To a safe and sound operation in the early 90s when Interest Rates were 13 or 14 for home mortgage. You had states which prohibited the enforcement of clauses. 30 year mortgages, thinking they would have an average life of seven years. Funded by shortterm deposits. Loansrohibited those under Consumer Protection, transformed those loans into 30 beingow yielding assets funded by highcost deposits. This is one example i have. Many examples where you have state laws designed to protect consumers in particular states without the strong ability to have Natural National laws that are necessary to protect National Banks. It is critical to the National Banking act. You. You have each listen to one anothers remarks, what did you agree with and what did you disagree with . I would be glad to take a stab at that. I agreed with everything he said. Banks are special and they serve a unique function. Transferring longterm assets into shortterm liabilities, which is critical to our system. Reference to the benefits the prompt corrective action. But ia worthwhile goal, do not think it is a realistic revision. ,riticizing something somewhere between 40 of its assets value is wiped out. If you are just see you receive institutions, the losses will be put on the fdic system. We have seen in a crisis institutions probably would not tax, buttwo percent they were not close and they were able to be revived. Tremendous savings for the american economy. With respect to sheila, i agree with most of what she said and i respect your views. I agree it was a bank, a run on the banks. Andsagree with her solution i disagree with the philosophy that to make a banks a source of liquidity, we have to make them hold liquid assets. There was a brown the Banking System. We did not have a Federal Reserve. We had jpmorgan, which got together the other banks and said, we need to provide country. To banks this they provided that liquidity. At of that experience, to develop the Federal Reserve system. When assets are good, the is there torve provide liquidity. If you say that they ask have to hold 2 trillion in Government Funds in order to provide emergency,n case of you are taking that fun out of the economy. Or 6verage could be five trillion of lending. You are not helping safety and soundness. Encouragingg to be holding longterm treasury bonds. If it is a liquidity crisis, those bonds will have to take a big haircut and you are encouraging banks to approve foreign debt. , spanish debt and , a much bigger return. I need to go long on treasury and i will mix it in with some foreign debt and therefore, you are creating the next crisis. Sheila . Let me make a few comments. Maybe you understood misunderstood what i was saying. I do not like the ability of foreign banks to hold a lot of liquid assets. Protection against a run on any bank is to make sure [inaudible] transparency, so people can get a better sense of whether the institution is solvent. There has been very little focus on a greater conspiracy. The market has done that a bit. Trend. A good i think it does create some very funny incentives. On pca, it is a perfect no. The former chair of the entity that was responsible for the situations having some sort of process to reach the trigger point was extremely important to us. It is never a happy thing to close a bank. A lot of pressure from. Oliticians, stakeholders they do not want to own up to the fact that bank is in trouble. The loss ratio were significant. By definition, you will not get very good pricing. Something that could make dca work better is a better methodology determining when you hit that two percent trigger point. There are ways to improve pca, the longer you loss is yourfirst best loss. You need to move ahead. Im preemption, we will just disagree on that. The Consumer Protection printing states. Dates their the not think i do think sec did have an ability to repay supervisory standard, was not clear how that was applied to the adjustablerate mortgages. I remember having discussions National Banks funding these loans. I think the standards apply to mortgage origination. Hole in theother who approach we are trying to take. There are market factors that can temper the states ability to go too far. They try to calibrate it. I do not agree with that decision, i regret the sec did that. It hurt its reputation. Many states in we will have to disagree agree to disagree on out. What are your thoughts . Dismissot willing to the suggestion that based on the experience from 198019 82, it worked quite well. Indeed, because it worked quite well, we were able to get through an extraordinarily. Ifficult situation accident thatn you that we got through that without spending one nickel of taxpayer money. That is what it is all about. Experiencerast that with the follow 2007. , centralleaders banking leaders, and other leaders are basically saying do not worry, the mortgage thing is manageable. Wrongas obviously quite to put it mildly. If we really are committed to the proposition that we can fix to big to fail to the Resolution Authority and other related definition,by seems to meuthority with aound together framework of much more corrective action. Nuancestand some of the you were referring to and they are valid. To make it work is not going to be easy, but we have to get there. Thing, i would like to clarify a little bit, the liquidity concept. On a very i believe enhancements to a regulatory agenda post crisis that one of the most important been in a process has putting into place through the Basel Committee sidebyside adequacy of capital and liquidity adequacy. , these are angs single discipline. Opposite sides of the same coin. , we alsohink of that have to keep in mind the notnitions of liquidity being used in that context speak about honor convert unencumbered liquidity. It is unencumbered. If you look at the way the framework for this single is playing out, it is not unusual to find emerging situations for the amount of unencumbered liquidity. Into