nyu law school, organized by a great lawyer named steve sexton. and you will be surprised to know he was a law clerk for the great jury trial lawyer hugo black. susan: thank you very much to akhil. and paul from being back this season. so glad to have you. and thank you all of you for watching and for those who participated. ♪

next monday--♪ landmarkonday on cases, griswold the connecticut. the supreme court ruled a statutory unconstitutional and establish the right to privacy is still evolving today. our guest star law professor at george mason university's antonin scalia a law school and the associate dean for research at a law professor at temple university. landmark cases monday and join the conversation. follow us at c-span. we have resources at our website for background.

the landmark cases podcast at c-span.org/landmark cases. ♪ "washington journal" lyra day with news and politics that impact you. coming up, political technology reporter leave al. -- lee val. also author and correspondent britney wilson. he sure to watch c-span's washington journal. join the discussion. >> william dudley spoke on

financial regulations and event hosted by the chamber of commerce. he announced he is retiring this year. this is about an hour. >> the federal reserve and the in narc federal reserve bank or critical players during the financial crisis.

chairary paulson, federal ben bernanke, and the new york fed president tim geithner managed a crisis and took the extraordinary 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 communicae, the federal reserve has taken on a larger role both in terms of bank regulation supervision as well as the regulation of systemic risk. that comes as no surprise to anybody in this room that the chamber has at times quibbles with the fed in other banking agencies. we issued a federal reserve reform agenda and have held extensive meetings with the fed on that subject. and i think we have made some progress, but make no mistake -- the chamber believe strongly in the independence of the federal reserve. we sent a letter opposing the recent bipartisan regulatory reform bill that would have

adversely impacted that independence. political interference of monetary policy decision never ends well, particular for mechanisms is and their workers -- american businesses and their workers. that's why we thought it was important to hear from new york fed president will deadly today. -- bill dudley today. he has run the fed since 2009 and has a permanent seat on the federal open market committee. he has been a major participant in all the post crisis financial the moments. before joining the fed, he was

goldman sachs to u.s. economist for over a decade. he holds a bachelor's degree from the new college of florida and it doctorate from the university of california at berkeley. he is also unique in the regulatory world. he listens. 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-deserved, he will be missed. with that, president dudley, let me offer you the podium and we will have a chance to have a little discussion after. thank you. [applause] mr. dudley: quibbles are much better than differences i think. [laughter] it's obviously a pleasure for me to be here to speak today. in my remarks, i'm going to discuss financial regulation and the way in which proper incentives can help ensure resiliency of the financial system. as always, what i have to say reflects my own views and not necessarily those of the federal open market committee or the

federal reserve system. so i think we have come a long way since the global financial crisis in building a more resilient financial system, one that can better support the revision of better financial services to american households and businesses such as those represented here today both in good times and in bad. i think there is 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 to come i think we need to reckon is that an effective regulatory regime and comprehensive supervision are not sufficient. we 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. today i will address this issue of incentives with the emphasis on complementary roles that they play. we need to have a robust financial system not just today but also in the future. the financial crisis was a watershed event that exposed severe deficiencies in the financial system, including the inadequacy of bank capital and liquidity buffers or risk management and internal controls and bad bank cultures. many financial firms took on excessive amount of risk and they did not always act in ways that was consistent with the interest of their customers or with the broader public.

the crisis revealed willful 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 i think the banking system is much more sound and resilient in a number of ways. first, systemically important banks are much safer. to have much bigger liquidity and capital buffers and the quality of capital is much improved. moreover, the capital regime now has a forward-looking element in which annual stress test examine the bank's ability to withstand losses under severely adverse economic conditions. it also constrains the amount of capital that a bank can return to their shareholders by dividends and share repurchases. strength and liquidity standards have given the market greater competence that banks possess adequate resources to whether temporary storms that might arise.

