understand the swap. i think what he is learned is that you're not going to drain the swamp hiring swamp monsters. >> thursday at 8 p.m. eastern embedded journalist under expenses in mosul iraq document the fight against isis. >> i'm trying to get you to care about someone that speaks a different language born in a different country come has a different color scheme and you do come totally different background, not born with the same privileges you are and try to make you care about their life and understand the parallels between yours and theirs. >> friday at 9:30 p.m. eastern former reagan advisor and advocate for what's been called trickle-down economics. >> it's really, really true that there are consequences to taxation. and those consequences are the same across the whole spectrum. you cannot tax and economy into prosperity. >> this week in prime time on c-span.

>> next, federal reserve bank of new york president william duffy talks about the need to change the pay structure for bank executives and potential changes to the dodd-frank and the volcker rule. he was chamber of commerce hosted this event of financial regulations. [inaudible conversations] >> good afternoon and welcome to the u.s. chamber of commerce. we appreciate you coming this afternoon and listening to our guest, president bill duffy of the new federal bank of new york. the federal reserve is a preeminent central bank and worker in the role the fed sets monetary policy an important tool in combating inflation or deflation and is an important policymaker for employment issues. the federal reserve and the near federal reserve bank or critical players during the 2007-2008 financial crisis.

the triumvirate of treasury secretary paulsen, federal chair ben bernanke and the near that president tim geithner managed the crisis at a fixed or new measures necessary to prevent the shutdown of the global financial markets. with the passage of the dodd-frank act and other measures such as the g20 pittsburgh summit communiqué, the federal reserve has taken on a larger role both in terms of bank regulation supervision as well as the regulation of systemic risks here it comes as no surprise to anybody in this room that the chamber has at times had quibbles with the fit and of the banking agencies in terms of regulatory process, a little over two years ago issued a federal reserve reform agenda and have held extensive meetings with the fed on that subject think we have made some progress. but make no mistake, the chamber believes strongly in the independence of the federal reserve. as recently as two weeks ago we

sent a letter opposing an amendment to the recent bipartisan regulatory reform bill that would adversely impacted that independence. political interference of monetary policy decision never ends well, particularly for american businesses and their workers. that's what we thought it was important to from new york fed president bill dudley today. president dudley has run the new york fed since january 2009 and has a a permanent seat on the powerful federal open market committee. he's been a major participant in all of the post-financial crisis developments. before joining the new fed he was goldman sachs top u.s. economist for over a decade, worked at morgan guaranty trust and also at the federal reserve as an economist or heals a bachelors degree from the new college of florida at a doctorate in economics from the university of california berkeley. president dudley listens.

at his request we brought in several groups of corporate treasures to meet with him because he wants to know how regulations are impacting the overall economy. we've also worked extensively with his staff on the small business survey that the federal reserve releases annually. despite his recently announced retirement from his current post which is well well-deserved, hl be missed. so with that, resident dudley, let me offer you the podium and will have a chance to have a little discussion after. thank you. [applause] >> so quibbles, that's much better than differences i think. it's obviously a pleasure for me to be here to speak today. in my remarks on going to discuss financial regulation, and the way in which proper incentives can help ensure resiliency of the financial system. as always what i had to say my

own views and not necessarily those of the federal open market committee or the federal reserve system. i think we've come a long way since the global financial crisis in building a more resilient financial system, when they can better support the revision of financial services to american households and businesses such as those that are represented here today, in good times and in bad. i think they're still unfinished business. on the regulatory side there's more work to be done to ensure that a systemically important bank can be resolved effectively on a cross-border basis in the event of failure. additionally, the efficiency, transparency and simplicity of the regulatory regime could be improved without weakening the core reforms to capital liquidity and resolution that i think made the financial system much stronger. most important i think when you direct recognize that an effective regulatory regime and comprehensive supervision are not sufficient.

we also need to focus on the incentives facing banks and their employees. after all, misaligned incentives contributed greatly to the financial crisis, and those incentives continue to affect bank conduct and behavior. so today i'm going to address this issue of incentives with the emphasis on the complementary roles that regulations supervision of bank culture play. each of these i think is necessary to ensure that we have a robust and resilient financial system, not just today it also in the future. the financial crisis was a watershed event that expose severe deficiencies in the financial system, including the inadequacy of bank capital and liquidity buffers, poor risk management and internal controls, and bad tank cultures. many financial firms took on excessive amount of risk, and they didn't always act in ways