the often well up high teens as a percentage of total assets and liabilities. Unusual ando longer it is unencumbered. About other concern aspects of liquidity remain very important. I do think we have made progress producing the absolute amount and the relative amount of other forms of liquidity, including repos and all those things. That single discipline of liquidity adequacy, we look back 10 years from now or something, unless i am dead wrong, which is possible, i think we may conclude that this is one of the best things. At the end of the day, all of us , the straw that breaks the camels back is not capital. It is liquidity. It runs on banks and things like that, which are pushing a button on a computer. If we get that right and if we get corrective action close to right, those two things would have a beneficial effect. Not just special banks, but on other intermediaries as well. I agree with the premise that corrective action is a very useful supervisory tool. Methodree that it is a of protecting the Banking System in times of financial collapse. That was helpful in preventing or dealing with financial collapse. Liquidity, you could take it from the perspective of, i really want a system that will be 100 safe and not have failures. You have a system that has 100 liquid assets. It has very high capital ratios. It is a balance. Safe andnt to have sound Banking System, you will have a system that is not working to provide credits the economy. If you do not have enough safety in town, youll have risky institutions. Banks are supposed to be risky. I think the commercial loan can be very risky. Risk. Are designed to take the liquidity rules being excessive. Ly are why would the rules say you can invest 100 in u. S. Treasuries or italian debt, but you cannot invest in have liquidity present for the market money for the money markets. Rationale tosome achieve some member the emphasis on safety and sound will be the predominant regulatory goal. It will not work in the long run. , there should be more capital. This is on reducing the reliance on shortterm funding. Why not just raise the reserve requirement. Someday someone will explain to me. Some of this stuff is counterintuitive. This emphasis on having a lot of sovereign debt. They have a chance to talk about fed policy for just a minute. Sheet look at the balance of the fed today or yesterday or , something in the 2 of magnitude of ,rillion dollars sitting there. He return on excess reserves that, by the way, it is not wholly independent of my suggestion in the essay that a transitioned up mechanism for Monetary Policy. You and i talked about this on other occasions, but we will have to figure out what the hell were going to do with those without 2 trillion. Schedule . Ks still still special westmark how has the role evolved over the last 30 minutes still special . How was the role evolved over the last 30 minutes . Anyone want to have a crack . I cannot resist. , includingdard , theng back at history last 30 years have been pretty tough in terms of the incidents shock. Us, if you do as i have, some comparisons, and you look at the number of serious financial crises occur in the years we have hadhe more in the last 30 years than they had in the 30 years leading. P it was the panic that created the reserves. It has been a rough go. The last thing that nags at me is the following do such a good job of managing all of these crises that we created a false sense of security for Market Participants that we would always be able to pull a rabbit out of. Hat i am not smart enough to know the answer to that question, but it is something that nags at me a lot. We will continue to work to the to thewith enhancements regular policies and practices, getting too big to fail. We have got to have a much more creative framework. People love to talk about contagion and risk or Systemic Risk. It is extremely difficult to anticipate in advance the specific events that produce and systemicsk risk. It is very hard to do that. Our track record of achieving that is pretty low. Mathematicians, statisticians,. Odels if we want to understand more about Systemic Risk and contagion, we ought to leave the models in the closet. Engaging smart people in an aggressive brainstorming session, not haunted kate upton thinkingnot aggressive. How do these things happen question mark what are their triggers . That,hen we get better at we will never be perfect and i do think those thoughts are extremely important in terms of our collective ability to come out of the mess. The last dirty years. To thisable industry loves models. I think most of them belong in the closet. There was an overreliance on models prior to the crisis. There continues to be a lot of them a lot of them. They are based on Historical Data did nothing to do with what was being generated prior to the crisis. Obviously, it technology has made markets quicker and that is reality. To reduce the risk of stress and , i do think the increased concentration of the industry the emergence of large Financial Institutions was implied too big to fail status has created a big part of the crisis. I wanted bondholders to take. Ome of the risk of loss. Lackrock, they are just find no offense to them, but that was not right. Could not even do that. . Hat kind of system they would be a little more cautious before investing. I basically agree. I have slightly different aspect to it. We do not understand what caused the crisis. The information is to starting to come out. My concern is that the regulatory pendulum has swung to that we do not know if it is the right answer, we do not know what it is going to do in terms of slowing the economy. We do not know what it is going to do in terms of being the cause of the next crisis. Let me use an example. Tremendous emphasis on a reward for Financial Institutions. Securities. Backed the Financial Institutions tell them, create a mortgagebacked security. Secondly, in the examiner who looks at a bank in 2004 and