at the global level, basel three has leveled the playing field and a number of ways, including composing constraints to meet capital requirements and introducing a leverage buffer first technically -- for systemically important firms, similar to what we have in the united states. the new regulatory standards have been complement it by supervisory framework for the largest banks. it explicitly acknowledges the impact that distress such firms could have on financial markets and the broader economy. i think these efforts have led to considerable improvement at risk management and banks which will help sustain the flow of credit to the real economy throughout the business cycle. second, we 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's now a well-defined mechanism under title ii of the dodd frank act for how to recapitalize a systemically important firm. they now have the ability to replace an important leadership and transfer subsidiaries to the new cap company and takes the total loss of the old parent company to absorb the losses and recapitalize the new parent company. including full clarity on what the appropriate role of the home and host of supervisors is not complete. it is key that work continues on this front to ensure that systemically important firms can fail without threatening to topple the rest of the financial system. i think this is a really important step to truly ending too big to fail.

some of the obvious systemic vulnerabilities that were exposed by the financial crisis have been remedied. we have made changes through central counterparties. we have more intensive supervision of systemically important ccp's and we have reformed the try part repost system and the money market mutual fund industry. we have to reckon is that even as we reduce and eliminate old vulnerabilities, we cannot rest on our laurels because new vulnerabilities will take their place.

these a couple cements notwithstanding, i've no doubt the current regulatory regime could be improved. the official sector should assess the efficiency and effectiveness of regulations on an ongoing basis. i agree with vice-chairman corals that there is more we can do to make the regime more efficient, transparent, and simple. that includes relief for small banks, greater tailoring based on the firm's level of systemic importance, and simple find the volcker rule. some of these changes have already been adopted or are in process. also i think we must take a broader view of what characterizes a resilient and robust financial system. to that end, i think we have to carefully monitor the incentives that influence the behavior of financial firms and other employees. the record from the crisis in more recent years shows how powerful incentives can be in driving individuals and firms to do things that are imprudent and or unethical. bad incentives can lead to conduct that not only generates large risk exposures and market excesses but also the roads 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 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 in short-term performance over longer-term, sustainable results. the willingness of credit rigid -- rating agencies to tranche subprime mortgages 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 their implicit government support to take on 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 comp lex mortgage operations with

little direct capital support or inadequate liquidity back up, 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 have seen a number of other costly breakdowns that were driven in part by poor incentives. in the libor scandal for example, a relatively small number of banks manipulated libor to their benefit the rate setting submissions that were not actually based on transactions. in contrast, a new u.s. treasury repo reference rate that the new york fed is involved with introducing will be based on actual transactions in a deep and liquid market and it's designed to be compliant with principles set forth by the international organization of securities commissions. the foreign exchange market, bad incentives encourage great rating at rate fixing times. reforms were subsequently introduced, including recommendations from the financial stability board report

on foreign exchange benchmarks and the recent publication of it affects global code, which is developed a central banks working with market participants. the creation of millions of unauthorized accounts at wells fargo also reflected that incentives. bank employees were compensated on sales volume 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 prospects. these recent cases to meet our disturbing in terms of their scale and flagrantly. in the case of the rate rigging scandal, the collusion by employs across different firms.

i'm disturbed by the fact that the manipulation of the foreign exchange markets occurred even after the libor scandal was well known. i think these episodes underscore the tremendous power that incentives have to influence and distort behavior, potentially leading to massive damage to banks coulters, reputations, and finances. some of the lessons on incentives that stand out for me include the need to guard against technical design flaws that can be manipulated and exploited for profit, ensuring that incentives are aligned and consistent with desired behaviors, recognizing that rules however well-intentioned can be gamed, and lastly having appropriate mechanisms in place so that firms can identify problems early and ensure rapid escalation and a malia ration of those shortcomings. -- amelioration of the shortcomings. it is important for financial institutions, especially those institutions that are systemically important.

