[E]arlier this week the federal banking agencies jointly issued a proposal to implement higher leverage ratio standards for the largest, most systemically important U.S. banking organizations. We have already finalized the rules on resolution planning and stress testing, and we are working diligently this year toward finalization of the remaining standards.

Fed. Gov. Daniel K. Tarullo said in testimony July 11 that the difference in treatment for insurers may come on the liability side. With a bank, there can be a rapid liquidation but insurance is very different, Tarullo said. There is no way to accelerate funding, he noted, referencing life insurance company payouts.

“People aren’t going to die more quickly if an insurance company is in trouble,” Tarullo said last week to demonstrate the limits of life insurance liquidations.

“With that constraint, we are working as much as we can in tailoring risk-weighting for insurance products but are a little confined here,” he said, adding to lawmakers' fears that the Fed’s hands are indeed tied for special insurance treatment.

“I think this does impose some difficulty for our oversight,” Bernanke said today of the Collins Amendment.

MCKEE: What do you think of the Brown-Vitter legislation, a 15 percent capital ratio for the biggest banks?

DUDLEY: I think that this is all about costs versus benefits. You could - you could go with a proposal that raised capital requirements on large institutions a lot, which is what the Brown-Vitter legislation does. There are going to be consequences of that. It's going to drive up the cost of credit in the economy. It's going to probably tighten credit conditions for a while. And so you have to weigh that cost versus - versus the benefit of reducing the probability of these firms failing.

I think the - the Dodd-Frank Act basically envisions that there's a more efficient way to achieve the same outcome of ending too big to fail. We all want to end too big to fail, but we should also want to end it in the most efficient way possible, the way that causes the least damage to the economy, that causes the least increase in the spread between the cost of deposits and borrowing.

Securities broker-dealers play a central role in many aspects of shadow banking as facilitators of market-based intermediation. To finance their own and their clients' securities holdings, broker-dealers tend to rely on short-term collateralized funding, often in the form of repo agreements with highly risk-averse lenders. The crisis revealed that this funding is potentially quite fragile if lenders have limited capacity to analyze the collateral or counterparty risks associated with short-term secured lending, but rather look at these transactions as nearly risk free. As questions emerged about the nature and value of collateral, worried lenders either greatly increased margin requirements or, more commonly, pulled back entirely. Borrowers unable to meet margin calls and finance their asset holdings were forced to sell, driving down asset prices further and setting off a cycle of deleveraging and further asset liquidation.

To monitor intermediation by broker-dealers, the Federal Reserve in 2010 created a quarterly Senior Credit Officer Opinion Survey on Dealer Financing Terms, which asks dealers about the credit they provide.

Broker-dealers experienced dramatic difficulties during the 2008 crisis, and the Federal Reserve needed to temporarily backstop broker-dealers with substantial lending. Given that recent history, the assumption that collateralized lenders like broker-dealers are not susceptible to runs has been proven wrong.

At the same time, broker-dealer capital regulation by the SEC remains largely unchanged, despite the lessons of the financial crisis. Consequently, broker-dealers remain vulnerable to losing the confidence of funders and counterparties should the world economy again experience a significant financial crisis.

Given the centrality of strong capital standards, a top priority this year will be to update the bank regulatory capital framework with a final rule implementing Basel III and the updated rules for standardized risk-weighted capital requirements… I think there is a widespread view that the proposed rule erred on the side of too much complexity…

The Federal Reserve also intends to work this year toward finalization of its proposals to implement the enhanced prudential standards and early remediation requirements for large banking firms... Once finalized, these comprehensive standards will represent a core part of the new regulatory framework that mitigates risks posed by systemically important financial firms and offsets any benefits that these firms may gain from being perceived as "too big to fail."

We also anticipate issuing notices of some important proposed rulemakings this year. The Federal Reserve will be working to propose a risk-based capital surcharge applicable to systemically important banking firms. This rulemaking will implement for U.S. firms the approach to a systemic surcharge developed by the Basel Committee, which varies in magnitude based on the measure of each firm's systemic footprint...

Another proposed rulemaking will cover implementation by the three federal banking agencies of the recently completed Basel III quantitative liquidity requirements for large global banks. The financial crisis exposed defects in the liquidity risk management of large financial firms, especially those which relied heavily on short-term wholesale funding. These new requirements include the liquidity coverage ratio (LCR), which is designed to ensure that a firm has a sufficient amount of high quality liquid assets to withstand a severe standardized liquidity shock over a 30-day period…

I think there is a widespread view that the proposed {Basel III} rule erred on the side of too much complexity.