saw her concentration and , thisgebacked securities is a very well run organization. Way to herall the. Ou think it is safe and sound stocks, is it going to be farmlands . We dont know. Investments wn we will wind up hurting the country in the process. Sufficient liquidity, stress tests all make sense, but it has to be a balance. Lets talk about a topic that even each of you touched on. The shadow system. A threepart question. Howhat that gives the shadowthe st system . Anyone interested starting up a hedge fund, Pay Attention to that last question. All, some of you may know that i recently put together a piece on the shadow Banking System. I presented that to a group couple of months ago. That is available on the website for anyone who wants to take a look at it. This was one of the most set out tohings ive put together by myself. Im very oldfashioned. It is very, very complex. All, one of the complexities arises from the fact that the term we all use about shadow banking is wrong. Most of what is in the shadows is not banking. Experience in doing my work in my research was as follows. That has a lot of isple a lot of support the problem with shadow painting or shadow Financial System, it is a oneway street. It stops going from the traditional banking or Financial System to the shadow banking based on my work, that does not appear to be to be right. A twoway street, not a oneway street. It is complex and it is a big. Just to give you one example. Very hard to put this together, but you can get access to some youtube photos today. Levels s viability one oflook at the data the shocking things is that in data, thed on the size of the shadow system is 20 trillion, give or take. 14. 7 trillion. By the middle of last year, the size of the shadow hill that is amazing. Systeme of the course was now 15. 7 trillion. Needless to say, talking about trillions, as is not small change. About ways in which we can better get our arms around this thing i would want. O make it clear in the paper the work being thrown by the owei the National Colleagues at 33 and liberty in new york, quite impressed with the progress. Progress is being made. There are specific conditions of the Risk Management vintage. One of the things i thought was a pretty good argument in this was the financial infrastructure stuff including settlements and all of that because right now, when you are a little bit way from the five or six or eight or nine best managed clearing systems. There are now dozens of them around the world. The discipline is i suggest that for all of those mechanisms, there should be a minimal standard whereby stress test and related techniques, we should have a any one of those organizations, any race in the capacityuld have the that on a business day, they could survive the simultaneous fault of their two or three largest participants. We have a lot of ferc to do to get our arms thoroughly around the shadows. Doddfrank tried to do with issues. Under title i, it gave ulators the ability to. Ocalled tiger one designation this is one area where it has identified as a problem and asked the fcc to address it. My view is more activities an institution oriented. If an institution is reviewed as unable to fill a traditional bankruptcy without disruptions, the best answer is to make them downsize until they can be. A bankruptcy process. Accept more and more to their business and put them under fed supervision is not the right solution. Issues. The there was a big overreaction to that report, but i do think the issues they identified should be through activity regulation and mostly by the fcc. It requires the agency to move forward and get ahead of these types of problems. There are mechanisms to deal with the shadow on. They can work if they are used properly appropriately. The shadow sector works great in good times. In bad times, it kind of goes away. Welled that rail regulated. Worry peertopeer lending is a small example of where youre having trouble, a separate mechanism. Quite lightlys regulated compared to a bank or a community bank. The competition is nice. There has been a problem with credit availability. How much of that is because they have developed a better mouse cat mousetrap. They do not have the same. Egulatory expressions they will not want to go to the platform and put their money and to make ones anymore and helpfully, you will have a robust banking sector. Think, it has to be in the focus of regulators when they see these new types of regulators. This is one area with the Consumer Bureau. Better disclosures could be helpful. We want to make sure everything works in the good times. If it means everything that is not regulated by a federal banking agency, i think it would try and bringto tryof the institutions identify those institutions that failure would cause a systemic problem. Shadow to regulate the boxing system and i do not think it is necessary. I also agree with sheila that it could be regulatory arbitrage. Iso not think the solution to impose the same Regulatory Regime on nonregulated institutions. Banks and net gives other entities the competitive advantage. Lets shift gears. Asset bubbles, over the last 50 years every concert has been associated with asset price bubbles. Actually distinguish the train those who pose a Systemic Risk and those who do not . Say, nobodymon to knows when there is an asset. I think it is hard to know when it will pop up. There are some things regulators cant and shouldnt do. Is, more robust they havent come where you can pay back the loan. You are not basing it on the fact that the asset is going to appreciate. This is being done by nonbanks. Inflatee, that will these houses. This building is exactly what we had. Leverage is another way. I applaud the occ for its leadership. The absolute type of thing the regular baiters regulators need to do. I think Monetary Policy does contribute to asset bubbles. I do not think it is hard to call it, it is important to know who is going to learn. Knowin