greater transparency in terms of things that really matter. and one of the things that's all over the place including in the mortgage space but it's not limited to that is a lack of

transparency. one of the things it's much too widespread. and that leverage is one of the things that grows out of the derivatives and other highly structured complaints. but they do a better job within the industry and trying to get more effective disclosure particularly as it surrounds the concept of leverage. getting the fiscal house in order he also said monetary policy only accomplishes so mu

much. we have to do it in a way that's fiscally possible. those are the kind of discussions we need to be having if we need fiscal policy to get more robust growth in our economy. i wish the congress with all of the unemployment there isn't a greater focus on jobs in the economy i don't know but i think that is a benefit for everybody including the banking sector to get this economy going in a way that we have been used to in the past. for financial service providers i think things for the long term in terms of the long-term customer relationships, think of making money by providing the value not hitting the fees and the complicated rivets people don't really understand what they are buying gifts back to customer service whether it's a business or a household provided and good value and longer-term.

that is going to make the institution more sustainable and profitable for consumers. i think w we needed a couple things. consumers are voters and they need to get more engaged in the financial reform and pushback regulators get when they try to institute unpopular reforms in the industry. i think we need more of a counterweight from the main street folks. they need to get more interested and put counter political pressure. as consumers of financial products they know what they are getting. it's helpful in terms of getting the disclosures and encouraging the industry to go to simpl asse the products that are easy to understand and proposing the consequences to them. if they do provide things where the fees are hidden i hidden ord the consumers also need to be prepared to protect themselves and so no what you are getting and if you are unhappy go

someplace else. there is a lot of customer relationship and financial institutions and we would probably be making it too hard to change the account relationship. and i'm talking above the brokerages as well. that move. it's another thing the consumer bureau might think about making it easier to move the transactions when you feel like you've not been well treated by your financial institutions. but another kind of market this one would be helpful and improving that sector. >> i'm going to add my thoughts to be viewed in the recommendations. i think the government should start to think about long-term policy in the short term political gain and it would gets the headline in tomorrow's pap

paper. the financial institutions are really screwed up and i hope that they have learned the lesson in terms of what happened at the reaction. i think some financial institutions should consider whether they want to be in a consumer business at all. thanks to many years the commercial lenders specialize the consumer products and i'm not sure that they are the best in the institution to be in the consumer business going forward if they are or have to have the kind of ethics that were discussed right here. my advice would be just because you can get a loan if you doesn't mean that you should

take it. >> any questions from the audience? speak o [inaudible] >> first of all i'm not representative of the banking industry. i can't speak for the banking industry. and things i said today the banking industry would oppose. but let me give an example of what i'm talking about. i read a paper that talks about

the conventional wisdom because when the rates went up people were tricked into getting the loans and the low interest rate then they had a shock two years later and then they were not able to repay and for many of the adjustabl adjustable-rate le was no shock because the interest rates went down and there was no increase in their monthly payment and if you look back in history the past 15 years of the performance of adjustable-rate mortgages, there is no correlation between or very little correlation between adjustable-rate mortgages and mortgage is the default without it being an increase in their

interest rates. there is a lot of effort that ultimately didn't happen, but to then provide penalties on the adjustable-rate mortgages it turns out that would have been an appropriate reaction. and i think it can be a very good product for people who are moving or starting families or start a home. it would have been an economic benefit that could have easily been taken away. so, that's just one example. we are beginning to get evidence certainly in the standards have been better liquidity and the right kind of liquidity having better and more reasonable capital requirements and stress tests these are things that make sense no matter what the courts of the crisis. but we need to make sure that

the actions we take are based on facts and not conventional wisdom. >> i'm sorry. i can't contain myself. i think the industry is not -- there have been some industry sponsored research and other kinds of reinventing history and what causes the crisis and whether that service people's interests if they don't want reform with creative confusion about the problems were and then we don't know what the solutions should be. and adjustable-rate is an adjustable-rate. it was at a much higher rate than the 30 year fixed rate mortgages. it's silly to suggest otherwise. and if you want research that doesn't necessarily reflect the industry i would suggest you go on the website that has done a lot of work on this and certainly yes, there was a

significant site of the mortgage market. they were professional investors relying on the mortgage application. there were also a lot of people living in lower income neighborhoods who had 30 year fixed rate fha mortgages that got refinanced in the 28-27 and they were much higher than the fixed rate subprime so there were definitely two different perspectives on that. >> i have to respond because i feel that my -- connected to the industry have any responsibility -- the government was forcing them to give poor people mortgages were, you know, a sophisticated roar ripping these investors off. off. was ioff. was it all the borrower's fault? i'm sorry. i heard that so much in 2006, 2007 and 2008 and i'm still hearing it. take some responsibility for this. [applause]

just a reminder for those of you we have a couple more questions -- >> [inaudible] >> one more rebuttal and then we both go to the gentle man in the back. >> i respect you, sheila. [laughter] no, you are a heroine. that's what i'm a little trouble with is your reference to the industry sponsored research because the answer. because the research may be and if it is i retract what i say that if you look at the empirical data that i've looked at him and i think you might want to say -- >> what is the default rate between the -- [inaudible] >> okay. why don't you take the discussion off-line and the speakers lounge. [laughter] gentle man in the back with a question. >> since we are having a

symposium honoring the 150th anniversary, i must ask that in your book one of your proposed reforms included abolishing the occ at the time regarding the agency's future has become troller. do you still espouse this proposal and if not, how has the occ altered its behavior to cause you to change your mind? and are there any particular rules, guidelines or other regulatory actions that you would point to as evidence of this improved and reformed behavior affects >> it was during the time pre- dated that he was at the fdic on the fdic board and was one of great frustration.

there were a lot of disagreements and i felt as opposed to being a partner to make sure that banks were stable it was an impediment. i also think just having so many regulators can complicate the response and the rule of writing and so having a framework where they basically told the company regulator and the fdic regulator that would be a merged entity it seems to me to make some sense that it was done before. i think that's tom has showed tremendous leadership and the examiners are some of the best in the country. they have really been top-notch and i don't think the congress is going to abolish them anytime soon but let me tell you something else that would make him a stronger agency which i think most of the folks would agree with is dealing with their funding. they have to rely on an examination of fees which is difficult, especially as the industry has become more and more concentrated.

the fed and the fdic has the advantage of having separate funding sources. trying to figure out a new structure where there's combinations of shared funding for the occ i think would make it an even more stronger and independent agency and that is something i hoped would be in the short term doable. if you want to complement, you think that he's done tremendous work here. and i had agreements including in the leadership and i do think that examiners are some of the best and most sophisticated among other regulatory community. with that said i found as i chronicled my book that it was an implement. >> last question, gentle man in the back. >> thank you to the great panel. my question is about the bank funding model. banks are supposed to be liquidated by design i always thought because they borrow short and bland in the trade. but if you look at a lot of the

regulatory proposals, the liquidity coverage ratio that provides more liquid shorter duration assets, debt the status is unclear. but the governor makes noises about getting the u.s. banks to issue longer-term debt. it seems like our regulators are suggesting that the borrow short and lend long model is no more attainable or that they can't do that anymore were in the same way. >> that's what they are doing. >> i think the issue is the non- deposit funding and the debt financing and whether that is short or long-term. that was an increasing portion of the liability structure and the larger institution. in terms of the non- deposit component of the funding base forcing the long-term debt.

that would have the effect of making the uninsured deposits more stable because he will have a thicker level of long-term unsecured debt in addition to the capital of the institution failed to protect the deposit which would make that funding more stable. so i strongly support the governor. that is the wrong way to go but i think that if you need to distinguish the deposit and non- deposit funding and analyzing what he's talking about. how the banks have funded is going to result in different impacts on the economy. so as a general matter i'm not saying that it's not appropriate, but no free lunch is going to be in the high cost of credit. maybe that's good, but it's going to be an impact. so we can have that model but it's not free.