that was consistent with the interests of their customers or whether broader public. the crisis revealed woeful shortcomings in many of these elements, and as a consequence it was really bad for the economy and millions of people. over the past decade the official sector in the financial industry has made considerable progress in addressing these problems, and to think the banking system is much more sound and resilient and the number of ways. first, system important banks are much safer. they have much bigger liquidity and capital buffers, and the quality of capital is much improved. moreover, the regime now has a forward-looking element in which annual stress tests examine banks ability to withstand losses under severely adverse economic conditions. and also constrains the amount of capital of bank can return to their shareholders by dividends and share repurchases. strength and liquidity standards

have given the market greater confidence that banks possess adequate resources to whether temporary storms that might arise. and at the global level basel iii us help to level the competitive playing field in a a number of important ways. including most recently by imposing constraints on banks use of internal models to meet their capital requirements and by introducing a leverage buffer for systemically important firms, similar to what we already have in place here in the united states. new regulatory standards have been consummated by a supervised framework for the largest banks that explicitly acknowledges the impact that distresses such firms could have financial markets and the broader economy. i think these efforts have led to considerable improvement and risk management at banks which will help better sustain the flow of credit and the real economy throughout the business cycle. second, made considerable progress in terms of bank resolution. systemically important banks now

have living wills that provide a roadmap for how these firms would be resolved in the event of failure. moreover, there is now a well-defined mechanism under title ii of the dodd-frank act for how to recapitalize a failed systemically important firm. the fdic now has the authority to initial a single point of entry resolution which places the parent company into fdic receivership, transfers its subsidies to the new parent company and takes total loss of absorbing capacity of the old parent company, take set to absorb the losses and recapitalize the new parent company. but the task of operational opg revolution for large global banks, including full clarity of what the appropriate role is of the home and host supervisors, is still not complete. its key work continues on this but to ensure that systemically important firm can fail without

threatening to topple the rest of the financial system. this is an important step to truly ending too big to fail. third, some the obvious systemic vulnerabilities we were exposed by the financial crisis have been remedied. we've made important changes to the mandatory clearing of standardized over-the-counter derivatives through central counterparties for ccp stupid more intensive supervision of intensively important ccp is an we have the money market major fun industry. went to recognize even as we reduce or eliminate old vulnerabilities, we can't rest on our laurels because new from those will inevitably take their place. so these accomplishments notwithstanding, i've no doubt that the current retort regime could be improved. indeed, the official sector should assess the efficiency and effectiveness of regulations on an ongoing basis. i agree with vice chairman corals observations there's more

we can do to make the regulatory regime more efficient, transparent and simple. that includes relief for small banks, greater tailoring based on the firms level of systemic importance, and simplifying the volcker rule. some of these changes as you know have already been adopted or are in process. but also i think we must take a broader view of what characterizes resilient and robust financial system. and to that end i think went to carefully monitor the incentives that influence the behavior financial firms and of their employees. indeed, the record from the crisis in more recent years shows just how powerful incentives can be in driving individuals and firms to do things that are imprudent and/or unethical. bad incidents can lead to conduct that not only generates large risk exposures and market excesses, but also erodes trust and confidence in the financial

system. for example, the precrisis housing boom would not have gone so far or so long without the widespread breakdown that we saw in mortgage underwriting practices that were driven in large part by poor incentives. some examples of the bad incentives that contributed to the financial boom and bust include compensation practices at financial firms that rewarded volume and short-term performance over longer-term sustainable results. the willingness of credit rating agencies to designate tranches of subprime mortgages, aaa in exchange for fees paid by a small number of issuers of mortgage-backed securities. the willingness of fannie mae and freddie mac to use the implicit government support to take a large amounts of mortgage risk with very little capital backing. the willingness of aig to use its aaa rating to provide credit protection to banks and

securities firms against complex mortgage obligations with little direct capital support or inadequate liquidity backstop. and pegging money market mutual funds at par which led investors to have an incentive to run at the first sign of trouble. since then we sin number of other costly breakdowns that were driven in part by poor incentives. in the libor scandal, for example, relatively small number of banks manipulated libor to the benefit through rates setting submissions that were not actually based on transactions. in contrast a new u.s. treasury repo reference rate that new york fed is involved with introducing will be based on actual transactions in the deep and liquid market, and it is designed to be compliant with the principles set forth by the international organization of securities commissions. the foreign-exchange foreign ed incentives help encourage rate raking at particular rate fixing

times. reforms there were such who introduce including recommendations for the financial stability board report on fourth exchange benchmarks and the recent publication of it affects global code which was felt by some to banks working with market participants. the creation of millions of unauthorized accounts at wells fargo also reflected bad incentives. bank employees were compensated on sales volumes with aggressive cross-selling targets without customers actually receiving beneficial services. in response the federal reserve board entered into a consent cease and desist order with wells fargo that requires the firm to improve its governance and risk management processes. these recent cases to be our particularly disturbing entrance of the scale and flagrantly, and in the case of the rate rigging scandal, the collision that occurred by employees across different firms. i am a particularly struck by

