Brookings Institution presents Financial Stability : A Conversation with Lael Brainard
Key Topics & Takeaways
- Counter Cyclical Buffer: Brainard said that a next step for the Fed is to determine what set of indicators would be used to trigger the activation and de-activation of a counter-cyclical buffer.
- Regulatory Data Sharing: Brainard worried that data-sharing initiatives are “taking some time” and highlighted that there are “legal impediments” to sharing certain information between regulatory agencies.
- Shadow Banking: Brainard said the Fed is trying to get as much data from the shadow bank sector as it can.
- Collins Amendment: Brainard noted that the Collins Amendment in Dodd-Frank would constrain the Fed’s ability to differentiate these requirements but said there is “reason to be hopeful” that legislation will be passed to fix this issue.
Speakers
- Lael Brainard, Governor, Federal Reserve Board
- Donald Kohn, Former Vice Chairman, Federal Reserve Board and Senior Fellow at the Brookings Institution
- David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution
Prepared Remarks – Governor Brainard
Lael Brainard, Governor of the Federal Reserve (Fed), stated in her prepared remarks that while the Fed’s founding statute “makes no explicit mention of financial stability,” safe guarding stability is “deeply engrained in the mission and culture” of the regulator. She then noted that the Fed “faces limitations as a financial stability authority” and highlighted regulatory challenges that result from no federal agency currently having access to complete data on bank and non-bank financial activities. Brained stressed the importance of bank and market regulators working together and sharing information on system risks.
Brainard said the Fed will place a “strong emphasis on structural resilience” and strengthen “less-tested, time-varying tools to lean against the build-up of risks.” Over the course of her remarks, she explained that the “four pillars” of the Fed’s financial stability agenda are: 1) surveillance; 2) macroprudential policy; 3) working across the regulatory perimeter; and 4) monetary policy.
Surveillance efforts, Brainard explained, would assess financial vulnerabilities including asset valuations and risk appetite, leverage, maturity and risk transformation, and interconnectedness in the financial system. She added that this surveillance would be “buttressed” by bank examinations and loan reviews, periodic analyses of system-wide consequences of market shocks, and studying the behavior of markets and institutions.
Brainard then said that stress tests are a “powerful tool” to build resilience in the financial system but that they have limitations because it is difficult for the Fed to introduce new stress scenarios without adding “a lot of complexity.” She then added that the Fed’s progress on developing tools to counter the “buildup of excesses” is “less advanced.”
If there is another housing boom in the future, Brianard said, the Fed could impose higher risk weights to mortgages, but warned that these actions to address excesses would be narrow and would take up to a year to have an impact.
Brainard said the Fed’s monetary policy should be a “second line of defense” and a complement, rather than a substitute, for macro-prudential tools.
Moderated Q & A
David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, then moderated a discussion with Brainard and Donald Kohn, Former Vice Chairman, Federal Reserve Board, and Senior Fellow at the Brookings Institution.
Macro-Prudential Tools
Wessel began by asking if the Fed may have to consider raising interest rates “more readily” than its international central bank counterparts because of its limited macro-prudential toolkit, and if the U.S. should grant the Fed more macro-prudential authorities.
Brainard replied that it is “too early to make a judgment” on the adequacy of the Fed’s macro-prudential powers but that comparing the Fed to other central banks is helpful.
Wessel then asked if the financial crisis would have been prevented if the Fed had stress tests, counter cyclical buffers, and other current regulatory requirements in place a decade ago.
Brianard said there is “no question” these requirements would have been helpful but that there is “no clear answer” if the crisis would have been entirely avoided. She added that things “would have been much better” if Title II of Dodd-Frank were in place to allow more orderly resolution of large financial institutions.
U.S. vs. UK Regimes
Wessel then asked Kohn what the U.S. can learn from the regulatory system in place in the United Kingdom. Kohn said the U.S. “has quite a bit to learn” from the UK’s system of fewer regulators, all with a financial stability mandate. He then highlighted the level of coordination amongst U.S. regulators as a shortcoming in comparison and said it would be helpful if consumer-based regulations could be carried out in a macro-prudential way.
Housing Policy
Wessel asked if the politics surrounding housing policy and objectives in the U.S. complicate the Fed’s decision to take certain actions that may restrict mortgage credit.
