Preventing Financial Crises – Conversation with the Chairman: A Teacher Town Hall Meeting

August 7, 2012

To anticipate and prevent another financial crisis similar well, obviously given the cost of the last financial crisis, we like to do all we can to anticipate and prevent another financial crisis, and if one happens, to mitigate its effects as much as possible. that the new regulatory structures both the dodd-frank act, when i say we, i mean, the financial regulators,

The government in general– are now taking a sort of a more system or systemic approach. that is, before the crisis every regulator had its own particular institution, and nobody was there watching the system as a whole. the idea that in fact that regulators ought to work together to identify risks in the broader system, which is called macro prudential regulation,

But it is now i think part of what the new regulatory structure is trying so, we have for example something called the financial stability oversight which consists of 10 major regulators, including the federal reserve, as well as some other regulators, who don’t have votes, the fsoc’s job is to look at the system as a whole, to try to identify problems, to see if there

Are risks that may threaten the system. are there weaknesses in the structure of the system? are there gaps in regulation that need to be addressed? the federal reserve has its own office of financial stability, which we created since the crisis, which has a similar function again to try to monitor the whole system, to try to identify problems that might be arising.

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And we worked closely with the fsoc to look for new problems, the next crisis might be coming from and to take steps to at least to provide a warning so that we can collectively address those problems. so that’s the first part which is to have a macro prudential approach, which is looking at the system as a whole and is trying to identify gaps the issues are very complex

And historically it just happens that, you know, very often that neither the private sector nor the public sector identifies a to make the system itself as resilient as possible. so, whatever happens, even if we don’t identify it or prevent it, and continue to provide credit even in the face of a shock. one example would be the new capital standards that have been agreed

Upon by not just the united states but essentially all the major countries in the world, so-called basel iii capital standards. what they would do is increase the amount of reserves capital and that means is that when banks, whenever, whatever may happen, they will have lots of capital which can absorb those losses and prevent those losses from turning into a failure so,

Greater capital, stronger rules on derivatives trading, more liquidity for banks, so they have enough cash on hand to meet withdrawals, all of those things are intended to make the system stronger, and it’s certainly going to be something we don’t anticipate– the system will be better prepared to absorb the shock without going

Transcribed from video
Preventing Financial Crises – Conversation with the Chairman: A Teacher Town Hall Meeting By Federal Reserve

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