As the banking system becomes more concentrated and complex, that just increases the financial stability risks, making the too big to fail problem even more acute. So what should we do about it? Today, I will evaluate three broad sets of choices: 1) Building a credible resolution regime and more resiliency in the financial system that together reduce the systemic costs of failure sufficiently so that large, complex firms can be allowed to fail; 2) taking steps, such as tougher prudential standards, that further reduce the probability of failure of such firms; and 3) breaking up the too big to fail firms so that no firm is so large that its failure would threaten financial stability in the first place. To summarize, I conclude that building a credible resolution regime is necessary but not sufficient. Even if the single-point of entry resolution framework proposed by the Federal Deposit Insurance Corporation (FDIC), which I very much endorse, is fully perfected, the costs of resolution for the largest systemically important financial institutions (SIFIs) will still be significant. I will argue that at least as much effort should be made to lower the risk of failure of such large, complex firms. Not only does this include higher capital and liquidity requirements, which we are implementing, but also building incentives into the system so that firm managements will act more forcefully and much earlier to put their firms on more solid ground before they encounter greater difficulties.
But I would urge you instead to look at the reports of our annual medical check-ups conducted by the IMF since 1990 in the form of what are known as the Article IV Consultations. The IMF team was in fact in Hong Kong for this year’s Consultation in the second half of October, when the short-lived but somewhat intense attack on our currency occurred. It was the best time for any diagnosis of financial problems. But after observing us closely over the period the team again gave us a clean bill of health. Let me give you a few relevant quotes from the Concluding Statement of the Consultation, which has already been published.