First to reduce, but not eliminate, the possibility of failure by making banks resilient not only to known, but also to unknown risks – the events in the tail of the distribution. Second, in a world in which banks can still fail, to give the authorities real, practical options for resolving failures that neither trigger widespread economic disruption nor require huge injections of public funds. And, by making investors in banks ultimately responsible for losses, as is the case for other industries, introducing a market discipline on risk taking that will further reduce the likelihood of failure in the first place. Reducing likelihood of failure I believe regulation can be effective in reducing the probability of failure. We have in Basel 3 a fundamentally reformed international risk weighted capital standard and, in the Liquidity Coverage Ratio (LCR), the first international standard on liquidity. The imposition of quantified capital add-ons for systemically important banks has been agreed. This risk weighted capital and liquidity regime has largely been legislated in the key jurisdictions. And, to complement these revised minimum standards, countries around the world are embedding a regular stress testing process as a key part of micro-prudential and macro-prudential supervision. Banks are now making the transition to the new, higher standards. The amount of capital and liquidity in the system has already been transformed. Globally there is now some $ more equity capital in the banking system than the level before the crisis. The major UK banks hold £ more equity and their leverage has broadly halved.
41 Whether there are diminishing marginal returns on additional purchases or actual limits on capacity for using  this tool—implying a size of the balance sheet beyond which further asset purchases become difficult or less effective—is a question for further research. Nevertheless, policymakers may weigh the relative merits and risks associated with asset purchases differently based on the balance sheet’s starting size. 42 The FOMC’s Policy Normalization Principles and Plans note that the Committee does not anticipate selling  agency MBS as part of the normalization process, but says that “limited sales might be warranted in the longer run to reduce or eliminate residual holdings.” 43 Changing the composition of assets within the portfolio, as was done during the MEP, can similarly influence  financial conditions without changing the portfolio’s size or increasing the supply of reserve balances. In this case, capacity to reallocate the portfolio is constrained by existing holdings. 44 Previously, agency MBS operations were conducted on a commercial dealer-to-customer trading platform. The  switch to FedTrade minimized operational risk, improved efficiency and competitiveness, and increased transparency around the Fed’s mortgage operations. 13 / 13  BIS central bankers' speeches