[applause] [applause] >> is a great pleasure to be here and an honor. i want to congratulate tom and others have set up this terrific conference and obviously happy birthday to the occ. i haven't written anything in my book that's as it should be abolished just to be clear. and we have jimmy stewart with us. there are a few left. these are people that are distinguished and they really need no introduction but just for those few of you that may be on the younger side and do not know that john reid was the chairman of citigroup citicorp

from 1984 to 2000, and then he transformed citigroup into a global consumer bank and rescued the new york stock exchange for many years and today he was the chairman of the board of mit, the corporation that john is running at mit as well. gene is an old friend of mine and she was ian was a transformational controller of f the currency between 1993 to 1998. then during the period peep at a special emphasis on making sure the low to moderate income households would be able to get loans from the banking industry and enforce the community

investment act. he also turned to working with bankers trust as the vice-chairman and subsequently he founded the promontory financial groups of these are two fantastic folks to talk to us about their views of the financial crisis and the reforms that have been implemented so far and away or we need to go. the title of the talk is protecting the bank. i think that we really want to change that to protecting the financial system because it's not just the banks that need to be protected. it's the entire financial system and it's not just the united states financial system is the global financial system of which the american financial industry is so much a part of. i want to leave a fair amount of time for q-and-a for everyone to

participate. just a few words about the economist perspective of this. at least one economist perspective. so, i am a professor of economics and the way that i look at what we have here in the financial system is that we have two public good that the stakes. one is a financial highway system. think about the physical highway system that is the public where a lot of people don't interfere unless there's congestion and you want to keep it open and free and working. those that are helping manage the system to gamble with their businesses and lead to potentially break down which was completely cut off the traditional commerce shipping of goods and services. so the financial system is very much a public good and financial highway system. the banks and other shadowing our running the system. and what they are doing is

gambling with it. there is a second public good that is the level of confidence in the economy. when lehman brothers failed in 2008, it's building did not collapse. none of the people working there died. there was nothing physical that happened in the economy but the failure scared the hell out of everybody. and we had collective panic. so, people who were employers searching all this panic and discussion, the searches for the spike after september so the press had a field day and there was nothing they could write about. politicians had a field day. everybody got nervous and the employers decided let's fire people before the customers stop

showing up and over the next 19 months, 8.5 million americans were kicked out onto the street from their jobs. that was a tragedy and this employer was firing somebody else's customer. so we had a coordinated panic and that's the other public good in the state of confidence as a public good. and when the banking system fails, and it could be an insurance company, it could be a small thing that flips its degree of confidence we could have the massive economic fallout. so we need to make the system -- we need to protect these public goods and that is the discussion we are going to be having today. i'm going to ask jean to start us off with comments about how he views protecting the financial system and then john will follow up and we will have

some questions, specific questions and then we will try to leave 20 minutes at the end for all of you to direct the attention.

bad cold but nothing works. he is a person of exceptional character, intellect and integrity as everybody knows and i'm proud to call him a friend. and of course i'm honored to be on the platform with john reid that i have a great deal of respect for and who once

supervises the institution and realizes his capability is extraordinary. now the issue before us that is on the panel specifically is off the bank as i remember terry and so, to what degree can we or should we wall off the banks? and they are an important premise for this is when the occ was founded 150 years ago by just the brilliant ability and intellect of abraham lincoln he actually personally sent his secretary to lobby the congress to get a nationa the national ct and banking act through and i'm sure it is true for tom and me over my shoulder was the bang and acting currency act when he aided by abraham lincoln who spent the time to work on the act himself. it was a brilliant stroke and at that time the banking system was in the financial system in

essence. and in 150 years the banking system was enormously important but a lot has changed and it is not the whole financial system. that's to some degree is in my remarks about sealing it off. will this make them safer in the financial system safer. what is the right relationship between the formal charter bank and the rest of the financial system? and i think the answer is as it is for much of the finance it is a matter of proportion, judgment and balance. right now we are at an important collection point it seems to me and many steps have been taken to strengthen the banks. they have made the system safer. we can take pride i think as a nation for having confronted the new financial realities and learn from the past and made changes. make changes. a wonderful thing about america you can -- there are these

wonderful regulatory institutions we can front our problems and we deal with them and make changes and move on. but as we implement the new rules we are in danger of letting it's going in the terms of losing balance to the detriment of the financial system and the broad economy. in some ways this is the hardest period so we have made the changes into the implementation is already less newsworthy but for those of us that have toyota in this sort of intricacy that seems to me that's the most important part or very important part. now a great part of the risk lies in the shadow banking system it seems to me. $9.2 trillion sector that grows every day. the shadow big in the system doesn't seem like a big thing if you read about the bang in the front page of the paper you to quickly and often don't read about the pieces of the shadow big system but its enormous and

it's growing every day. that is the more we walk the banks off from the real financial economy, the more financial activity is moving to the unregulated financial players. we can see almost everyday in the newspaper of the town is a draining away from the system and moving to the unregulated sector and those that made read the press you can see this transformation is going on. and in a highly dynamic age, the swing of the pendulum can happen rather quickly. internet peer-to-peer lending to hedge funds and others is only the tip of the iceberg that's getting bigger. now, as someone who believes in regulation and supervision, i myself am uncomfortable with the notion that regulating by charter type is distinct from activity makes sense. isn't the right answer like activity and weight regulation?

his inactivity is risky it isn't made less risky by putting it into an entity that has a different chart were different name on the door if you will and much less regulation and supervision. and goodness knows i think you could see that for consumers importantly that a consumer doesn't even know the name going into the unregulated institution and getting abused it seems to me is something we all want to worry about. things are different to a degree. deposit insurance covers the benefits and taking the deposits insured or not and making the loans along with maturity transformation is a tough business requiring an enormous amount of skill. and if we found after 150 years of regulation supervision that there is a great deal of value that comes with men and women such as those at the occ with the experience and responsibility to help ensure honest dealing and avoidance of

access i think one can overstate in my view the importance to the well-being of the financial system of the supervisory excellence that you see at the occ and other financial regulatory agencies. everything cannot be done by rule. a lot of what makes a difference in the safety of the system has to be done by feel and touch. and that supervisory experience that has developed -- and it takes generations to develop at an organizatiothat an organizata profound difference in the safety of the system. but banks are not in essence the entire financial system as i mentioned earlier. it's not the way it was when the occ was founded. they are inextricably intertwined with an ever more dynamic financial system and history has taught us they cannot be walled up. i must say that this is my

biggest. the great depression as the scholars today understand was caused by restrictive monetary trade policies. bank failures did not cause the great depression. they were in many ways caused by the great depression. anytime there is a financial crisis in the united states we call it a banking crisis. the great depression people view it very much as a banking crisis but if you look at the academics like one of my most talented academic friends in this area find the great depression is a caused by governmental policies. it's also instructive to note that what is now called the great recession or the financial crisis of 2008. on the brink of the disaster it wasn't a bank disaster. bear stearns, lehman brothers, aig, fannie mae and freddie mac.