the fact that the manipulation of the foreign-exchange markets occurred even after they libor scandal was well known. i think these episodes underscore the tremendous power that incentives have the influence and distort behavior, potentially leading to massive damage to bank cultures, reputations and finances. so some of the lessons on incentives that stand out for me include the need to guard against tactical design flaws that can be manipulated and exploited for profit. ensuring that incentives are aligned and consistent with the desired behaviors. recognizing that rules, however well-intentioned, can be gained. and lastly, having appropriate mechanisms in place so that firms can identify problems early and ensure rapid escalation and amelioration of those shortcomings. many of these issues and risks are likely also apply to

companies but i think they're particularly important for financial institutions,, especially those institutions that are systemically important. the scale of such firms not the -- magnifies the impact of bad incentives on financial system and on the economy. at the same time that same scale also makes it more difficult for senior management to properly control a firms activities and monitor the conduct and behavior of its employees. for these reasons we need strong internal and external checks on banks, and that's a very what you want to turn to now. as i said earlier based on financial system is one that is safe and resilient and can support the revision of financial services at a reasonable price to the real economy, good times and bad, and one that promotes confidence and trust among its customers and counterparties. financial institution should be prudently managed and subject to strong internal checks, including appropriate risk management policies, procedures,

internal controls, compliance and audits. meanwhile an effective financial regulatory and supervisory regime should be as efficient, transparent and as simple as possible. these goals are broadly shared by supervisors at banks alike which suggest to me the relationship between supervisors and banks does not always need to be adversarial. indeed, healthy dialogue between the two helps make the supervisor process work better. for example, it's important that firms are proactive in revealing their problems to the supervisors. individual institutions can benefit from the horizontal perspective that supervisors bring to the examination process. this perspective can highlight where the firm stands, vis-à-vis best practices, or where there may be important vulnerabilities in terms of its operations. i would admit there's an irreducible amount of tension built into the relationship between supervisors and banks,

given that each parties roles, interests and responsibilities are not always going to coincide. banks are naturally more sensitive to the constraints on the profit opportunities or other dividend policies, and they are much more sensitive to the cost of regulation. they also may question a much protection is necessary. for example, how strange it to the requirements need to be or how severe should the stress testing assumptions be? these are areas where i would expect the perspective to differ. supervisors are principally focused on compliance with laws and regulations as well as issues of safety and soundness. they also bring to the worker perspective of financial stability that may not match the more narrow interests of a particular firm. for example, supervisors seek to address the externalities created by the failure of the systemically important firm by imposing higher capital and higher liquidity requirements and the firm would select it was

left to its own devices. the financial crisis is a vivid reminder that there can be many risks to financial stability, and we need a strong internal and external constraint on banks. banks. here i think there are three pillars, regulation, supervision, bank culture, , tht almost play an effective role. regulation establishes what is legally permissible for banks to do. supervision helps to reinforce those rules and evaluate whether the banks controls and other processes are conducive to safety and soundness. and bank culture sets out the norms for what is appropriate behavior. but the st. andrew's pillars are mutually reinforcing. regulation and supervision, for example, attempt to address various market failures in banking that can contribute to excessive risk-taking. bank culture in turn helps extend bush norms in areas were regulation may be silent.

so in this way regulation, supervision and bank culture are complements and deficiencies in any one of the three can be problematic. for example, as we've seen in cases of unsafe and unethical behavior in recent years, strong regulation and supervision cannot substitute for deficiencies in bank culture am especially not on a timely basis. it's the public sector job to establish and enforce rules, but rules are inherently limited in their ability to constrain conduct and behavior. much of our regular regime has been developed in response to problems that have arisen over time. because regulation is typically reactive in this way, it may not always keep pace with the evolution of the financial system or of the broader economic environment. also we must recognize that at times actions will be taken that are clearly inconsistent with the spirit of the rules that are in place or the rules will

simply be violated. so consider for example, the use of lehman brothers so-called repo 105 105 transactions to wn address its balance sheet. beginning in late 2007 lehman use repo 105 transactions to temporarily remove security summits balance sheet for a few days and they did this in order to mislead investors and counterparties about what is true financial condition was. these transactions had the benefit of being recognized as sales even though they were merely identical to standard repo transactions the state on the balance sheet. another example following the introduction of basel iii, some banks try to reduce their capital requirements by transferring risk to other counterparties. in certain cases this occurred even when those counterparties did not provide any additional resources to absorb potential losses, either because they didn't have much capital or