the scale of such firms magnifies the impact of bad incentives on the financial system on the economy. at the same time, that same skill makes it more difficult for senior management to properly control a firm's activities and monitor the conduct and behavior of its employees. for these reasons, we need strong internal and external checks on banks. that's the narrative i want to turn to now. as i said earlier, the strong 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 in good times and bad and one that promotes confidence and trust amongst its customers and counterparties. financial institutions 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 efficient, transparent, and as simple as possible. i think these goals are broadly shared by supervisors at banks alike, which is just to me the relationship between supervisors and banks does not always need to be adversarial. indeed a healthy dialogue between the two helps make the supervisory process work that her. -- work better. it's important that firms are proactive in revealing their problems to their supervisors. individual institutions can certainly benefit from the horizontal perspective that supervisors bring to the examination process. this perspective can highlight where the firm stands vis-a-vis best practices or where there may be important vulnerabilities in terms of operations. i would admit there's an irreducible amount of tension built into the relationship between supervisors and banks given that each party's roles, interests, and responsible these are not always going to

coincide. banks are naturally more sensitive to restraints on profit opportunities or dividend policies and their much more sensitive to the cost of regulation. they also may question how much protection is really necessary. for example, how stringent to the capital requirements need to be or how severe should the stress test functions being? these are areas where i expect the perspectives to differ. supervisors are principally focused on compliance with laws and regulations as well as issues of safety and soundness. they also bring to their work a perspective on financial stability that may not match the more narrow interests of a particular firm. for example, supervisors seek to address the externalities by the failure of a systemically important for them by imposing higher capital and higher liquidity requirements if the firm 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 and strength on banks. here there are three pillars -- regulation, supervision, and bank culture must all 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. bank culture sets up the norms for what is appropriate behavior. at the same time, these pillars are mutually reinforcing. regulation and supervision attempt to address various market failures and banking that can contribute to excessive risk-taking. bank culture in turn may reinforce norms where it may be silent. in this way, regulation, supervision, and bank culture are covenants and deficiencies in any one of the three can be problematic.

as we have seen in cases of unsafe and unethical behavior in recent years, strong regulation and supervision cannot substitute for deficiencies in bank culture, especially not on a timely basis. it's the public sector's job to establish and enforce rules, but rules are inherently limited in their ability to constrain conduct and behavior. much of our regulatory regime has been developed in response to financial 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 transactions to window dress its balance sheet. beginning in late 2007, lehman brothers used repo one of five transactions to temporarily remove securities from its balance sheets for a few days and did this in order to mislead investors and counterparties about what it's true financial condition was. these transactions have the benefit of being recognized as sales even though they were nearly identical to standard repo transactions that stayed on the balance sheet. another example -- following the introduction of basel three, some banks try to reduce capital requirements by transferring risk to other counterparties. in certain cases, these occurred when those counterparties did not provide any additional resources to absorb potential losses. either because they do not have much capital or because they were affiliated 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 implying 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 were to find creative ways around rules, i think this is going to have an insidious effect on culture. as i see it, and organizations culture gets into trouble when it equates what is right with what is legally permissible. and when what is wrong becomes viewed as what is legally permissible. impermissible. the proliferation of rules followed by the gaming of those rules can be ultimately

self-defeating. the end result may not only be a loss of trust, but over time, and more burdensome regulatory regime than would otherwise be the case. so while regulation supervision's are necessary 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've previously said, incentives drive conduct and that establishes the social norms that help define his firm's culture. the first step is for firms to evaluate the sentence -- the incentives they have in place with respect to personal evaluation, compensation, and promotion to make sure those incentives are consistent with the types of behaviors you want to encourage. for example, how are 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? when employees do speak up, how are they subsequently treated? my colleagues and i at the new york fed have commented previously on the essential role of good culture and supporting a banks reputation, financial condition, and performance, and fostering customer confidence and trust. we've argued that cultural capital through its ability to limit misconduct risks can be an important bulwark to a firm's financial capital. culture is often viewed as a soft topic, but i disagree with this. the financial penalties associated with misconduct are anything but soft. bank firms since the crisis have paid about $320 billion of penalties through the year end 2016. the hit to a banks reputation from misconduct can also be quantified through its impact on the banks share price or its funding cost. culture should be about concrete incentives and behaviors that

help achieve specific goals, and that implies that coulter should not be viewed as a soft issue. i've argued on several occasions that bank leaders to get a better view into their firm's progress on culture and conduct by doing more things collectively. for example, major banks in the united states could participate in industry wide survey of their employees that was conducted by an independent third party. with the results anonymous to encourage respondents to the candid in their assessments. if we did it this way, these results would create a more accurate picture of how banks are actually doing and i think this would actually underscore how much more work is needed to help improve bank cultures. another idea that i discussed is the creation of a database of banker misconduct to combat the problem of rolling bad apples. this is the case where employees are dismissed due to suspicion or proof of misconduct unwittingly hired by other firms in the industry where they have the opportunity to repeat their actions.

