Preserve Market Function Not Institution
Many think that the regulation of systemic risk should be primarily focused on preserving the viability of institutions that are "too big to fail" because of their size, interconnectedness, or risk concentration. But this view of systemic risk can result in a financial regulatory model that focuses too much on institutions, not enough on investors, and it positions a government regulator to pick winners and losers among companies at the expense of investors and market certainty - as we saw during the events of September 2008.

Another view is that systemic risk regulation should focus on ensuring the continuation of systemically important market functions, and on investor protections. This can be accomplished by regulation that affirmatively prevents institutions from growing too big to fail in the first place. This view requires that regulation go beyond setting prudential standards.

The process must also involve identifying the systemically important market functions that an entity provides and work to isolate these functions within the entity. The objective would be to ensure that the functions can be separately maintained should other parts of the entity fail. The regulation could also provide for cross-entity relationships to allow one or more entities to step in and continue the functions seamlessly. For example, let's think about the SEC regulation of the national securities market system: if the NYSE-Arca systems were to fail, the SEC has designed our market system so that NASDAQ would pick up the important market functions.

I believe systemic risk regulation should focus on the continuation of market functions, and not necessarily on the preservation of institutions.