Introduction

Chair Yellen—again, thank you for being here with us today and for your insightful remarks.

You took us through a vivid “walk down memory lane” of the financial crisis and the role of distorted incentives in fueling excessive risk taking. I fully agree that important progress on the regulatory reform agenda has improved the resilience of financial systems. I also welcome the continued vigilance of the Fed and other institutions.

Yet, as we all know, in too many places, financial stability is still not well-entrenched. Our recent Global Financial Stability Report finds that financial stability risks are rising and rotating—from banks to non-banks, from sovereign and bank solvency to market liquidity, and from advanced countries to emerging countries.

This suggests to me that there is still work to be done to address distorted incentives in the financial system. Indeed, actions that precipitated the crisis were—mostly—not so much fraudulent as driven by short-term profit motivation. This suggests to me that we need to build a financial system that is both more ethical and oriented more to the needs of the real economy—a financial system that serves society and not the other way round.

So today I would like to focus on how to induce a change in the “culture” of the financial sector—how to better align financial incentives with societal objectives. Clearly, better regulation and supervision play an important role—but so does individual accountability.

I will focus on three topics: