Regulation: Fed's Tarullo outlines Fed's plans for new regulation

In a speech last week, Tarullo made the following comments:

- If we have learned anything from the present crisis, it is that systemic risk was very much built into our financial system.

- The leverage and interconnectedness of firms in the financial services sector, and the critical role that financial intermediaries play in modern economies, mean that a malfunction in the financial industry can immediately and profoundly harm the entire economy.

- Systemic crises typically reveal failures across the financial system.

- There was a massive breakdown of risk management and a suspension of simple common sense within many financial firms.

- This crisis is the culmination of changes in both the organization and regulation of financial markets that began in the 1970s.

- There was probably too little attention to the risks faced, and created, by the entire holding company, including the affiliates principally involved in trading and other capital market activities.

- By dividing supervisory authority for holding company affiliates among a number of supervisors based on their charter or activity, that law elevated the concept of "functional regulation" to the potential detriment of a more effective form of consolidated supervision.

- Systemic risk concerns, including too-big-to-fail issues, extended beyond bank holding companies to firms that were unregulated, at least for safety and soundness purposes.

- While it is clear that improved capital regulation alone would not have prevented the financial crisis, it is equally clear that large financial institutions should have been required to hold higher levels of capital in the pre-crisis period.

- One need not subscribe to an exaggerated view of the potential of market discipline in order to believe that there is considerable room for progress in enhancing the transparency of financial firm operations so as to permit better market monitoring.

- A different kind of market, or at least non-government, discipline should be fostered in the internal corporate policies of financial institutions.

- "Horizontal reviews" of risks, risk management, and other practices across multiple financial firms can help identify both common trends and firm-specific weaknesses.

- A systemic risk perspective requires that the Board conduct more closely coordinated supervision of major bank holding companies. This is the direction in which we will be moving.

- There should be a statutory requirement for consolidated supervision of all systemically important financial firms--not just those affiliated with an insured bank as provided for under the Bank Holding Company Act of 1956

- There should be a resolution regime for systemically important non-bank institutions to complement the current regime for banks under the Federal Deposit Insurance Act.

- There should be clear authority for special regulatory standards--such as for capital, liquidity, and risk-management practices--applicable to systemically important firms.

- There should be an explicit statutory requirement for analysis of the stability of the U.S. financial system.

- Additional statutory authority is needed to address the potential for systemic risk in payment and settlement systems.

- There are some options that are considerably more dramatic. Proposals to limit the size (or interconnectedness) of financial institutions would represent a historic break with how we have regulated the financial system