the triggers for the crisis are not being. when the non- banks, less regulated financial players got sick, so did the banking system and that is parallel to the 1930s. inks are a part of the transmission process but in both cases it isn't the cause. this is an issue of competitive dynamics and why do the banks get caught up in this area park is the danger of the shutter system of competitive dynamics. if you're going to stay in business and have an enormous shadow system that can do what it wants, the pressure of moves you in that direction. and then of course it is an issue of connectivity, natural conductivity in the financial sector. this is not to say that banks are not important players in the economy and they are indeed a transmission belt as i just mentioned area they should be regulated and supervised and regulated in supervised by experts such as those at the occ

and other bank regulators. but to think that we can solve serious financial and systemic problems is i believe a big mistake. the financial crisis of 2,000 teaches us that the banks in the fake holding company isn't the answer and that is one solution to the problem, but it's not. the affiliates got into trouble and the entire banking organization gets into trouble including the bang. as i mentioned, the other financial players don't work either. so where does this leave us? to my mind tha it suggests the following rules. one, the banks ought to be regulated by specialists and we are blessed to have in the organizations like the occ. number two, it suggests we shouldn't rely upon the walls between banking and non- big but will not solve the financial

problems by over regulating and squeezing activities out to the unregulated sector. in my view, quite the contrary. number three, to the extent that an activity is risky it should be regulated in the financial system in an evenhanded way. again, i come back to what i think is the right rule. like activity, like size of activity and weight regulation. of course this takes some doing. but anyway, those are my thoughts and thank you very much for listening. [applause] i hesitate to get up because they met with larry for much of these bunch of couple weeks ago and we agreed we would have no n starting commenting since i thought i was going to be talking with paul volcker committee and i've often spoke about the rule and so forth so

i'm sitting here reacting in real time, but let me say a few things. first of all, i agree very much with the banks and you have to look at function and the size. i haven't intended to talk very much about regulation. i've experienced it, and i must say it's a very important component of the industry. when i got in trouble in the '90s, had we not had the interaction with the regulators that we did i doubt seriously that we would have gotten out as well as we had. in other words, it really did help in the dealing with the problems we were dealing with. the thing i would say is this coming and i'm going to introduce a couple of new ideas. one is when you think about the bang site think you have to understand something about bank customers. there is a small but very large

and important set of customers who enjoy access to the capital markets. they have been rated, they have access to the capital markets, they become customers of banks and also customers of institutions who specialize in intermediating in the capital markets. that is what we are dealing with when we dealt with our most recent crisis. the great majority of customers for the banking industry do not have access to the capital markets. they are not part of the problems that we had here. they get impacted but remember for the great majority of the bank customers committee are looking for bang to finance their activities and they don't have the luxury of issuing the data or other instruments that could be sold on the capital markets. markets. often times they don't have much of an equity base and certainly it's not one that is treated.

that industry which has gone through its troubles i like the comment about going back to the 80s, that industry when they got into trouble did not constitute a systemic risk to the economy. it could be very devastating to a local economy. i can read member when the texas banks got in trouble and it was disastrous to help the local economy but they didn't invite a systemic risk that exists with the larger institutions that are dealing with these larger enterprises that do in fact have access to the capital markets. so, when we talk about the industry, you should talk about the ministry that serves those that have access to capital markets and when you look at the industry particularly the portion of it that deals with entities that have access to the capital markets, there has been

an immense transformation that i did not have to live with totally during my career. i just saw the beginning of it. the banks have provided credits to their customers involve custn seven or eight year loans were long-term financing if you want anything beyond that you went in the days of glass-steagall to someone that goes with the bonds were equity on your behalf. when the securitization came along all of a sudden the industry shifted its focus and many customers were not the people who wear originated credit but they were customers who wanted to buy an investment product. people who manage money -- and managing money in the united states and in the developed part of the world is a very large business because we have large pools of capital that need to be professionally managed, and the

pools of capital demand performance and it is a very competitive arena. and if he remember during the 60s and 70s when the market didn't really do all that while, there was a tremendous amount of pressure put on investment managers who were managing pension funds and college endowments and things of this sort to get performance because the institutions they were dealing with required that performance for their own economic well-being. the industry responded by becoming very aggressive. the idea of the shareholder value is some of that emerged from that and it had a profound impact on the structure of the financial sector because all of a sudden people who choose to simply provide credit and allocate capital as economists would describe it started looking at how they could create products that could be packaged and sold to an investment

industry that was looking for the higher yielding products than those that were traditionally available to them so the industry shifted very, very importantly to creating products for investors. and that's where the idea of packaging mortgages can come, and that of course has been sliced and diced and made very sophisticated so that you could now create products that don't really exist. they are sort of synthetic products that you create and so to the would-be investors. as this transformation has taken place, it changed the structure of the industry that traditionally deals with customers who have access to the markets. and it allows the industry to take products that normally would sit on the balance sheet of the banks that did deal with customers that have access to markets. you could package them and sell them off to customers and the industry has changed. and with that change, the

vulnerability of the system, the highway system where you are ise talking about picking at risk because if a difficulty developed within one of these institutions, they were so interconnected and so tied to other institutions that the notion of systemic risk worth -- it couldn't even be pronounced when i first joined the banking business. the notion of the systemic risk became a reality. so we are now dealing with the issue of how can we have a healthy thing system that provides the function that the society needs? at larry, i like your hibernate analogy. analogy. he yet lived in a world where systemic risk doesn't take on this character that you also referred to were just factor that leads to an actual close down where you can't use the highway system that's been built

aup as everybody is scared to gt in their car and get on it. that's what we are talking about now. the notion that the banks are special is important because they do have a particular role to play because of their depository functions and because of their function and clearing up and settlement mechanisms most importantly from the money chance for purposes which are absolutely fundamental to the operation of this highway syst system. when mr. volcker came up with the notion -- and i noticed that it's just become a label as opposed to an idea -- the idea that things that are banks that enjoy the protection of depository insurance and liquidity at the fed, that they should not be using their institution for purposes of speculation with their own capital. they get work on behalf of their

customers, but they should not be engaged in trading activities for their own account. i joined in supporting this argument, and frankly in supporting a separation of those that engage merrily in the capital markets from those who do not en and the word is primay because of the managerial issues and that is something that is not typically in the conversation. but the only skill that i bring to this discussion is the fact that for 30 years, i.e. in fact was a manager within a bank. i am not trying a trained economist and i've never been a regulator although i've come to know regulators pretty well. my only contribution to the discussion is i have the responsibilithad theresponsibila banking institution. i will tell you from the managerial point of view, and again i go back to one of the

comments which i think is extremely important switch has to do with culture, values, ethics and so on and that associate with the management of institutions, the culture and the management of the institution that is a traditional bank house we imagine it in our mind as opposed to an institute that deals primarily in the capital markets or an institution that deals primarily in trying to create the investment product beats require different management, different cultures and different skills and i would argue for a separation based on managerial differences. i think it would be better for the structure of the industry and for the problems that we are dealing with if you could get to the managerial separation between these areas things. and take that into account because alternately, when you deal with the crisis, the

structure of the management and the capability of the management is extremely important. and i do think we would benefit if there was some comfort in a position based upon the managerial difference as well as the functional difference. why don't i sit down on the questions and we will elaborate this. >> let me ask a few quick questions of you in the sense if you give quick answers we can get everybody a broad sense of your general views. and then we will again in about 25 minutes we will move to some q-and-a. so do you think the system is safer today than it was in 2007? >> absolutely. i think the changes of the last few years have been profound. you've got vastly increased capital standards, increased

liquidity requirements and a whole panoply of other requirements and good offices like the office of financial research at the treasury is a big step forward in terms of looking at the system. from a systemic perspective. having said that, i think that the implementation of these rules as we go forward is profoundly important, because where the banking industry may be safer, the whole financial system may be weakened. if what we have is a moving of activity into the shadow banking system without any regulation or capital standards or liquidity -- >> is it safer or not so clear on that overall? >> overall, probably better. but the shift is dangerous and it's something that has to be watched pretty closely. >> i don't think it is safer.

no question that banking industry is better capitalized into that presumably is going to continue. it's certainly alert. people are not sleeping and people are paying an awful lot of attention. and on the other hand, the interconnectedness of the major financial institutions into those that are deemed to be a systemically important, if anything is greater the institutions are greater, i doubt seriously -- i think the fact that we have more capital and people are paying attention makes the likelihood of the problem smaller. that is a problem were to develop, i think they are so interconnected now that we would be right back to where we were with bigger institutions and it would take a wad of money. so, my sense is if we were flying on an airplane and you wanted to say is the risk of this plane crashing going up or

going down, probably the risk is going down, the probability of the crash, but i tell you there are going to be a lot of dead people if the plane crashes. >> do you think that the role of the financial system is to gamble with this public good or just to intermediate between households who want to save and lend money and households that want to borrow money and also the households that want to invest money in the firm's and the nonfinancial firms that want to borrow and also sell securities? why do we need the financial intermediaries to gamble with the financial highway at all? i've not figured that one out. are they somehow adding some

value? we wouldn't let gas stations systematically gamble with their businesses. they could gamble on their own but we want to let them sell securities, like for example we would allow them to sell forward contracts on gasoline. and all do the same and take the same position in all leave their businesses with the keys in their hand to the pump. that would be ruled out immediately by congress, but yet we are letting the financial system broadly speaking continue to gamble. you're telling us we have a big chest that could crash. jerry was telling us earlier today that things almost went south big time in the early '80s. we just saw it happened globally in 2,828 is in its time for the financial intermediaries to stop gambling entirely on the financial highway system? >> if you ask the question and i in favor of gambling at the financial system, the answer is affirmatively no, no gambling. [laughter]

but the issue i think is a bit more complex. and i know you see that as a way to sort of illicit, you know, sort of interest and to provoke the comment. is the nature of the transformation process risk-taking and in order for the economic opportunity whoever is lending money is taking risk. it's not a surety. if you call it gambling, then the whole financial system has always gambled to a degree thanks to the product. the question i think is to the extent that the risk-taking is as controlled, thoughtful, regulated and supervised and can be consistent with the needs of the society. and there is a -- that's where it gets complicated. and i would even say nerdy

because you have to make decisions how much risk you are willing to take and not whether or not you take any risk. >> the scale makes a big difference. you know, the fact of the matter is the individual gas stations go broke. you may have to drive an extra 5 miles to get your gas. individual banks, you must take threats. if you use the gambling and a loaded term. you must take the risk that if there are individual sites so that you are not threatening the entire highway, that in fact has worked out pretty well. there are societies that use their bank's for economic purposes and basically caused them. if the government would need to bail them out at the end of that it works pretty well.

what we are seeing is the don't want all the gas stations taking the same risks and we don't want them all owned by a single entity that is going to result in all the gas stations getting close to. so it is a question of scale the scale is such that we worry about them because they would have the second order effects that we are not willing to live with. so, it seems to me that it isn't fun -- function. the banks will take for us almost all of the bank failures or credit failures. shipping, so for them so long you lend and it goes bad you

have a big problem. if the scale is distributed so that you are not closing the highway is down it is unfortunate, but it works. your question is can we risk the highways and so the answer is no way should not and that's why we have this big discussion. >> i would go a bit further in this regard that systemic risk you have to be caused by a pan of the at large institutions. but the great depression was a systemic event. and we didn't have institutions at the scale that we do today. it seems to me that we are always going to have from time to time challenging global events and the nature i think of the finance and the pendulum swings. the difference is that while the regulations can do some things to lower the probability and perhaps the extent of the

systemic events, the underground day-to-day activities of the entities that are fighting in the analogy is enormously important. >> you said it's important for the financial intermediaries to take the risk. in 1795, frederick the great of prussia and also own also denmat point is that it's something called the covered on the system which is basically if you look at it i think it is pretty much an equity-based mutual fund system. so i want to lend money to john so that he can buy a house. he is trying to sell me his mortgage. you are a mutual fund in between us. you sell the shares to me and others that were willing to buy the pool of mortgages.

now you are a financial institution that could never go broke. for the centuries now would you favor livinwhat youpay for livit system to the covered bond to the equity base and it's used to mutual fund system like they have in europe. there is the need to risk my money with john but there is no need for you to risk your institution. >> larry, i'm not sure whether if you have a one-to-one capital persist when a ratio, which is what that suggests that you would indeed eliminate systemic risk.

i do not know that it is the case. i do know that what we have admitted in the financial system for several hundred years is to some degree in leverage model. in other words, the bank in fact are leveraged and so is the rest of the financial system. that is the capita capital based 1-line with regard to the risk-taking wending. if we have believed for a couple hundred years not just the united states but globally that kind of leverage added the value to growth and economic development. i think you are at the heart of a very big issue and it seems to me that it is go -- i hate to keep going back to the shadow system, but one of the good things that has come out of increasing capital is the leverage in the big tank system has come down. so you still have the system that is more contained prior to the crisis in the banking system even so. today however you still have

10-1 and 12-1 you have the shadow system 50-70-1. you have to decide the balance is coming into those are the kind of difficult questions that i know you put your mind to. that's why the academic focus on these things is so important. >> what do you think? panic i think the question has been answered. >> okay. this has worked pretty well in europe for a couple hundred years. the question is whether we have the option of switching to it. there have been members of congress and even the secretary caught that this was a way to move. europe has a banking system as well and it certainly has exposed maybe enlisted shape than ours. it's a come it isn't as if the society is operating on a different way. >> let me push you on the

question of capacity. sheila bear said that the system is far too opaque. would you agree with that? given the story of the tylenol scare back in 1982 but probably most of you will remember. there were four bottles of tylenol that were sold in an undisclosed manner in the sense that there were no safety seals back then. so somebody put cyanide in these bottles cut the four bottles of taiwan. and within a few days, people died from eating this stuff. around the world there were 30 million bottles. there were only four bottles that were poisonous and there could have been others but nobody knew for sure because there was no safety seal on the containers. around the world, places like thailand, everybody decided that

it's too dangerous to buy. that market just dropped like crazy. there was a run-on tylenol if you like. a 100 million-dollar markets went to zero. now what a johnson and johnson duplex they threw away all of the old tylenol, they recalled it and repackaged it with safety seal containers. that's why we can't open anything these days. that is an act of disclosure. we don't have much disclosure as far as i can tell in as far as the sheila can tell. so we have a kind of faith-based thinking. people are investing money in these wending me to your bank and you are in the middle and you are lending it to john, that you might be angela and be involved in the know doc loans and i wouldn't know and i might get news there might be back mortgages you made and suddenly i panic and i try to get my

money out and others do as well. .. transparency has got to be clear and it's very hard sometimes not to panic people with information that may be totally unclear to them. sadly, financial literacy in this country, even among

well-educated people is remarkably well actually and that is a huge responsibility we all have too sorted kids ourselves better educated. but having said that, it is. the question is what information one is out in how one gives it out without causing a financial panic. you know, paula jimmy stewart. that is something the bank regulatory fees have pored over for generation, how much information to give out. if you gave every piece of single information outcome you could really have it misuse, misinformation and also difficulty and disciplining institutions. interesting enough if you want to get philosophical, there are societies in the world, you think of china come you certainly also think to some degree europe or the transparency is less than in the

united states and you wonder whether or not with that lack of transparency you actually are likely to have less pmx unless run institutions. i'm not advocating for this is to buy any means. this question of transparent tea, how much you recognize, how much his markets and market is very difficult stuff and potentially highly volatile. >> yeah, i agree. you have to have some online of the institution just for division of labor if nothing else. if you trust the institution they are making judgments about credit and risk that they are going to take. you have some track record. yesterday some degree of transparency. no one knows how much. i'll tell you having run a bank where you have been in a transparent tea, and other words the management of the bank having as much information as they wants about anything that is going on.

