•  We continue to require that examiners rotate to another institution after three to five years. This tenure allows enough time to gain an understanding of a firm without sacrificing examiner independence. •  We have taken concrete steps to encourage examiners to speak up, which we view as a core competency. For example, we evaluate examiners on their level of engagement with colleagues and their willingness to share insights. •  We created programs to encourage peer recognition of good ideas, including funding for new supervision ideas proposed and voted on by supervisory staff. •  We increased the opportunities for feedback to senior managers, including the head of supervision, in addition to other channels already provided by the New York Fed. Among other improvements, we conduct regular town halls and provide a standing, on-line forum as a device to funnel questions to group leaders. In both settings, questions and answers are offered in an open, transparent manner. •  And we require examination teams to spend more time at New York Fed headquarters and less time “in the field.” Additional time at headquarters promotes cross-firm discussion and direct communication between senior managers and examiners. For example, we offer a seminar series at which group leaders discuss key issues in supervision with our supervision staff. Each and together, these improvements to the substance and process of supervision contribute to financial stability by providing greater insight into bank resiliency and risk. But these enhancements are not self-executing.
But we are also concerned with illiquidity in particular markets when it threatens the stability of the system as a whole. It is this concern that motivates the choice of assets we lend against in both normal and stressed conditions. A loss of liquidity in markets on which the banking system as a whole relies can magnify the mismatch between the maturity of assets and liabilities on banks’ balance sheets. A banking system in which large volumes of funding need to be renewed very frequently is a fragile one, vulnerable each day to a shock stemming from rumours and loss of confidence. And it is in those circumstances that a backstop is needed. The reason for it is not to support individual institutions. It is to avoid an unnecessary loss of confidence in the system as a whole. That backstop is central bank funding when private markets important to the stability of the system have temporarily closed. But central banks are not there to support liquidity in all markets at all times. They are not there to create a liquid market in all financial instruments that traders or some rocket scientist have dreamt up. Nor are they there to maintain indefinitely a market when changes in information or risk appetites make it more difficult to sustain a private market, as in some asset-backed security markets recently.