At an analytic level, we need to be clear that prudential aims vary with the risks posed by diverse groups of banks. To take an obvious example, the risks to the entire financial system that would arise from the failure of a very large, universal bank call for different prudential objectives from those suitable for a $ million community bank.
At the level of application, we need to tailor prudential regulations and supervisory practices with an eye both to those varying objectives and to the characteristics of differing groups of banks. This morning I would like to revisit, and develop a bit more, the concept of regulatory and supervisory “tiering” as it pertains to community banks.