And, to date, many of the largest firms have considerably improved their capital levels and capital planning processes. Simply addressing the quantity of capital and the quality of the planning processes isn’t enough, though. And without elaborating too much on something I’m sure you are quite familiar with, the reasons include: •  Capital ratios and numerical targets are snapshots in time – and often a lagging indicator of financial condition. •  These snapshots don’t incorporate the future – they don’t anticipate what might happen in different economic times or in different market conditions. •  Capital ratios don’t incorporate the impact on a firm’s ability to generate revenues during stress periods – and thus don’t indicate a firm’s ability to rebuild capital as necessary. •  So, clearly, stronger capital standards need to be combined with a better ability to anticipate the future – to incorporate a more forward-looking element into assessing the financial strength of a firm. Thus, supervisory and risk management tools need to expand to include stress testing – and from this came the supervisory stress test and resulting Federal Reserve Capital Rule and the requirements in Dodd-Frank for stress testing. I think it’s fair to say that the new capital rules will and should change how firms think about risk within their organizations.
My second observation is that this is a difficult topic, one that generates very heated discussions, but one that is necessary as the industry tries to tackle the complex issue of what can be done to restore public faith in the financial industry. This begins with questions like: •  What is the source of the problem? •  Are the problems we are experiencing unique to financial services? •  What incentives and disincentives – compensation, fines, prosecutions and other measures – need to be altered for behaviors to really change? This is a topic that we will surely revisit a number of times over the coming months as both the industry and the supervisory community begin to answer some of the tougher questions. Complexity Let me now turn to the third element of the supervisory framework: reducing complexity. In large measure, this translates into sound recovery and resolution planning. The development and implementation of a credible resolution mechanism for large, global banks is a must. By credible, I mean that if a failure of one of these financial institutions arises, then home authorities will proceed with the resolution plan, rather than intervene to prevent a failure. Although the specifics of the resolution mechanisms will necessarily vary to some extent across jurisdictions, the goal is common: to be able to resolve any large, global firm regardless of its home jurisdiction without taxpayer funds and in a way that minimizes the knock-on effect to financial markets and other financial institutions.