because they were actually affiliate with the bank in question. i would also note that the establishment of too many bright line rules may actually be counterproductive to the goal of encouraging good bank cultures. for one thing, detailed rules can be construed as applying the responsibility for good conduct rests with the public authorities. for another, rules may create opportunities or incentives for legal and regulatory arbitrage. when banks work to defined crater ways rebels i think this'll have an insidious effect on culture. as i see it, organizations culture gets into trouble when it equates what is right with what is legally permissible, and when what is wrong he comes viewed as what is legally impermissible. the proliferation of roles followed by the gaming of those rules can be ultimately self-defeating. the end result may not only be a

loss of trust but overtime pay more burdensome regulatory regime than would otherwise be the case. so while regulation and supervision in the city to ensure a resilient and robust financial system, i very much doubt that they are sufficient. they need to be supplemented by bank management that pays close attention to incentives, conduct and culture. as i had previously said, incentives drive conduct, and that establishes the social norms that helped define a firms culture. so the first step is for firms to evaluate the incentives they have in place with respect to personal evaluation, compensation and promotion, to make sure that those incentives are consistent with the type of behaviors they actually want to encourage. for example, how our compliance violations treated in terms of compensation and promotion decisions? are incentives in place to encourage people to speak up early when problems are smaller

and more manageable? and when employees to speak up how are they subsequently treated? my colleagues and i at the new fed have commented previously essential role of good culture in supporting a banks reputation financial condition and performance and in fostering customer confidence and trust it we've argued that cultural capital to its ability to limit misconduct risk can actually be an important bulwark to a firms financial capital. culture is often viewed as a soft topic but i disagree with this. the financial penalties associate with misconduct are anything but soft. make bank firms since the crisie paid about $320 billion a penalties through year and 2016. they hit to a bank's reputation from misconduct can also be quantified for example, through its impact on the banks share price or its funding cost.

culture should be about concrete incentives in behaviors that help achieve specific goals and that implies that culture should not be viewed as a soft issue. i've argued on several occasions that bank leaders could get a better view into their firms progress on culture and conduct by doing more things collectively. for example, major banks in the united states could participate in an industrywide survey of their employees that was conducted by an independent third party. with the results anonymized to encourage respondents to be candid in their assessments. i suspect if we did it this way these results would create a more accurate picture about how banks are actually doing comedy think this would underscore how much more work is needed to help improve bank cultures. another i did that i is the creation of a database of banker misconduct to combat the problem of rolling bad apples. this is the case when employees

are dismissed due to suspicion or proof of misconduct are unwittingly hired by other firms in the industry where they have the opportunity to repeat their action. understandably, firms are concerned about legal risk if they share information about banker misconduct with others, but there may be ways to address these concerns through legislation. once again i invite the industry to take initiative on these industries and look to the public sector for support. for their part i believe that supervisors also have a special role to play in assessing incentives at the firm level and the possible implications for bank behavior misconduct. supervisors can mitigate misconduct risks by supporting the development of effective corporate governance regimes, prudent risk management policies and strong compliance and control structures. that can be all done within the framework of effective oversight from the firms board of directors. ultimately establishing and maintaining an effective culture

with appropriate risk governance and control is the responsibility of individual firms and industry but the official sector can help by highlighting best practices and addressing collective action problems and other market failures. i'd like to briefly touch on some areas where i think there's for the work incentives may be warranted. including some regulatory changes that might address certain incentives and first mover problems. at the outset let me say i don't think i have all the answers and i don't mean to suggest that the ares i discuss today are the only areas where there is room for improvement. but these issues are ones i think our more investigations of possible solutions make awarded. i discussed we had made substantial progress in raising banks capital buffers but i buti believe it would be also worthwhile to evaluate other changes to our capital regime to encourage earlier action by banks and economic environment deteriorates.

banks are naturally reluctant to raise capital due to concerns about stigma and potential equity dilution. tank management may also delete a move to raise capital because they are prone to over optimism about the outlook for the firm or for the economy. there's also an externality problem. if the bank does not get full benefits that accrue to the financial system when it take steps to strengthen its own financial condition. now although supervisors to have some tools available in some circumstances is often chorus safety and soundness basis that may not always be forthcoming in a timely manner. and changes in the 2018 program do enable banks to avoid a federal reserve board objection based on the quantitative assessment by raising new capital. and that is a step in the right direction. if the current which he may not

be sufficient to ensure that banks will raise capital proactively as we go into the next economic downturn. compensation is also a powerful incentive. as i mentioned earlier the emphasis in compensation practices and on short-term performers over longer-term sustainable returns was a key vulnerability revealed during the crisis that helped motivate imprudent behavior. currently senior bankers are paid mainly in cash and the first stock grants. this structure creates incentives to take actions to maximize a banks share price, rather than to minimize the risk of a banks failures. while compensation practices ana day to feature a longer, a larger and longer deferred component, greater emphasis on deferral in the form of long-term debt which might also be recognized as a key lack to better align senior managers interests with a long-term safety and soundness of their

