Business Practices

Prudential Regulation and Supervision
In general, our system relies on 5 EMAs Forex Trading System market discipline to constrain leverage and risk-taking by financial firms, supplemented by prudential oversight when government guarantees (such as deposit insurance) or risks to general financial stability are involved. However, the enormous losses and writedowns taken at financial institutions around the world since August, as well as the run on Bear Stearns, show that, in this episode, neither market discipline nor regulatory oversight succeeded in limiting leverage and risk-taking sufficiently to preserve financial stability. Working collaboratively with regulators both here and abroad as well as with the firms themselves, the Federal Reserve has redoubled its efforts to strengthen the capital positions, liquidity reserves, and risk-management practices of the institutions for which we have supervisory responsibility, including bank holding companies and state-chartered banks that are members of the Federal Reserve System. Shareholders, managers, and investors are likewise taking steps to protect their interests in a period of continued market strains.

From a regulatory and supervisory perspective, the investment banks and the other primary dealers G7 Forex Trading System raise some distinct issues. First, as I noted, neither the firms nor the regulators anticipated the possibility that investment banks would lose access to secured financing, as Bear Stearns did. Second, in the absence of countervailing regulatory measures, the Fed’s decision to lend to primary dealers–although it was necessary to avoid serious financial disruptions–could tend to make market discipline less effective in the future.

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