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Ask the Expert

We are all aware that the Great Recession had a negative impact on the economy. What do you feel are the most positive regulatory changes to come from the crisis?

As appeared in the Cleveland Fed Digest's Ask the Expert

We’re always looking for improvement opportunities. One lesson we learned from the financial crisis is that weaknesses can spread from one firm to other firms quickly because of the interconnectedness of the financial system. When weaknesses spread, that has a potentially large impact on the health of the financial system.

The Federal Reserve and lawmakers made several important changes after the Great Recession. The Fed now looks at similar risks across bank holding companies (BHCs) in addition to focusing on individual BHCs. We’ve strengthened our focus on BHCs’ financial condition in the face of an economic downturn or other stressful event. You can see this in our Comprehensive Capital Analysis and Review, whose results are publicly available. These stress tests require each BHC to consider the risks it is exposed to, financial or otherwise, and to hold sufficient capital to withstand severe stress. The tests should give the public more confidence in a company’s ability to withstand an economic downturn and continue to lend and serve its customers.

There are a couple of reasons why banks may have gaps they don’t identify before banking supervisors do. Sometimes, it’s a cost issue; it costs money to implement strong internal controls, whether they be systems or people. Sometimes, it’s inexperience of the bankers. They may not have experienced the consequences of something to know they should have a policy in place or a risk limit. Examiners, having the perspective of seeing many companies, can provide that insight.

Another example of our focus on continuing to learn and make changes is the large financial institution rating system. That rating system, if implemented in its proposed form, would help us assess large firms—those with $50 billion or more in assets—in the areas of capital (banks’ cushion for losses), liquidity (funds necessary in the short term for a bank to meet its obligations), and governance (how a bank is managed).

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