firms. as i see it having more compensation in the form of deferred debt would have to benefits. the one i think would the incentives for risk-taking. for another if debt holdings were actually at risk of conversion to equity in the event of failure, i think senior bankers would be incentivized to cut dividends and raise equity capital earlier to reduce the risk of failure. having a regime in place that creates strong incentives for management to steer aggressively away from bad outcomes would be better than one in which management has incentives to temporize in the face of rising risk. some banks have experimented with such compensation machines, and i would encourage more to do so, but this type of reform may need a push from the regulatory side. banks may be reluctant to adopt these types of pay structure on the own for competitive reasons. they may proceed there's a first

mover disadvantage in attracting and retaining talent. another possible reform could involve putting a greater onus on senior management for the cost incurred from regulatory fines and other legal liabilities rather than placing this all on shareholders alone. shareholders should not be shielded from such cost and fines because they also have profited from the associated gains, but at the same time it doesn't seem fair or prudent to shield the decision-makers from responsibility for costly breakdowns to the degree that they are shielded now. greater personal liability may also be a powerful incentive to promote better behavior. i suspect if we made changes in these areas this would cost senior managers to encourage the staff to speak up earlier about risks, the more intended when red flags are raised, and respond earlier and more forcefully.

i would also note the many regulatory reforms introduce over the past decade may create incentives of their own with important implications for bank behavior. such incentives may alter the nature and locus of risk-taking and, therefore, they need to be closely monitored. risks could be pushed outside of the banking system or incidents could lead to different bank strategies, business models, or product offerings that introduce new risks. .. >> that's encouraged window dressing by some banks at the end of corners. and the others that we put in place mostly had the tent at

that tiff effect of safer institutions and financial institutions, should also be mindful of potential unintended consequences. so, to sum up, i think we've made considerable progress toward a robust financial system and while we should do more to make the regime more trans parent and simple, there is the revolution of cross-global banks. we should focus more on incentives which can assure our dynamics work well and banks have right incentive to steer away from trouble. and regulation and supervision, they're necessary, but they are not sufficient. they also must be supplemented by bank cultures that encourage ethical behavior, the early identification of problems, and a willingness to address those problems proactively. so, thank you for your kind attention and i think i'll take

some questions. [applause] [inaudible conversations] [inaudible conversations] >> thanks very much. let me take a couple of minutes to ask you a few questions and then throw it open to the floor. i was just asked if anybody is going to ask a question from the floor please make sure to identify yourself by name and organization. if you're members of the press please hold your questions until the last is over. president dudley, you've headed

up the fed and used a permanency and you're vice chair of the open markets committee so you've been there for a really dynamic period of time, that people are going to write about a hundred years from now, so the financial crisis, the aftermath of the financial crisis, the winddown of extraordinary measures, probably some of the volatility that we're seeing now as we return to the normal market behavior. what are your observations from such an extraordinary period of time? >> well, i think-- the most obvious observation is we need to do better. i mean, the financial crisis was horrible for, you know, millions and millions of households and businesses, and i think that we need to do a better job in terms of how we regulate and supervise banks and assess the financial stability risks of the financial system so we don't have a return of a financial crisis, like we've experienced in 2007, 2008, 2009.

that was the worse financial crisis of my lifetime, i think the worst since the great depression. the number one thing keep in place the changes we made in place and mike the financial system more resilient. so the new york fed traditionally has been the lead banking regulator within federal reserve. >>. >> i think the board of governors-- >> the new york fed had a very special police, but dodd-frank changed that a little bit and there have been other changes. how do you see the role of the new york fed deinvolving today? >> i think our fed has an important role within the federal reserve system for a number of reasons. number one, we're the bank that actually executes monetary policy, so, monetary policy set by the open market committee, but the new york fedex --

fed executes on behalf. and one of the two financial centers around the world, new york and london, we really have to do a good job of assessing what's happening in financial markets and take that information back to our colleagues on the federal open market committee and third, we really have a very strong international orientation among the reserve banks. we run central bank account services which basically has contact in business with central banks all over the world. i actually go to basel every two months and sit on the board of directors for the bank for international settlements which is a really important part of the outreach and coordination across the central banking committee. so, you know, i'm biased, but i do think the new york fed is special both because of what new york city is and what some of the operational roles that come to the new york fed. >> you talk in your speech about the need for more to be done in terms of cross-border