even their get rid of the risks because you understand you may get rid of con creations of risk and things of this sort. this is one of my objections to the risk based capital formulation. i don't think we know the risks are until after the fact and therefore i really am, you know, sort of agnostic. i ask her to say all set to risk it. we don't know how race you. so you've got to manage them as if there is a hidden risk. and it isn't a lack of transparency. it is a question of judgment. you know, the price of oil dropped from 100 barrels of oil to $50 they barely assure you there will be risk in your portfolio that you didn't know because there's a lot of people sustain a price level that existed at the time. banking industries can't take price adjust then. if you think a building is worth $100 million the next week it is

worth 70 come you have a battle on your hands. it seems to me transparency important in order to gain credibility with your depositors and investors. you want to tell them whatever they might need to make an informed judgment as to whether they want to deposit with you or not. the reason the fda is it this is they came in and provided a number a lot that got rid of that kind of judgment. and by the way, one of the reasons the chinese and the european systems work is because the government has a history protect the depositors and people are willing to live with less transparency. when you get into shadow banking situation where you have more sophisticated investors, they are going to demand the kind of information they want from the people who are managing their money and they all insist upon it. having transparent t. is

important. i think it is vital, but ultimately transparent he isn't going to get rid of the because the people who have total transparent he, they make mistakes about risk. >> let me push on the lehman brothers kept all this information to itself in a few days before it went under, i think on september 12th, to put out a report that fatah had 11% capital, which is higher than most of the banks have any stress test. the sec must have approved this document because they had been in the bank since bear stearns had crashed. so, because nobody can investigate the assets online for the public didn't have the information ,-com,-com ma the

hedge funds might have had some information, but nobody could really tell. so they all ran. >> can i say something about that? look, i went through a crisis. jerry does it better than i in the 90s where people were worried about safety. i spent tons of time talking to people who lined to us. i talked to the other banks to give us lines of credits and so forth and so on. and the level of disclosure exceeded by fire anything in the public domain and they were very interested and just seen me in getting a sense is reed okay, except for telling the truth? is a capable are not capable? this level of disclosure undoubtedly exists with lehman and the funders much have reached the conclusion that lehman wasn't going to make it. it had nothing to do with public

disclosure, nothing to do with 11% capital requirements. you have counterparties who are funding you if you are in the security business. almost all your funding from counterparties. they are getting on for disclosure they want. the major counterparty calls and says i want to come over and i want to talk about what's going on. you meet with them, talk to them, so forth and so on. what happened is for good or for evil the firm was unable to come than their lenders that they in fact wanted to get out of this is that they were unwilling to take risks. but this occurs any time a company is in difficulty. suppliers if you are a retailer canonization company go out of business because your supplier won't ship to you. it's all a question of judgments made at a counterparties and it has very little to do with public disclosure.

it is all the interaction that occurs between funders and the institution. regulators play an role of the banking industry they are because of the bank of england says not to worry, these guys are going to be okay, other londoners will place a certain amount of credibility with the bank of england. >> i think what john said is profoundly important in terms of the way it works. the problem if you mechanize every incoming rockets or market environment and it can make, everybody is that. is to simply market to market, ever institution is gone. >> not if they're closed in mutual funds through 25% of the financial assets in this country are held by every mutual finance. i don't work for any mutual finance from a just to be clear. not talking about the money market funds, which are leveraged. talking about the other mutual

funds. there's 10,000 mutual funds in total. 7500 or equity base. not a single one of those went out of business because of this financial crisis. so we had a financial earthquake certain structures collapsed in the others, which were built out of stone did not collapse and we rebuilt a pattern at straws as far as i can tell. i guess we have to differ on this. let me ask you a different question which is on the money market. do you think they should be market to market? the mutual fund money market funds? >> market to market as a general rule ,-com,-com ma let's leave that aside for the moment. it seems to me a very, very dangerous area that deserves a great deal of looking art. i am in favor actually of looking at real numbers and

real-time. but the way market to market often works in terms of how it translates in the financial system, its point of time market to market. so the question becomes whether on december 31 that market to market on that day at that time as the decision in terms of how you measure all kinds of things within the institution. it's one of the reason supervision is so important because regulators have the opportunity to receive provides three mechanism to look at the institution of her time. it goes to john's excellent point of who is management. what is the real quality of their book. the problem with these market to market discipline that seems to me is they're certainly good in them. we certainly want a more transparent and won a transparent society. at the same time, there is danger because you make wrong adjustments based on simply die.

>> i agree 100%. >> so money market mutual fund should be allowed back to the bug without any change in their regulatory status? how would you deal with that? would you require them to pay for fdic insurance? >> gene set it up for appeared or were answered in the market question per se. i'm not particularly knowledgeable about the trade-off in money market funds. but any mutual fund any mutual fund you buy into, whether money market or otherwise, there are risks. you know, you may have 100% capital leverage, better a comment letter. but the point is the value of the fund could go up or down. >> profoundly. one of the real dangers of assuming any part of the financial system in another self will not be volatile in crisis is system is so complex you don't know why to people sort of

panic will roam the respect that is how well it is fine. to your excellent point, john, people can lose a lot of money and say i want all of my money. they're going to take out of their money. >> i know are going to go to questions right after this. there's two different things. the panic will happen in stock markets will fluctuate like crazy. in 87 where the stock market went down like crazy. in 2000-2002, the stock rocket crash 50%. none of the financial institutions collapsed. these intermediaries collapsing seem to scare people like crazy. that could be averted by this alternative system. let us ask the audience now for their questions and please come to the microphone and give us a question or two.

>> yes, please. >> just come right up to the microphone. don't need to have me be able to see your hand. >> i have a question for john reed. the kind of size and potential complexity of citigroup was thrust into the spotlight when the group provides a capital plan. wondering your thoughts on the complexity of the organization. as a part of the global sprawl? does that make it more risky to be in multiple countries? multiple businesses? is the more the consumer versus corporate do you talked about? thanks. >> you know, size is one thing, but multiple business mind is the other. i of course spoke about the culture of management that is required if you are dealing with capital markets as opposed to if you are not.

city today is immensely large and its geographically dispersed, but it has been geographically dispersed since 1902. the complexity i think comes from the line for business. may a major capital markets as well as very traditional banking operations and that makes for a very difficult management structure. if anybody here want to really get scared, and they should read a book called command-and-control, which is a story of how the united states operates its nuclear weapons. the conclusion is human systems are immensely difficult to manage with discipline and banks are no different. when you end up with a couple hundred thousand employees, which is the situation at not

only citi, but a number of these institutions, even if he knew exactly what you wanted to do throughout the organization is an amazingly difficult kind of task. so i would argue that citi's problems is referred to in the press, i have no went right knowledge whatsoever reflects this complexity. the seemingly in the mind that the fed were unable to create whatever the fed was looking for. when you are talking about an institution that is large and size, diverse and activities and has gone to restart amount of managerial turmoil, you can well imagine that it was very difficult for them to respond to the request that they got. just due to this scale, complexitcomplexit y, lines of business and the fact they've had three or four ceos over the last 10 years couldn't have

helped. >> questions? yes. >> fred ryan meyer. you were described as transformational when you are in control of the currency. you have an interesting history in a summit with the takeaways would be from your experiencexperienc e as you basically introduce innovation through your role. >> well, you know, some interesting ones for me, thank you for the question. one that i think is fascinating as we encouraged community reinvestment lending to low and moderate income people. interestingly enough, there have been those that have tried to claim that that kind of advancement is in fact the cause of the financial crisis. but in any case, it is in another self unsafe, just not true. the boston fed and the san francisco fed did a book and

found them fact that learning to low and moderate income people done properly is not only transforming in terms of their own life experiences, but also is it exactly as as my name to a person with great themes? maybe not, but perfectly safe if done correctly. innovation in finance seems to me a cent and we don't want to stop because the wonderful thing over the last couple hundred of years, the development of the banking system through the national banking system in 1863 as opportunity as well. in our era, one of the people i most respect and i think we try to work on with the sec was ahmed younis and the enormous contribution micro lending has to global poverty elimination.