understandably firms are concerned about legal risks if they share information about banker misconduct with others, but there may be ways to address these concerns through the legislation. i invite the industry to take the 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 applications for bank misbehavior and misconduct could supervisors can mitigate misconduct risks by supporting the development of effective corporate government regimes, strong compliance and control structures, and i can all be done through the firm's board of directors. ultimately establishing and maintaining an effective culture is the responsible the of individual firms in the industry come up at the official sector can help by highlighting best practices and collecting best action problems and other market

failures. i would like to briefly touch on some areas are a think further work on 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. i don't mean to suggest the areas i discussed today are the only areas where there is room for improvement. these issues are one or more investigations of possible solutions may be warranted. we have made substantial progress in raising banks capital buffers, but i believe it would also be worthwhile to evaluate other changes to our capital regime to encourage earlier action by banks when the economic environment deteriorates.

thanks and naturally reluctant to raise capital due to concerns -- banks are naturally reluctant to raise capital to concerns about stigma. this hesitancy we saw over and over again as we work our way through the financial crisis. bank management may delay a move to raise capital because they're prone to optimism of the outlook for the firm or economy. there's also an extra now the problem. -- next are now the problem. it takes steps to strengthen its own financial condition. while supervisors have some tools available in some sense, these often require a safety and soundness basis that may not always be forthcoming in a timely manner. changes in the 2018 c car program to enable banks to avoid a federal reserve board objection based on the quantitative assessment by raising the capital. that is a step in the right direction, but the current regime may not be sufficient to ensure that banks will raise capital proactively as we going to the next economic downturn.

compensation is also a powerful incentive. as i mentioned earlier, the emphasis in compensation practices was a key vulnerability revealed during the crisis. helped motivate imprudent behavior. currently, bankers are paid mainly in bank -- cash and deferred stock grants. this creates an sent devise to maximize the banks share price, rather than minimize the risk of a banks failures. while compensation practices do feature a larger and longer deferred component, greater emphasis on the furl in the term of -- deferral in the form of long-term debt could better align interest with the long-term safety and soundness of their firms. having more compensation in the form of deferred debt would have two benefits.

it would reduce risk-taking. debt holdings actually at risk in the -- risk of conversion of equity -- i think bankers be more likely to cut capital earlier to reduce the risk of failure. having a regime that creates strong incentives for management to steer away from that outcome would be better than one in which management has incentives. some banks have experiment and with such regimes, and i would encourage more to do so. this type of reform may need a push from the regulatory side. banks may be reluctant to adopt these types of paid structure on their own. they may perceive there is a first mover disadvantage.

another reform could involve putting a greater onus on senior management for the cost incurred from regulatory fines, rather than placing this on the shareholders. shareholders should not be shielded from such costs and fines, because they also profited from the associated gains, but it does not seem fair or prudent to shield the decision-makers from responsibility to the degree 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 encourage management to have their staff speak up earlier, be more attentive, and respond earlier and more first fully -- forcefully. regulatory and forward -- reforms introduced over the past decade, may create incentives of their own. such may alter the nature and locus of risk-taking, and therefore they need to be

monitored. risk could be pushed outside the banking system, or they could lead to new models that introduce new risk. there is long history of such behavior. off-balance sheet instruments rose sharply in the 1980's in response to the introduction of minimum primary requirements based on balance sheet size. the use of leverage ratios based on. -- period end -- has encouraged windowdressing by some banks at the end of the corridor.

