“The regulatory reform will not come to a close once the new legislation has been enacted; the work of containing systemic risk and the too-big-to-fail problem will need to be adaptive. The ideas and criticisms of those outside the regulatory agencies will remain essential to this work”.
He said that several potential regulatory devices with a more direct systemic focus have also garnered substantial interest, both here and abroad. Prominent among them are proposals to:
(1) impose special taxes or capital charges on firms based on their systemic importance,
(2) require systemically important firms to issue or maintain contingent capital instruments that would convert to common equity in periods of stress, and
(3) reduce pro-cyclical tendencies by establishing special capital buffers that would be built up in boom times and drawn down as conditions deteriorate.
Each of these ideas has substantial appeal, but, as has become clear, each also presents considerable challenges in the transition from a good idea to a fully elaborated regulatory mechanism.
Many legislative proposals would extend the perimeter of regulation so that rules designed to promote financial stability would apply to firms that currently are not subject to prudential regulation because they do not own a commercial bank. The legislation passed by the House, for example, would subject any firm whose failure could have serious systemic consequences to consolidated supervision, including minimum capital and liquidity requirements.
He concluded by saying that “Regulatory reform will not come to a close once we have enacted our new regulations and legislation. The work of containing systemic risk and the too-big-to-fail problem will need to be adaptive. The perspectives, ideas, and criticisms of those outside the regulatory agencies will remain essential to this work, even if they can sometimes cause some discomfort for those of us within.”
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