Moreover, the sophistication and complexity of these new tools often make it more difficult, not less, for supervisors to assess the true risk of a banking organization and to assign appropriate capital requirements. Adding to these difficulties, supervisors must account for risk exposures that are altered at an ever faster pace.
We have often said that, in this environment, we want supervision and regulation to simulate or mimic market discipline in the sense of creating the proper incentives, costs, and rewards. I also believe that we ought – where we can – to skip the middlemen and go right to our first line of defense: market discipline.