while the reforms we put in plays have had the intended effect in encouraging safer institutions, authorities and financial institutions should be mindful of unintended consequences. i think we made considerable progress towards a more resilient financial system. while we should do to market -- do more to make the regime more efficient, there are outstanding issues that require additional work such as the cross-border resolution of large banks. we should also focus more on incentives, which can assure regulations work well. that banks have the right incentive to steer away from trouble. regulation and supervision are necessary, but they are not sufficient. they must be supplemented by bank cultures that encourage ethical behavior, early identification of problems, and a willingness to address those problems. thank you for your attention. i think we will take some questions. [applause]

>> thank you for those remarks. let me ask you a few questions then we will throw it open to the floor. i would ask if anybody is going to ask a question from the floor, make sure to identify her self.

if you're a member of the press, holier question -- hold your questions until the event is over. you have headed the new york fed since generally of 2009, which means you have a permanent seat on the federal open market committee. you've been there for a dynamic. of time -- dynamic period of time people are going to write about. the financial crisis, the aftermath, the wind down of extraordinary measures. probably lead -- what your observations from such an extraordinary. of time -- extraordinary period of time. >> most obvious is we need to do better. the financial crisis was horrible for millions of households and businesses. we need to do a better job in terms of how we regulate and supervise banks and assess the risk of the financial system so we do not have a return of the financial crisis like in 2007, 2008, and 2009.

i think that was the worst financial crisis since the great depression. we need to make sure we keep in place all those changes we made and make the financial system stronger. >> the new york fed traditionally has been the lead banking regulator within the federal reserve. the new york fed has had a special place in the that. dodd-frank changed that a little, there been some other changes. how do you see the role of the new york fed evolving? >> i think the fed has an important role for several reasons. we are the bank that actually executes monetary policy. monetary policy is set by the federal open market committee, but the new york fed executes on behalf of them. we are one of two big financial centers around the world.

new york and london. we have to do a good job of assessing what is happening in the financial markets, take that back to our colleagues on the federal open market committee. third, we have a strong international reputation. we run a reputation called central-bank account services. i sit -- which is a really important part of the outreach and coordination across the central banking committee. i am biased, but i think the new york fed is special because of what new york city is and what some of the operational roles are. >> you talked about the need for more to be done in terms of the cross borders resolution. you mentioned your role with the

bank of international settlements. how have you seen the global financial regulatory system evolve? is that process the right one or does the needs of -- need to evolve further? >> i look at raising standards all over the world to have a safe global financial system and a more level playing field. i think it is in u.s. interest to participate in goes and push for a more sustainable regulatory regime around the world. i think it has is in good stead. the financial stability board has been doing a lot on resolution to make sure this can be done effectively. one thing we are going to take up over the next and coming months is we are going to look

at how well the financial stability board's work on resolution. we will take a look at the effectiveness of that and try to identify strengths and weaknesses. i think we are making progress. i worry about declaring victory prematurely. >> you also had an extraordinary career. you started work in part of j.p. morgan chase. you spent a long time in the private sector. you've also been involved in this extraordinary period of time as a part of the fed. how do you see the evolution going? what are the good and the bad you see? >> i think we benefit from the financial system we have. it is unique around the world.

we have three major pillars. we have a very efficient capital market. we have large systemic banks the operate across the country. we have thousands of community banks. i think each of those pillars is important in terms of satisfying the flow of credit to businesses and enable corporations that are not financial firms to hedge the risk of they incur. i think the regime is a good one. it has three pillars. we need to make sure we keep each of those pillars strong. >> the united states is unique in that regard, right? >> i think so. >> does that create any issue in terms of the uniqueness in the american system or is that something you have not seen in your international discussions?