resolution. and you mentioned your role with the bank of international settlements, as well as the financial stability board. how have you seen the global financial regulatory system evolve? is that process or structure that we have today the right one or does that need to evolve further? >> well, i think we've made-- look it, i look at the work that's done in the banking settlements and the financial stability board, all about raising standards around the world, to have a safe global financial system and a more level playing field. so, i think it's very much in the u.s. interest to participate in those forum and to push for a more sustainable regulatory regime around the world. so, i think it's actually stood us in good stead. for example, on this issue of resolution. the financial stability board has done a lot of work on resolution to try to make sure that this can be done effectively on a cross-border basis and one of the things

that we are probably going to take up in the next coming months in bassil the chair on that financial system, we'll look how well the financial stability works on resolution is actually going to work on a cross-border basis. we'll look at the effectiveness of that and try to identify strengths and weaknesses. i think we're making progress. what i worry about is declaring victory prematurely before we have everything completely buttoned up. >> you've also had an extraordinary career. you know, you started morgan guarantee trust which most people don't realize now is j.p. morgan chase or a part of it and you spent a long time in the private sector and as i said involved in this extraordinary period of time as a member of the fed. how have you seen the financial system evolve? how do you see that evolution going? what are the good and the bad that you see coming with that?

>> well, i think we benefit from the financial system that we have. it's pretty unique around the world. we have sort of three major pillars. we have a very efficient, broad, deep, capital market. we have some very large systemic banks that operate across the country and then we have thousands and thousands of community banks and i think that's pretty unique, you know, around the world. i think that each of those pillars is really important in terms of satisfying the flow of dread to households and businesses and to enable corporations that are not financial firms to be able to hedge and manage the financial risks that they incur, so, i think the regime is a pretty good one, but we have to recognize it's got three pillars and we need to make sure that we keep each of those strong and viable. >> do you, i mean, in the united states is unique in that regard, right? with those three pillars. >> i think so. >> do you, from your international perch, does that create any issues in terms of

the uniqueness of the american system versus others or is that something that you have not seen a problem in your international discussions with other regulators? >> there's no question that, you know, it's an institutional setup and every country is different. when you take laws at international level and apply it to a level, there's something lost in translation. that's why a lot of the descriptions internationally what we want the outcome to be and then it's up to the country to decide what kind of regulatory system do they need to sort of put in place to achieve that outcome. so rather than saying you should do it this way, you need to do it in a way that acheives this outcome so i actually think it works effectively. a good example is that it's a big project early in my tenure for the fed is the financial infrastructures. we're now clearing over-the-counter derivatives across the counterparts because it's good because it's risk

reducing, but this makes the central counterparts much,much more important in terms of key points of-- these are key risk points much failure in the system potentially so we developed internationally these principles for financial inventory. and basically said this is what-- this is how your financial infrastructures need to operate, they need to be able to achieve these kind of goals. we're not telling you how to exactly to achieve these goals, that depends on the regime you're in, but you have to have this level of resiliency. >> i think a common theme of a lot of your public discussion as new york fed president has been about culture and you talked about it again today. and you've talked about the need for culture to change in financial institutions. have you seen culture changing? >> i think that a lot of banks are making good effort on this board of directors now, a lot of banks have set up separate committees just to look at the culture and conduct.

there's a lot of effort by senior bankers, ceo's that are pushing down on the organization. the idea that culture and conduct really are important. so, i feel like you know, here is the goal. we probably start here. so we've made part of the journey, but i think more can be done and i gave a couple of suggestions in my remarks today. most notably, i think in the u.k., there is an industry-wide survey of banks, banking standard boards does for the banks in the u.k. and i think it would be great to have something like that in the u.s. because i think giving a set of information, allows you to benchmark your performance relative to others is really important and assuring people respond to that server is truly that they can respond exactly how they see fit, i think that would improve the quality of the information and the information you'd be able to an i ply that information to see where you were strong and where you were weak relative to your competitors. >> one other thing i just want to pick up from your speech.

you also talked a bit about regulations and laws, defining what is good or bad and that people may now become-- are becoming too reliant, let's say, what a regulation is saying or not saying independent of that. what, can you flesh that out a little more. what you were trying to-- >> the example of gave of lehman brothers was repo 105, legally permissible, but clearly against the spirit of the rule and used to-- designed to distort people's assessment of their balance sheet. so if you have a good culture, you can' going to say i can do this, but it's misleading, it's unethical, so therefore, it's inappropriate. so, that, you don't want to be in a regime where basically the banks just look to the regulators to set a set of rules and say whatever is permissible within this set of rules goes because the