as i look back, i think there is a balance between innovation and soundness. i think the comptroller's office is actually done a good job of making my ballot and allow things to grow up and basically support a growing economy. >> we have time for one more question. let me just -- if there's no other questions, let me read to you, apart from the whole issue we've been discussing, the more narrow issues about the financial system, how do you see the world economy today or would you do if you were running the world economy right now? >> as with a lot of finance, so much of what takes finance happen for me is what they used

to call humorous. that is the individual that of confidence or lack of confidence. we are living in an enormously dynamic era where more discoveries are being made daily that probably were made in the period from zero to 1700. that offers tremendous opportunities of elimination of poverty, opportunities for a better environment. but it also creates all kinds of opportunities for risk. so i would say in terms of world economy these days, my own personal model is to keep your seatbelts fastened tight. >> i would sign up with that i think the opportunities are clearly they are in there is no question in the last 20 years there has been an immense change and poverty levels on a global scale and that is all for the good. we have a very big

interconnected system and i think the biggest challenges government. that government is the single biggest problem in the world and bad government is distributed. i mean, there's really a horrible and a little bad and good exists in a small pocket. [laughter] that the question of can we get this interconnected system to maintain some momentum i think it's possible, but it is certain to challenge dean on the short-term i definitely have a seatbelt on. >> okay, thank you so much. >> john, jean, larry, thank you so much for your term in his contribution. >> more now from the conference on a game at the head of the group recommending such regulations are not banks and

customers. a senior financial regulator from the european union at a banking consultant are also on the panel. >> okay, we are going to get started while my cattle drivers are out in the hallways forcing people into the room. it is an honor to introduce my friend and tom curry's friend, andy calamare. he's currently executive vice president of the cooperative central bank. that is not to be confused with the federal reserve system. at the massachusetts cooperative central bank. i serve on the board of the federal home loan bank of boston where he is our chairman. by the way the federal home loan inc. of boston is cosponsoring the reception after this event so i hope as many of you as possible will hang around for that. it is all yours.

>> thank you. >> thank you, professor. you've been called worse, i know. exactly, exactly. we've got a great distinguished panel this afternoon to talk about issues affecting banks in the future. their bios are in your package. we will not spend a lot of time on fees, although kam and i both served his agency heads of state government, decided we would go back to settle some old scores, issued the subpoenas and then come back. >> absolutely. >> sec, president and ceo of the acpa, china bank knows what it is like to work in a bank. kerry and shaw petrou is of measuring analytics at the forefront of most banking analytical questions on the last iowa say how many decades.

i'll leave that to her. i go back further than you, but you sir we are at the front line. also we have the honorable sharon bowles of the european parliament. she is the chair of the influential economic and monetary affairs committee which is guiding the european parliament forming consist of votes for the end. we are delighted to have you all here. we are going to start with can find. karen shaw petrou adman willow and with the right honorable -- the honorable sharon bowles who will get to the bush is doing across the pond. >> thank you. i wish i had that cool british accent. that will really be neat when she gets up to speak in words like rubbish and things like

that. i love that stuff. i want to take the comptroller. happy birthday, even though you were born in the civil war kind of an auspicious occasion. but nevertheless, wonderful job you and your staff are doing. i want to thank boston university and com. com, thank you for having me here today. i painstakingly wrote out a 15 or 20 -- probably a 20 minute speech that i'm not going to give because i don't like to give speeches. that's not like me. i feel too much like a regulator when i do that. the regulators and i have a checkered history, even though i was one i went time, but i was a tax regulator. i was the director of the tax department in the state of missouri. if you come from a state that is

two thirds, you don't want to be the tax director. let me tell you that. there are some counties in southern surrey where they are still 19 their own money. they don't like nice county, much less federal worse the government. you have to understand the culture of our state. but i live in washing to now, which makes those folks admit their own money look mild air to some of the people in washing to. i thought i'd seen it all until i moved to washington. it's a different culture than the midwest. let me tell you. i have a passion for community banks. i chartered a bank. it then went out and bought a bank visa flummox some of my megabanks friends. they would say it was the bank? i would say i am the bank. who are your shareholders? me. i had one senior banker from a huge giant baked unfortunately

didn't make it through the crisis say to me, well how do you do your board meetings? and i said well, after supper my wife and i are eating apple pie and drinking coffee and talking about the bank. that's important to me. it totally formless to. he couldn't figure that out. there's not a great appreciation for privately owned banks in this country, the ladies and gentlemen, there are about probably 5500 or more privately owned banks in this country and a huge portion of those are owned like mine was by one in the family and they are sort of under the radar. you don't even see them, but they are there, believe me. i am tasked with talking about the future of community banking. those of you that ascribe to the big game theory, if there was another big bang, sometimes you hear people say that the only

thing that will survive the next big bang are the roaches. actually two things will survive. the roaches in the community banks. they will both survive. policymakers, regulators, presidents have been trying to do away with community banks for 200 years and they just keep surviving. they just won't go away. if you really delve down into the history of the current fee act, one of the objectives was to have just a national banking system. no state banking system. they thought they would eliminate the state banks. surprise, they survived and that is what they'll continue to do. community banks have a very bright future. they have a symbiotic relationship with their communities. they have flat management

structure is. they are nimble, innovative, they develop innovative products. leave it or not, most community banks are very technologically savvy. it would surprise you. i may also appeal to jan wyatt. they appeal to generation y because they are relationship bankers. jetliners create -- crave good relationships. they may detect dependent, but they still like relationships are not as important. sioux community banks are prolific small business blunders. even though they only control 19% of the assets of this nation, they make 60% of the small business loans that this country. and small business creates jobs. two thirds in this nation over the last 15 years has been by small businesses. so you have a relation ship

going. community banks don't give bailouts. community banks sometimes have trouble raising them. that is what we worry about is we worry about being able to raise bail, much less getting a bailout. so we have two twin challenges to that great future. asset concentration is one of the challenges and regulatory burden is the other twin challenge that occurred via problem for community banks going forward if we don't overcome those challenges. but we will. how does asset concentration and regulatory burden manifest themselves? first, systemic risk. you've heard all of that. right now, just six bank set of 6600 banks, just six now control over 50% of the issued banking asset and this nation's

deposits. just six banks. okay, market advantages. there are dozens of studies that talk about the market advantages. the imf $70 billion a year damage. the new york federal reserve bank 41 basis points on an advantage image. if capitol advantage's view on no all about the advantages. lack of diversity. the fdic did a study. it shows that the 3200 counties in this nation, 1200 of those counties, roughly one in three counties is only served by a community they. that's the only source of commercial banking services to the citizens of those counties. if you add up the populations of the counties, it is short of 20 million people. the only physical presence in that county as community bank. so asset constant creation is a driver of consolidation and mass

