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ALL IN 

cating many activities already conducted within the bank to providing constructive
feedback that the bank can use to enhance further the quality of its risk-management

systems,” Chairman Greenspan had said in . Across agencies, there was a “his-
toric vision, historic approach, that a lighter hand at regulation was the appropriate
way to regulate,” Eugene Ludwig, comptroller of the currency from  to , told

the FCIC, referring to the Gramm-Leach-Bliley Act in . The New York Fed, in a
“lessons-learned” analysis after the crisis, pointed to the mistaken belief that “markets
will always self-correct.” “A deference to the self-correcting property of markets inhib-
ited supervisors from imposing prescriptive views on banks,” the report concluded. 
The reliance on banks’ own risk management would extend to capital standards.
Banks had complained for years that the original  Basel standards did not allow
them sufficient latitude to base their capital on the riskiness of particular assets. After
years of negotiations, international regulators, with strong support from the Fed, in-
troduced the Basel II capital regime in June , which would allow banks to lower
their capital charges if they could show they had sophisticated internal models for es-
timating the riskiness of their assets. While no U.S. bank fully implemented the more
sophisticated approaches that it allowed, Basel II reflected and reinforced the super-
visors’ risk-focused approach. Spillenkothen said that one of the regulators’ biggest
mistakes was their “acceptance of Basel II premises,” which he described as display-
ing “an excessive faith in internal bank risk models, an infatuation with the specious
accuracy of complex quantitative risk measurement techniques, and a willingness (at
least in the early days of Basel II) to tolerate a reduction in regulatory capital in re-
turn for the prospect of better risk management and greater risk-sensitivity.” 
Regulators had been taking notice of the mortgage market for several years before
the crisis. As early as , they recognized that mortgage products and borrowers
had changed during and following the refinancing boom of the previous year, and
they began work on providing guidance to banks and thrifts. But too little was done,
and too late, because of interagency discord, industry pushback, and a widely held
view that market participants had the situation well in hand.
“Within the board, people understood that many of these loan types had gotten to
an extreme,” Susan Bies, then a Fed governor and chair of the Federal Reserve Board’s
subcommittees on both safety and soundness supervision and consumer protection
supervision, told the FCIC. “So the main debate within the board was how tightly
[should we] rein in the abuses that we were seeing. So it was more of ‘to a degree.’” 
Indeed, in the same June  Federal Open Market Committee meeting de-
scribed earlier, one FOMC member noted that “some of the newer, more intricate
and untested credit default instruments had caused some market turmoil.” Another
participant was concerned “that subprime lending was an accident waiting to hap-
pen.” A third participant noted the risks in mortgage securities, the rapid growth of
subprime lending, and the fact that many lenders had “inadequate information on
borrowers,” adding, however, that record profits and high capital levels allayed those
concerns. A fourth participant said that “we could be seeing the final gasps of house
price appreciation.” The participant expressed concern about “creative financing” and
was “worried that piggybacks and other non-traditional loans,” whose risk of default