regulators would not be able to keep up and the people in the firms would be clever in finding ways around the regulations, and that environment, you're just going to have this sort of horse race between the regulators trying to bolster the regulations, the firms trying to get around the regulations, and you're going to end up with a lot of complexity in your regulatory regime and not effective in well performing financial system, it's just not a place, a direction that you want to go. >> host: do you think that an enhanced dialog between the regulators and regulated would also help with that? >> well, i think we do have that, i think we have that dialog, you know, i think important when you're a regulator talking to a regulatee that it's important to understand what your incentives are and the firm's incentives are so you can actually have an intelligent conversation. the best conversations that i have with bankers are when they understand my perspective and i understand their perspective because then we can actually identify the source, the cases

where there is a common interest and when there's a divergence and we understand why we have areas of disagreement and then that allows you to sort of find common ground. so how we can actually make their firms and the financial system better and safer. >> well, you're in washington and that means you're not going to get away without talking about some legislation. but, obviously, we've had a little banking bill that was passed out of the senate recently, and that included a change in systemic risk thresholds 0 from 50 billion to 250. and the changes as well in terms of possibly doing away with some of the volcker compliance programs and the smaller banks. you've talked about this in the past how some of these regulations should not have been imposed on large community regional banks. do you have any thoughts that you can share about that legislation or those efforts? >> yeah, you know, i'm pretty sympathetic with the senate

banking rate legislation in the sense that it maintains the key pillars of dodd-frank i think are really important, capital, liquidity, central clearing over-the-counter derivatives. supervision of financial market utilities by the federal reserve because now they're systematically important and retaining title 2 over liquidation authority when a big bank gets in trouble and changes that they made in terms much providing relief for smaller banks, i think absolutely makes sense, and the changes to the volcker rule. so, do i agree with every last, you know, period and sentence? probably not, but generally, i think it's legislation that goes in the right direction. >> we have been supportive of that because in some of our travels from around the country and obviously, we represent the type of business that there is and size of business, but when you go out, particularly in the heartland of the country, there has been a disconnection between small business lending or lending for small

businesses, that banks aggregate lending should have gone up, but it's going to places other than small businesses. so, do you think that this is an appropriate way to maybe right size some of those impacts and is that a way that we can help to incentivize some growth, but make sure that reasonable risk taking is also undertaken? >> i mean, it sort of goes in that direction. community banks are really, really important to local businesses and so, it's really important that they continue to be vibrant. my great-great grandfather was a community banker so i'm biased. he showed me his bank balance sheet. i saw his banking book during the great depression and what it was was a series of very large debits to keep his bank afloat and his bank actually did survive the great depression so i think that community banks are very important avenue of supplying credit, especially to small businesses.

and i think that that needs to be recognized in terms of the regulatory regime. now, one of the challenges has been over the last decade. some of the sources of credit to small businesses that we've had prior to the financial crisis, will really hurt by the financial crisis itself because a lot of small businesses, especially start-up small businesses were basically funded by family and friends, home equity lines, and credit cards. and so we go to the financial crisis, home equity lines pulled back, credit cards pulled back and friends and family, economy is not so good. so, it's been a long road back for small businesses because those sources of credit were constrained. and the most difficult lending decision for a bank is really to a small business, it doesn't have much of a track record. banks like to lend against collateral, and so the hardest thing is for that business to get that initial capital so they can develop that track record to give the bank confidence in terms of how they're going forward.

that's why we have the small business administration. we have community development organizations to help small businesses get over that hurdle because that start-up is very, very important for a vibrant small business community. >> shifting here a little bit. so, we were talking a little bit about this, you know, during lunch, but c-card i think is something you see as being an important tool, but it also allows then for the fed and other regulators to then determine if, you know, banks can issue dividends and the li like. do you think that c-card today is appropriately calibrated. should changes be made to it? can it be used as a tool taken into other accounts of concerns being raised. >> i would step back and say stress testing is really valuable. if you actually look at the

turning point during the financial crisis is when we actually did the stress test for the large systemic firms in the spring of 2009 and they were viewed as credible by the market participants broadly. that was really the turning point for the financial crisis because people understood that it's not sufficient to have enough capital today, it's important to have enough capital in the future, even under very adverse environments. so, the stress tests i think are very, very important because they create a forward looking element to the capital standardsment so we can argue about precisely the c-car or how important the stress test is, but i think it's important to have stress tests, credible stress tests because they basically increase the degree of confidence in the viability of our financial system even under bad economic circumstances. so, i think that you know, the federal reserve is continuing to look at this process and

refining this process and i think thwill continue to do so. at the margin, it's important to have stress tests that are pretty severe to make sure that firms have enough capital on a forward-looking basis. do you also, i mean, so we're eight years past dodd-frank and we're nine years past the depth of the financial crisis. and you know, now we're hearing about randy quarrels looking at, you know, adjusting something, maybe taking a hard look at the volcker rule, you know, we were talking a little about c-car, do you think this is an appropriate time to look at some of those issues? >> i would argue you should always be looking at your regulatory regime to see whether you've got the dials right in terms of how simple and transparent and efficient it is. and what he's arguing for i think is very much common sense. you know, obviously, following the financial crisis we knew that the financial regime was