>> there's no question international setup is different. there's always going to be something lost in translation. that is why a lot of the prescriptions developed internationally are about what we want the outcome to be. then it is up to the country to decide what kind of regulatory system to put in place. rather than saying you should do a in this way, you say you need to do it in a way that achieves this outcome. a good example is a project i worked on pretty early in my tenure at the new york fed. it is risk reducing. this makes the federal counterpart more important in terms of key points.

these are key risk points of failure. we developed internationally these pencils -- principles for financial market and vettori. we sit this is how your structures need to operate. they need to achieve these goals. we are not telling you how to achieve those goals, but you have to have this sort of resiliency. >> i think a common thing of a lot of your public discussion has been about coulter. -- culture. you talked about it again today. you talked about the need for culture to change in financial institutions. have you seen culture changing? >> i think a lot of banks are making good effort on this. and a lot of banks have set up separate committees to look at the bank's conduct. there's a lot of effort by senior bankers pushing down the

in the organization the idea that conduct is important. i feel like here is the goal. we probably started here. we made part of the journey, but more can be done. i give suggestions in my remarks today. in the u.k., there is a survey of banks the banking standards board does. i think it would be great to have something like that. getting a set of information allows you to benchmark your performance relative to others. ensuring people respond to that survey that is truly an honor my -- anonymized, i think you would be able to apply the information to see where you are strong and weak relative to competitors. >> you also talked a bit about regulations defining what is

good or bad. people are becoming too reliant on what regulations are saying and that there should be independent judgment. can you flesh that out a little more? >> the example i would be -- i would get would be the one of lehman brothers with the repo 105. legally permissible, but against the spirit of the rules and designed it to distort people's assessment of their balance sheet. if you have a good culture, you're going to say i can do this, but it is misleading, it is unethical, so it is inappropriate. you do not want to be in a regime where the banks look at the regulators and say what is ever -- whatever is permissible in this set of rules is good because the regulators will not be able to keep up and the people in affirms we cover -- in the firms will be clever finding ways around the regulations.

you are going to end up with a lot of complexity in your regulatory regime. it is not a direction you want to go. >> do you think an enhanced dialogue between the regulators and the regulated would also help? >> i think we do have that dialogue. when you are a regulator talking to a regulating, it is important to understand what your incentives are so you can have an intelligent conversation. the best conversations i have with bankers is when they understand my perspectives and i understand their perspectives. then we can see where there's common interest and where there is a divergence.

that allows you to start finding common ground and make the financial system better and safer. >> you're in washington. that means you're not going to get away without talking about some legislation. we had a banking bill passed in the senate recently. that included a change in systemic risk thresholds and other changes in terms of possibly doing away with some compliance programs for smaller banks. you talk in the past about how some of these regulations should not have been imposed on large regional banks. do you have any thoughts you can share about that legislation or

-- aon to, retaining title ii .iquidation of authority and the changes they made in terms of providing relief for smaller banks makes sense, and the change to the volcker rule. do i agree with everything? not.bly but generally it is legislation that goes in the rate direction. >> we've been supportive of that because in some of our travels around the country, when you go in theticularly heartland of the country, there has been a disconnection between lending for small businesses

lending aaggregate has gone up, but it's gone to a place other than small businesses. so do you think this is an to maybete way braid-size some of those and but incentivize some growth make sure reasonable risk-taking is undertaken? >> community banks are really important to local businesses, so it's important they continue to be vibrant. my great great father was a community banker, so i'm biased. he showed me his banking book during the great depression and what it was, was a series of very large debits to keep his bank afloat. his bank actually did survive the great depression. banks are a great way to supply credit to small businesses and that needs to be

recognized in terms of regulatory reaching. what of the challenges is some of the sources of credit to small businesses prior to the financial crisis work hurt or the financial crisis itself because a lot of small businesses,start up were funded by family and friends, home equity lines, and credit cards. so go back to financial crisis, economy not so good. it's been a long road back for small businesses, in part because those sources of credit work constrained. the most difficult lending decision for a bank it is to a small business without much of a track record. banks like to lend against collateral. so the hardest thing is to get the initial capital to develop record.k that is why we have small business administration and

community development organizations to health small businesses get over that hurdle. very, very important to have a vibrant small business community. were talking it a little seek this during lunch but are is something i think you see as being an important tool, it also allows of their regulators to determine if banks can issued dividend and the like. secar today is an appropriate tool, along with other concerns raised? reallyss testing is valuable. if you look at the turning point

