good times. everything works in the good

times but in the bad times heavy weekend banking sector. >> i'm not sure what the term shadow banking system means, and my concern is that if it means everything that's not regulated by federal banking agency is the shadow banking system, i think it would be a mistake to try and bring all these institutions into that system. and, therefore, i kind of like very much what she was said, which is to try and identify those institutions that the failure would cause a systemic problem, rather than simply say we need to regulate shadow banking industry because i don't think i'll would be necessary i don't think we'll be productive, but you have to be subject to federal supervision, even if your small or not systemically important. i also agree with sheila that they could be regular arbitrage

which is unfortunate that a don't think the solution is to impose the same regulatory regime on non-regulated institutions. there's a certain advantages to doing a safety net which gives banks and others a competitive advantage. so it may even out. >> so let's shift gears. each of you have touched on this topic as well, but asset bubbles. to over the last 50 years virtually every financial crisis has been associate with asset price bubbles as the only. how can we distance between asset bubbles that post systemic risk such as those that do not such as the dot com bubble in the year 2000? >> people, it's common to say nobody knows when there's an asset bubble added a by the. i think it's very hard to know when it's going to pop, but i think anybody that didn't think it was a housing bubble prior to

the crisis in which my mother saw. shouldn't comment about it, for heaven's sake, let's have some common sense. i think there are some things regulators can' can and should o make sure that government actions don't further have bubbles. one is more robust regulation that requires loans to be based on ability to repay. if you're limited business or household, they've got in, where they can back a little bigger not just making a loan based on the idea that the asset is going to appreciate. we get into that during the crisis when people who were routinely given loans and credit this was being done by nonbanks without having to document that they could pay. of course, that's going to inflate prices come if he distills -- is asleep at the price of the house you have increased demand and unsustainable prices. that's exactly what we had. leverage is another way. just to make sure that bubbles don't get out of hand and not

just capital requirements to regular banks to also look at the kind of leverage that the people they are lending to. i applaud the occ for its leadership on this leverage long guidance. it's the type of thing that regulars need to do, especially in this very prolonged period of accommodating monetary policy and yes, i do think that monetary policy does contribute to asset bubbles or creates risk and asset bubbles to i think it's very hard, i don't think it's hard to call a. i think it's hard to know when it's going to turn. by definition, asset bubbles,, everything's it would keep going, right? so knowing when it's going to turn is for difficult and telling people to stop the madness, you know, chuck prince's favorite statement, you know, when the music is to play in you've got to keep dancing. that kind of groupthink dynamic is something regulators have to defend against. but i do think some of the things we are seeing now with tougher capital requirements will help constrain the

silliness. >> a lot of people recognize asset bubbles but i think the practical matter is that when you in the middle of an asset bubble, it's almost impossible to stop it. and let me illicit that just a few examples. in 2006, a modest guidance to try and attempt commercial real estate lending. and they got called before congress and were lambasted in public to the extent that one of the regulators missed owned the guidance. there was a tense to rein in fannie mae, freddie mac, arguing that they were undercapitalized. 2004, we saw no well

prize-winning economists -- nobel prize-winning economist and professors write papers think they would be one chance and 500,000 if fannie mae would ever become undercapitalized or insolvent. use of comptroller clark when he tried to rein in commercial real estate. created a bubble. he was deemed the regulator from hell. that's what it was called and he was not allowed his confirmation hearing. he was not allowed to have a second term as comptroller because he tried to camp down spending. it happens over and over again. when you're in the middle of a bubble, if you try and camp down credit, you will be accused of being the regular from hell.

be accused of hurting the economy, you'll be accused of preventing disadvantaged people from getting a house, et cetera, et cetera. and right before the bubble, the house passed legislation called the no down payment mortgage loan bill. okay. now, what would've happened in 2005 over 2006 if the agencies would've said we're going to prevent, we're going to tell our banks they can't buy mortgage-backed securities, because that's where the losses were. it wasn't in originating loans. it was in buying the loan where banks lost the money. if the regulars had come in and said, banks can't buy mortgage-backed security company think the reaction would've been very, very harsh on the agencies. >> i would say if the argument is forget it because regulators have too much political

pressure, i just don't buy that. that's why we have strong peope in these jobs. that's why they've independence, that's why they of the term protection. that is their job and they need to do the job. that's the throw your hands up and say we let the crazies go on begin because congress is going to whack us if we don't. i just don't buy that. i agree the political pressure is terrible, but there was a lot of pushback on the leverage long guidance but other people defend it and it died down. you guys are still implement it, right? i think you can do it. i think again we've got much tougher leverage ratios as part of the basel committee work. a lot of support for the. i hope to see that finalized soon, pushback on that but i think the regulators are going to have the courage to move ahead. that's exactly the kind of thing ththe kind of thing the need too because are building again in the system. >> let me just respond briefly, because first of all, i didn't say throw up your hands and do

nothing. i agree with you that regulars need to do something, and i think appropriate capital standards, appropriate liquidity, appropriate supervision is part of the solution. but it's also not just -- a dog but in 2008 come in 2008 when just about everybody knew we had a problem, congress passed legislation which regulators can't ignore directing federal housing finance agency to ensure and and freddie led the nation in providing home mortgages to very low, low and moderate income people, created standards they would have to meet with the guidelines, and directed federal housing finance agency's to encourage the use of innovative mortgage products. it's a statute. in the 80s, regulatory

forbearance for agricultural loans was put into law. so there are other examples but regulatory capital for commercial real estate loans was a directed to be given 50% risk weighting when the loans were securitize, even though they saw 100% was appropriate. you can't simply say that the regulators can put up a brave face and stared down congress and nothing will happen. and if they are wrong and if there wasn't a bubble, then they would be responsible for causing it to the economy. >> it's not easy. i was head of the fdic for five years and it took a lot of flak. i think one thing the regulars need to do more of which they don't come is the public. i'm sorry, i know people disagree with my engagement with immediate but get up and explain what you're doing and why you

were doing it. because if you're quiet about it, the people who don't like it have a lot of political influence and a lot of deep pockets. you got to get out in the public domain and explain what you're doing and why you're doing it. if you can't explain what you're doing and the public benefit of it, then maybe you should rethink. i think there are tools that need to be in use more aggressive. believe me, i quite sympathize and i wish congress would just stand down and get out of it because, you know, sometimes they are a positive influence but i'm sorry, most of the time they are not. you are a negative influence. it's not the regulars are perfect and there's a legitimate role for congressional oversight, but not letters signed by 200 members of congress telling them to stand out on april or whatever. i don't think they are the people with the technical expertise, the once that goes to the comment letters and have -- that's why they have these jobs, to make these kinds of