inadequate, so there was a lot of regulatory work that had to be forth coming, and now that much of that is now in place, i think this is an appropriate time to look at it and sort of ask the question, can we achieve the same outcomes more efficiently, more simply, more transparently and that's what we're going to be looking at. >> let's see if there are questions from the floor. >> one right over here. >> hi, bill, paul, currently unaffiliated. first of all, thank you for your service. the question is, you've emphasized two particular points in your remarks, the importance of incentives and the importance of capital. could you speak to the tension between the leverage ratio that has a negative or perverse incentives for firms to acquire riskier assets, the tension between leverage ratio and the

risk related that is by nature somewhat imperfect. >> the leverage ratio is capital divided by total assets so the leverage ratio basically treats risky assets the same as not risk assets. so a treasury bill is treated the same as a second mortgage. and you know, you could argue that's not the greatest capital regime. so, why would the leverage risch show put in place? it was put in place because it was viewed that relying completely on risk-based capital standards might lead to gaming of those capital standards and inadequate level of capital in the system. so, i think, you know, in the ideal world, the leverage ratio would be sort of a little bit below the level where the risk-based capital regime is, a sort of a safety net and i think the federal reserve is looking at the leverage ratio to see whether it should be recalibrated for large systemic firms so it's not as binding

and we see in the legislation, there was some relief for the custody of banks, in terms of reserves held and you know, bank reserves, so that leverage ratio with be less finding. i think that it's useful to have as a safety net, but you probably don't want to have the leverage ratio be the dominant factor driving the capital regime. i think in 0 your current reseem. i don't think it's the leverage regime is the driving capital for most banks. i think what is the dominant regime is c-car and the stress test. and i think that that's okay, as that being the constraint because that's the constraint that ensures the bank will have enough capital to operate even under adverse economic environments and that seems like exactly the kind of capital regime you'd want to have in place. >> any other question from the floor? >> i'm tony from pimco.

to what extent do international capital standards rules and regulations drive domestic standards? >> well, i think that-- the question is how do international capital standards drive domestic standards? i think that everything that is negotiated in bassil is by concensus, by completely voluntary, it's not like the bassil process imposes on the u.s. tougher capital standards or tougher regulatory regime. i would argue the direction goes much more the other way, we have a set of capital regimes in the united states and we want to make sure that those same regimes or similar regimes are implemented across the rest of the world so there's a level playing field and a safe global financial system. so the idea that it's imposing bad requirements on us is absolutely not how it's working. i think it's very much us using

the bassil process to raise global standards to a level consistent with standards we have in the united states. >> with that, to you the united states has tougher capital rules. and i think one of the complaints that we've had from some of our members capital rules and you have other jurisdictions presumably under the same system have a much la x-er-- if you look at it, the u.s. sees basel as a floor, and others see it as a ceiling. do you see any incongruities with basel 3? >> i think that bassil 3 especially with the newest changes that put constraints

that banks use internal models for their capital requirements actually does level the playing field more than what we had befo before. >> every country it different and you debate the netherlands versus us and it's hard to tough that out exactly because the institutional setup is so different and in different countries. so, i don't-- i'm not-- i don't think we're ever going to achieve the thing where the capital regime is exactly the same across every country because the institutional setup and the financial system, how it's constructed is very different country by country, but i think we can get to a place where the differences significantly small and don't impede the ability of banks to compete on a relatively fair and level playing field across borders. i mean, you know, i don't think

we have anything to worry about, frankly. if i look around the world and i look how u.s. banks are doing relative to large foreign banks, it seems like u.s. banks are doing fine. it seems like the regime that we have in place is not making the u.s. banking system safer and more resilient and not impeding their ability to be competitive not just here, but around the globe. >> so, let me just ask you for people who are in the room today. what's the one message that you want them to leave with. >> one message i want them to leave with, not just regulation, that's supervision, that's sufficient. you also need to focus on incentives because incentives drive bank conduct and culture and bank conduct and culture is really important for banks not getting into great difficulty. that's my message. >> thank you president dudley. and please, everybody thank him. [applaus

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[inaudible conversations] >> and live now to the national press club here in washington this morning for a conference of the free state foundation on telecommunications policy. the chair of the federal communications commission will address the gathering as well as officials throughout the telecommunications and administration and management and budget and people from academia and think tanks. we're expecting a big topic of conversation the fcc's decision to end net neutrality. live coverage here on c-span2. [inaudible conversations] >> okay. please ask everyone to take their seats. we'll