Lessons from the financial crisis

3

Basel Committee on Banking Supervision (2008), Principles for Sound Liquidity Risk Management and Supervision (Basel, Switzerland: Bank for International Settlements, September).

4

For example, see Ben S. Bernanke (2007), "Central Banking and Bank Supervision in the United States," speech delivered at the Allied Social Science Association Annual Meeting, Chicago, Ill., January 5.

5

Senior Supervisors Group (2008), Observations on Risk Management Practices during the Recent Market Turbulence (Basel, Switzerland: Bank for International Settlements, March 6); President's Working Group on Financial Markets (2008), "Policy Statement on Financial Market Developments," policy statement (Washington: U.S. Department of the Treasury, March 13); Financial Stability Forum (2008), Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience), (Basel, Switzerland: FSF, April 7).

Since the onset of the crisis, the Federal Reserve and other U.S. supervisors – in many cases along with supervisors from other countries – have been working to identify both its causes and its lessons. Our contributions have been reflected in reports issued by, among others, the Financial Stability Board, the President's Working Group on Financial Markets, and the Senior Supervisors Group, which includes representatives of seven industrial countries.

5

Ongoing international collaboration, which began before the crisis, has enabled U.S. supervisors to learn from the international experience and allowed us to compare the performances of individual U.S. institutions with those of a broad cross section of global financial firms.

The Federal Reserve is also in the midst of its own comprehensive review of all aspects of its supervisory practices. Since last year, Vice Chairman Kohn has led an effort, with participation from Board members, Reserve Bank presidents, and staff from around the System, to develop recommendations for improvements in our conduct of both prudential supervision and consumer protection. We are including feedback from the Government Accountability Office, the Congress, the Treasury, and others as we look to improve our own supervisory practices. Among other things, our analysis reaffirms that capital adequacy, effective liquidity planning, and strong risk management are essential for safe and sound banking; the crisis revealed serious deficiencies on the part of some financial institutions in one or more of the areas. The crisis has likewise underscored the need for heightened vigilance and forcefulness on the part of supervisors to make sure that standards are met.