during the financials crisis it is when we did the stress test in spring of 2009 and they were viewed as credible by market participate since broadly. the beginning of the financial crisis because people understood it is important enough to have capital the future, even under very adverse and environment. so the stress test are important as they create a forward-looking element to the capital standards. we can argue about the development or stress test, but it is important of credible stress tests because they increase the degree of confidence and the viability of our financial system, even under bad economic circumstances. so i think the federal reserve will continue to refine the process but regardless of what

we do at the margin, it is important to have stress tests that are pretty severe to make secure.ms are >> we are eight years past dodd-frank. nine years past the death of the financial crisis. now we are hearing about randy quarles looking at ingesting things, taking a hard look at the local role. -- the volcker rule. is this the time to start looking at that? time to look at your financial regime. what he is arguing for is common sense. obviously, the financial crisis, we knew the financial regime was inadequate.

so there was a lot of regulatory work that had to be forthcoming and now that much of that is in place it is time to look at it the samecan we achieve outcome more efficiently, more ?ransparently, were simply >> lits if there's any questions from the floor. >> one over here. >> thank you for your service. the question is, you emphasize to particular points in your remarks. and sentence and capital. good you speak to the tension between the leverage ratio, which kind of has perverse incentives for firms to acquire riskier asset. the tension between the leverage ratio is the binding constraint and the risk-weighted architecture which by its nature is somewhat imperfect.

>> basically, leverage ratio is capital divided by total assets. it trades a risky asset the same as in not risky asset. the treasury bill is treated the same as a second mortgage. you could argue that is not the greatest capital regime, so why was the leverage ratio put in place? because it was viewed that relying on complete risk-based capital standards might lead to gaming of those standards and and an adequate level of n the system. in an ideal ratio, it would be a little below the level where the risk-based capital regime is. a little safety net. i think the reservist taking a look to see whether it should be recalibrated so it is not as binding. we see in the legislation, some

relief for the custody banks and terms of reserves held. you know, bank reserves said that the large ratio will become a little bit less binding. the leverage ratio is useful to have as a safety net, but you probably do not one of the leverage ratio be the dominant factor driving the capital regime. i think in our current regime, is the dominant regime driving capital from most makes? i think what is the most ccar and theg is stress test. to see the banks will have enough to operate on. and that seems like the kind of cap regime you would want to have in place. >> questions from the floor? >> hello.

i'm tony from pimco. to what extent do rules and regulations drive domestic standards? as an anchor? >> the question is, how do international trends drive domestic trends. i think everything that is negotiated is by consensus. really, voluntary. so it's not like the process imposes on the u.s. tougher capital standards or topper regulatory regimes, i would argue it goes the other way. we have a set of capital regimes in the united states and we want to make sure the same regimes are implemented across the rest of the world so that there is a field and a safe global financial system. basal idea that somehow

is doing bad things i think is wrong. it is a level more consistent with what we have in the united states. >> with that, i agree with you that the united states clearly has tougher, historically tougher capital rules. i think one of the complaints we afford from some of our members is set the united states is going to have tougher capital roles, yet you have other jurisdictions, presumably under the same system, have a much more lax system. such you take a look at it that basel as art of sees floor, others see it as a ceiling. do you see any incongruities with basel three? >> i think basel three, especially with the newest constraints putting on banks to

drive capital requirements really does level the playing field more than we had before. so i think we are definitely moving to a better place. every country is different. every institution set up is different. you go to a different country and debate how riskier things in the netherlands versus the u.s.. it is hard to sus set out because the institutional setup versus thatent -- u.s. it is hard to sus that out because the institutional setup and so different. but i thinkountry, we can get to a place for the differences are sufficiently small that they do not impede the ability of the banks to compete on a relatively fair and level playing field across borders.

i don't think we have much to worry about. if i look around and see the u.s. ranks relative to large hard banks, it seems like it u.s. banks are doing just fine. it does not seem like the regime is making the banks safer but also it is not impeding their ability around the globe. >> let me just ask you, for people in the room today when is the one message you want them to live with? >> that it's not just regulation and supervision that is sufficient, you also need to focus on and sentence because incentives strive may conduct an culture which is very important for banks to not get into great difficulty. --to i president deadly andk you president dudley thank you everybody.

[applause] [indiscernible conversation]

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