Managing the Transition to a Safer Financial System1

The current financial crisis demonstrates the need for changes in the supervision and resolution of financial institutions, especially those that are systemically important to the financial system. The challenge is to find ways to impose greater market discipline on these firms by giving them incentives to reduce their size and complexity through capital standards, leverage limits, systemic risk insurance premia and other measures. Foremost in the reform agenda is the need for a special legal framework to ensure the orderly resolution of a complex financial institution. There must also be incentives to protect consumer interests, as there can no longer be any doubt that abusive products and practices pose threats to the safety and soundness of the financial system.