diminishes access to banking services for millions of americans. as americans and as 1200 counties. asset concentration taken to an extreme view stories free market capitalist system. our free market capitalist is based on competition and diversity. as you take asset concentration to the extreme, there is no diversity. you become a cyclops. we have the coptic banking system, one giant i stomping around. that doesn't promote diversity. right now we have an oligopoly. we are headed to a monopoly. and how does that encourage competition and diversity? short answer it doesn't. you know, i want to say some thing about con's subsidy review bill, h.r. 26. it's an interesting way to

approach the topic. at least they have to acknowledge it on their balance sheet. i cba supports that. they think we have to get her arms around the concentration problem, but that is just one problem. the flipside of the same coin is regulatory burden. regulatory burden is a byproduct of asset concentration. and why do i say that? because if you look at every single major financial piece of legislation that has gone through congress since the late 1970s, dealing with some aspect of regulation, it has been triggered by a major bank. it has been triggered by something that happened at the congress and regulators want to correct that a major bank and then it tumbles down on us. it is indiscriminate. big regulation is indiscriminate. it is blind to the size of the bank. so when my little banking

jeffersons city, missouri, which was a $50 million bank, i have to fill out the same 80 page report that citi has to fill out. i have to have on my shelf many of the same policies that bank of america has come even though i don't engage in that stuff. it is indiscriminate and it is choking community banks to death. regulatory burden chokes off credit. regulatory burden stymies the relationship model. community banks are built on the relationship banking model, one-on-one. i sat out in my lobby, my desk. i had a desk even though i owned the bank and i was the president. i could always go into the opposite i wanted to. but i sat out in the lobby and i saw every customer that came into that big. i knew them all. he said relationship business

and regulation squeezes the relationship out of banking. you are put into a process. it becomes a process. judgment and relationship are squeezed out that his death to a community bank. it is the relationship that is key to the competitive edge that community banks can have. and this stifles innovation. community bankers are very reticent to develop something new for fear that they are going to go on the wrong side of some regulation. when i got into banking, tom, you'll probably remember this, the quarterly call report when i got into banking, my very first call report that i had to fill out in 1984 with 14 pages long. i could fill it out at my desk. it took me maybe half an hour and then i would file it. today, the call report, this one that is coming out is coming up today as a matter of fact,

march 31st, not call report is 72 pages long and is going longer here in the near future. look it up around 80 pages long four times a year. you know, you still have thousands of community banks better under $250 million in asset size and they are having to fire 320 pages a year, roughly 80 per quarter to the regulators. that is time consuming. it's burden sun. there's got to be a better way. so taken together those twin challenges of asset concentration and regulatory burden, which is many times born out of the major bank culture, those need to be overcome and then we have a bright future. but don't misunderstand me. community banks will survive.

they are survivors. they have survived if have survived every crisis and they will survive every crisis in the future because we are americans. we aren't norrell. a few people passed that commemorates capital. that's another gripe i have, by the way is that we need to listen up on de novo. there's a lot of people who want to create banks out there, but the de novo process is broken and we've got to fix it again. so a word to the wise, you'll be hearing more about that. they are people that want to serve basis, so let them start bank said let's get it going again. thank you very much. [applause] >> thank you as usual. we will next dear friend karen shaw petrou who will talk about intermediation as well as other matters. >> thank you very much. i'm i'm going to stay put because if i go to the podium

shall take all the attention, but because i didn't wear pocket and i will drop by mike. thanks again to con and all of you for inviting me here. this is a fascinating conference and i just want to say i do think your idea of keeping this going and reviewing how the policy discussions everybody is talking about are faring and hold another meeting like this next year would be a great contribution and i really hope you do it and i'm sure all of you do as well. the topic to con is asked to talk financial intermediation, the future thereof. when i think about it, really takes me right into this question of shadow banking. i know there is discussion this morning on a couple different panels. but often when we think about shadow finance is put into the wholesale context of products like security finance, repurchase agreement, money market funds, asset securitization.

not to traditional financial intermediation process. what i'm going to to try to discuss today -- sorry. she disagrees. what i am going to try to discuss today is how the shadows and what they are lesser unregulated institution are playing an ever greater and indeed often exponentially greater role in the business lines that are key to financial intermediation and therefore cut across the spectrum of community banks in the very largest global u.s. financial services firms. just a couple of facts to make clear what i think this is important, the most recent survey from the financial stability board, which is overarching agency for global banking securities and insurance regulators a couple of weeks ago calculated shadow bankunited global $71.2 trillion number,

which is big and it's even bigger when you think about the fact that they leave out a lot. they leave out many retail services, retail payments, mortgage finance, that in the u.s. and other parts of the world are quickly redefining themselves. so i think that $71.2 trillion number is low. even if it is sent, the fsb also finds shadow finance equals 174% and assets of u.s. banks. it's a very big market presence here, even as measured by those data, let alone what i think it really is. it is a clear issue for the industry and also a major one for the regulators and for the occ. from a regulatory news, i think we need to think about our current approach, which is i

will call a regulation the charter. if you are bank, that rulebook gets thrown at you and the systemic rulebook gets donna bank holding companies over $50 billion in assets, even though i think it is silly, the smaller edge of the spectrum are not systemic and indeed much closer to the community banks model, let alone to the global, systemically important banks. conversely, if you are not income even if you are directly engaged in financial services that are regulated, capitalized, subject to liquidity requirement that a bank, you have none of those requirements. that has been true for a long time and keeps bits and pieces of pie and spake a something in return for its rules. it got monopoly charters. because of the rapid increase in financial intermediation,

especially in what i would call deposit taking, that's an awfully franchise model is broken. so the regulation a charter model really encourages what we call regulatory arbitrage. when the economics of a business are driven by regulation, profitable act judy's book over where the rules are less, even if the risk is the same. so what i would recommend instead is a regulation by function model. i try to talk a little bit later on about how back we done under current law. we heard senator dodd and representative frank made clear that new law isn't going to happen, but there is a key piece, a little noticed that the act that puts the total right now into the hands of u.s. regulators know what i think are the rapid growth of the regulation by function model.

for financial services firms, this is a really critical issue. because at the end of that monopoly franchise, debate being the only place it could gather deposits and deposits be the only liability funding product that customers large and small one it has come basic if you can't drive. in our part is, we do regulatory strategic landscapes and what we are often asked to do is look at a particular business line, usually a large one and model it out to see how holding all things equal, which is hard to do, what are the economics of the business under debate model in the nonbaseball without the rules. we will do business go? we try to look not just at the current rulebook, but also the perspective on in the policy framework. when you do this come easy across the the spectrum a dramatic shift in business.

some of this is obvious in key business lines like mortgages were the business is really redefining itself overnight in part because of the capital treatment of mortgage servicing rights. in other areas that the combination of growth and to elegy, which we see particularly the retail payment died. let me be clear i don't think the rulebook is wrong. i am not in any way saying that the capital rules for msr is too tight for the challenges -- the changes in the bank regulatory model for the systemic dictation are right or wrong. with the business planning hat on, i say what i think they are in terms of competitiveness drivers adding the definition of comparative advantage of the u.s. financial system. with share it here, i should mention we are taking a different approach to shadow banking. because of our charger functional regulatory framework,

we talk a lot about it, but we do very little other than try to build out the big take regulatory framework and it won limited case, money market funds perhaps address some of those risk for potential cece regulation. the european system of coors does far more about that night has a much different approach. they do two things. one key role at the basel three rule like eggs, broker dealers and investment managers so we don't have the opportunity where you do the same this is like a corporate loan in a bank or broker dealer or hedge fund, it is easy to get away from the rules. i think it is an important difference. interestingly, the e.u. is also focusing on shadow bankunited to emerge policy initiatives. one is an effort to shut off the interfaces between banking and

shadow banking by curtailing linkages within the system, particularly in the wholesale financial market. ..