Today, although some of the most fragile investment vehicles and instruments that were involved in the pre-crisis shadow banking system have disappeared, non-deposit short-term funding remains significant. In some instances it involves prudentially regulated firms, directly or indirectly. In others it does not. The key condition of the so-called "shadow banking system" that makes it of systemic concern is its susceptibility to destabilizing funding runs, something that is more likely when the recipients of the short-term funding are highly leveraged, engage in substantial maturity transformation, or both…

First, the regulatory and public transparency of shadow banking markets, especially securities financing transactions, should be increased. Second, additional measures should be taken to reduce the risk of runs on money market mutual funds. The Council recently proposed a set of serious reform options to address the structural vulnerabilities in money market mutual funds.

Third, we should continue to push the private sector to reduce the risks in the settlement process for tri-party repurchase agreements. Although an industry-led task force made some progress on these issues, the Federal Reserve concluded that important problems were not likely to be successfully addressed in this process and has been using supervisory authority over the past year to press for further and faster action by the clearing banks and the dealer affiliates of bank holding companies.

Proponents of breaking up firms by business line may reply that the next financial crisis will not likely have the same genesis as the last, and that separating commercial from investment banking could at least mitigate the risks of extending the safety net provided depository institutions to underwriting, trading, and other activities of very large firms. But an industrial organization perspective suggests that the proposal could entail substantial costs. The reinstatement of Glass-Steagall would mean that bank clients could no longer retain one financial firm that would have the capacity to offer the whole range of financing options--from lines of credit to public equity offerings--depending on a client's needs and market conditions. Moreover, many banks that are far too small ever to be considered too big to fail do provide some capital market services to their clients--often smaller businesses--a convenience and possible cost savings that would be lost under Glass-Steagall prohibitions.

The slow nature of this recovery, the limited amount of new lending after more than four years and the continuation of banking issues in some countries may suggest that the [regulatory] actions we took left unresolved problems. In addition, we must consider whether what we are doing is sustainable in the long run or whether it only increases the chance of future crises.

“I have seen a disturbing uptick in what we call operational risk,” Raskin said on a panel today in Boston, referring to errors stemming from substandard bank management.

The shadow banking system today is considerably smaller than at the height of the housing bubble six or seven years ago. And it is very likely that some forms of shadow banking most closely associated with that bubble have disappeared forever. But as the economy recovers, it is nearly as likely that, without policy changes, existing channels for shadow banking will grow, and new forms creating new vulnerabilities will arise.

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We should create greater transparency with respect to the various transactions and markets that comprise the shadow banking system. For example, large segments of the repo market remain opaque today. In fact, at present there is no way that regulators or market participants can precisely determine even the overall volume of bilateral repo transactions--that is, transactions not settled using the triparty mechanism. It is encouraging that the Treasury Department's new Office of Financial Research is working to improve information about this market, while the Securities and Exchange Commission is considering approaches to enhanced transparency in the closely related securities lending market.

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A second phase of triparty reform is now underway, with the Federal Reserve using its supervisory authority to press for further action not only by the clearing banks, who of course manage the settlement process, but also by the dealer affiliates of bank holding companies, who are the clearing banks' largest customers for triparty transactions. But this approach alone will not suffice. All regulators and supervisors with responsibility for overseeing the various entities active in the triparty market will need to work together to ensure that critical enhancements to risk management and settlement processes are implemented uniformly and robustly across the entire market, and to encourage the development of mechanisms for orderly liquidation of collateral, so as to prevent a fire sale of assets in the event that any major triparty market participant faces distress.

"If a firm said, 'We're doing this because it's a hedge,' they would be required to explain to themselves, importantly, as well as to the primary supervisor, what the hedging strategy was, how it was reasonably correlated with the positions that they were hedging, and how they would make sure that they didn't give rise to new kinds of exposures," Mr. Tarullo said.

J.P. Morgan would have to provide regulators with documentation showing this, he added.

Federal Reserve Bank of Kansas City President Esther George said the U.S. banking industry and economy have benefited from having both federal and state supervisors.

“I’ve seen no evidence that other regulatory structures, including single regulator models, fared better in the most recent crisis,” George said today to the Conference of State Bank Supervisors in Savannah, Georgia.

“You can reach a size where risk management becomes an exercise,” Fisher said today in response to audience questions following a speech to the Texas Bankers Association meeting in Fort Worth. “At what point do you reach a size you don’t know what is going on beneath you?”

“That is not the American form of capitalism,” Fisher said. “We are calling for significant downsizing of those institutions. We don’t feel the Dodd-Frank Act is the answer to the problem.”

“We pray for the big risk management teams in those big New York banks,” the Dallas Fed chief said.

It is sobering to recognize that, more than four years after the failure of Bear Stearns began the acute phase of the financial crisis, so much remains to be done--in implementing reforms that have already been developed, in modifying or supplementing these reforms as needed, and in fashioning a reform program to address shadow banking concerns. For some time my concern has been that the momentum generated during the crisis will wane or be redirected to other issues before reforms have been completed.