Large Banks and Small Banks in an Era of Systemic Risk Regulation
The financial crisis and its aftermath have revealed fundamental problems in both risk management by financial institutions and supervision by government regulators. These shortcomings arose in no small part from a failure by both the private and public sectors to adjust to far-reaching changes in financial markets over recent decades. There is a growing, though certainly not unanimous, view that supervision and regulation must be substantially more oriented toward containing systemic risk and addressing the associated problems posed by institutions considered too-big-to-fail. The public policy agenda will thus rightly be dominated for some time by proposals for legislative and administrative measures directed at systemic risk. In a moment I will offer some of my own views on the subject. Even as we move into this era of systemic risk regulation, however, it is important to recognize that changes in the financial services industry have affected every bank in America, large and small. While smaller banks will not likely see the extensive supervisory changes that have been proposed for the largest financial institutions, they too must adapt their risk-management practices to new competitive and economic conditions. Only by doing so will they continue to play their distinctive role in providing credit to individuals and small businesses.