u.s. regulators will disregard the law but there is a crisis they will step into the markets still expect them to so we have a great deal of hazzard left the system and i think that puts us at a risk. and it's not just in the banks. we need to look at the resolution across the framework of the broker-dealers, financial market infrastructure, and critically people who hold other people's money because the risks are very different in asset management van and banking but i do not think they are negligib negligible. when you take it down to the bottom line and you look out for ten products, retail payments,

combinations of rules and computers, smart phones, all of the new technology is rapidly leading to redefinition. i know we talked about the relationships that i think they love their phones better. [inaudible] [laughter] >> surveys show that most maloney does look rather do also business with google and apple and they will be happy to do business with them. paypal is doing peer-to-peer lending and the crowd source funding for the small business lending. the major issues that are still small pieces of the market is taking profitable edges into shoving a considerable potential and in the private equity funds like carlisle.

apollo has a book of $100 billion worth of corporate finance and i don't even want to guess how much capital it holds against that 100 billion, but it's not much. major players attracted the segments of the markets that were oncmarket that wereonce tr. so what to do about that. the charter to regulate by function you can do that under section one 20th of the dodd frank act which allows the authority to designate activities or practices not only that our systemic but also that pose risks to vulnerable consumers or investors. the same issue you on many financial service firms it doesn't matter to the consumer if the house is lost but the lender is a banker. the payments transferred on the new system through the bank the

money is gone and we need to have rules that protect customers as well as the financial system. they had ordered the primary regulator to implement the rules but i think it could do a better job than it has done identifying the activities out to the future lay in thlaying these out and ry frameworks and then calling on the regulators in the market to regulate itself. i know that many of the shadow banking products i talk about are seen as marginal but on a business planning basis as i say they can be significant in the key sectors and from a product perspective. we've seen the ibm, companies like the giants and the u.s. manufacturing and corporate sector brought low by remarkable upstarts like apple and i didn't

expect to see the finances any more invincible. i think these shadow issues are very significant and if policymakers wait too long to craft the regulatory framework from a charter they will have waited too long and will have a new set of risks in a financial system that we are only beginning to see emerging now. thank you very much. [applause] we will next hear from sharon. thank you. i will stand up to juggle with pieces of paper i've been making notes of what to say so i hope that you are all. first of all thank you very much for inviting me. it's good to be here and it's nice to be somewhere other than dc when i come to the states and

the first thing i thought i would do is a little bit of scene setting. first of all although the eu does have a big problem with concentration in terms of market share held by its large banks even in 2010 we actually have 10,192 in the eu is down to around 8,000 now with about 6,000 within the euro zone. that reduction wasn't really by banks closing as it has happened in the state. it's been more by the community banks in fact having to be taken over and forced into mergers where we found we had community banks with very similar business models that were in a kind of relationship with one another

and so we found we had systemic things happening in spain and of course it is also worth noting that the first banking problems in the uk with a narrow bank, northern rock and mortgage bank it was end with one of the large broker-dealer banks also of course they got in on the act later. another scene setter about the eu is when we do the legislation because we are not one country and we are operating under a treaty, the legislatures in the parliament and the second chamber which is the finance ministers, and there are two chambers. it's not just the finance ministers. if we don't agree it doesn't happen. and we have to actually agree a lot more and so we are well into the details of what happens within the regulatory authorities here in the united

states. broadly speaking we are all tackling the same problems. for banking we have had coordination for some time and we adapt that to the smaller banks in a proportional way but they all come under the proposals. we have a problem with mortgages in the sense that all of the mortgages are in the banks a lot of them with the big banks that are also broker-dealers and the mortgages even when there are covered bonds it has a serious impact on the leverage ratio. we heard earlier a recommendation look at the danish mortgage bank. well i tell you you would be very frightened if you saw the leverage ratio and treat them as a normal bank where they have been stable for 200 years. also, take care with the term covered bonds. there are some very good ones for the mortgages like in denmark there are some very good

german ones that cover all kinds of corporate loans and there are some that have followed out rubbish like asset security. so we are having trouble trying to get the definition and we are working on it. there is also a problem that they say seldom from one bank to another, so that has an impact on large exposures and it also has an impact on the level of asset in the bank. so there are effects. in the markets it is harder to coordinate. i think partly because some of it like derivatives is new and the markets are more diverse. i think in some respects the u.s. has bigger capital markets and is well played for those that provide a better alternative to the source of funding in the banks. in europe everything revolves around the bank and the loans

rather than corporate bonds ando the asset management is in the bank. the interactions in the market are different in europe so the same rules give different outcomes and therefore we need to have a look at the interaction with the markets also when we are doing banking rules because otherwise you sometimes get these results in the credit you patient adjustments in the absence of having the credit default swap market. the problem having all of this stuff in the bank is that many times not many times but several times they are gdp so they are all the more systemic plan there is a problem and so maybe that is also why in europe there tends to be what i would call social security for banks rather than letting them go into liquidation. we also do have a problem that we've got a single currency in

the same way tha way that all od that is another dimension of interconnection. so, looking at the euro zone, we had a spread of the financial crisis into the sovereign debt and economic crisis that exposed the flaws in the imperfect monetary union as well as in banking and the lack of fiscal discipline. so as it runs on rules and not on a mutualist system all of those issues, sulfur and banks and fiscal discipline all have to be dealt with at once. one of the ways to stabilize was to try to separate the banks and alongside that of two suffered the fiscal discipline and the coordination of budgets. so that means on the financial supervision we have a combination of the rules plus some special extras which we call banking unions and then on

the economic governance side as we call it we have lots of new rules to stop the countries behaving badly with budgetary coordination and disciplines aimed at making sure that we have much better fiscal control and again with stronger measures in terms of fines and disciplines and other things. so altogether with statistics and other things grown in for good measure my committee has done 64 legislative acts and if you want to know more about them, you have to go to my website. but some of the features with those discussed today is banks are special and as i said we are much more in their power without significance to take the load but we are also dealing with structural separations and the activities can still go on in the group and i've actually just

been wondering why we haven't taken the rules to say we like the asset management to be outside of the bank so we can start to build a proper capital markets and maybe we should have suggested a structural separation between asset managers and banks so i might go in hiand fight in the finance ministers when i get having left here. in the shadow banking we already do have more comprehensive regulation partly because some of the stuff in the bank and also because we have regulation of the funds through the fund management and the alternative investment fund managers direct access that the deal with hedge funds and private eq. also when we were transposing into the capital requirement

directive i decided that quite a lot of shadow banking activity has one leg in the bank. so i thought a good place to grab that is in the banking regulation. we made an attempt to that in particular to the disclosure of things like asset and various other reporting requirements which are now going to be built on a separate piece of legislation. now we also have no common bankruptcy law in the eu so we have passed our resolution and recovery proposals where we have legislators prevailing. so now after using up all of the accordion there has to be at least 8% of assets. there's only three european banks in the crisis that would have eaten their way through the levels of capital plus 8% and in

the combined effect of that. we've also put a limit on how much more you can go to funds or the state you can only go for the further 5% because we reckoned after that it should be wound up and if you can't rescue it by the time you've got up to about 25% of assets, then what are you doing trying to rescue it? we've legislated at the bank funding resolution fund that is 1% of the cover to deposit it has to be built up over time so it may take a while to get there and the euro zone funding gets pulled. that is absolutely all things based on size and brisk. there's still a little bit of fighting going on as to how that is to be defined in a subsequent ma