Moreover, attempts to address specific vulnerabilities can be supplemented by broader measures – such as requiring banks to hold more capital and liquidity – that make the system more resilient to a range of shocks. Two other related points motivate our increased monitoring.
The first is that the financial system is dynamic and evolving not only because of innovation and the changing needs of the economy, but also because financial activities tend to migrate from more-regulated to less-regulated sectors. An innovative feature of the Dodd-Frank Act is that it includes mechanisms to permit the regulatory system, at least in some circumstances, to adapt to such changes.