Brainard said the Fed needs to be “realistic and clear” about the tools it has available to address risks to the financial system stemming from the housing market, especially when “working on the borrower side.”
Kohn said he was surprised with how little reaction there has been in the UK about their actions to build resilience in their housing market. He said there would “probably be more fussing” in the U.S. but actions to improve stability “could be sold” more effectively if they are presented as way to avoid a repeat of the recent mortgage crisis.
Impacts on the Economy
Wessel asked if the Fed’s efforts to improve stability could “do too much” and ultimately constrain credit and hurt the broader economy.
Brainard said there recently has been substantial improvement in credit availability saying that credit conditions are generally “quite favorable,” however she worried that mortgage credit is still too tight. She added the Fed needs to have a “very clearly differentiated” and tiered approached to regulation based on the size of financial institutions. Brainard said the Fed can “get differentiation increasingly right over time.”
Bond Market Liquidity
Wessel asked if there are concerns with the level of liquidity currently in bond markets.
Brainard mentioned that the Fed is conducting a detailed analysis of the events that took place on October 15 in the bond market, when volatility was exceptionally high, to determine if there are any structural vulnerabilities in the system that may have caused these issues. She cited that potential sources of vulnerability may include effects of new regulations, new trading methods, new technology, or high-frequency trading practices.
ShadowBanking
Wessel asked about the risks and trade-offs of certain activities moving to the shadow banking sector as regulations restrict bank behavior.
Brainard said the Fed “think[s] very actively about that” and that it is trying to get “as much data” from the shadow bank sector as it can.
Regulatory Information Sharing
Wessel asked if the Fed can see data across different regulatory agencies after all the efforts and reforms of Dodd-Frank.
Brainard said data sharing initiatives are “taking some time” and highlighted that there are “legal impediments” to sharing certain information between regulatory agencies.
Audience Q & A
Impact on Small Banks
A member of the audience asked how the Fed takes into consideration smaller banks that are more affected by interest rate spreads for their businesses when determining when and how to raise rates.
Brainard said data gathered from small and large banks provides valuable insights on how regulations affect different size firms and again highlighted the Fed’s efforts to properly tailor regulation to firms based on the level of risk they pose to the financial system.
CountercyclicalBuffer
Another audience member asked how uncertainty about the impact of Fed actions is taken into consideration by the Board.
Brainard said the Fed is “humble” about how to identify potential asset booms and how a counter-cyclical buffer may be used. She said the Fed should look at historical examples of when Fed action was taken too late and consider if some tools should contain built-in “automaticity.” Brainard added that the next step for the Fed is to determine what set of indicators would be used to trigger the activation and de-activation of a counter-cyclical buffer.
Kohn said that a counter-cyclical buffer should be set to a high-enough level to allow the market to be comfortable in the event that it needs to be released.
Insurance Companies
When an audience member asked how the Fed will treat insurance companies deemed systemically important, Brainard said it is the Fed’s preference to differentiate capital requirements between banks and insurance companies. She noted that the Collins Amendment in Dodd-Frank would constrain the Fed’s ability to differentiate these requirements but said there is “reason to be hopeful” that legislation will be passed to fix this issue.
For more information on this event and to view an archived webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:General,Hearing Summaries Agency:Federal Reserve,Publish Year:2014
Key Topics & Takeaways
- Counter Cyclical Buffer: Brainard said that a next step for the Fed is to determine what set of indicators would be used to trigger the activation and de-activation of a counter-cyclical buffer.
- Regulatory Data Sharing: Brainard worried that data-sharing initiatives are “taking some time” and highlighted that there are “legal impediments” to sharing certain information between regulatory agencies.
- Shadow Banking: Brainard said the Fed is trying to get as much data from the shadow bank sector as it can.
- Collins Amendment: Brainard noted that the Collins Amendment in Dodd-Frank would constrain the Fed’s ability to differentiate these requirements but said there is “reason to be hopeful” that legislation will be passed to fix this issue.
Speakers
- Lael Brainard, Governor, Federal Reserve Board
- Donald Kohn, Former Vice Chairman, Federal Reserve Board and Senior Fellow at the Brookings Institution
- David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution
Prepared Remarks – Governor Brainard
Lael Brainard, Governor of the Federal Reserve (Fed), stated in her prepared remarks that while the Fed’s founding statute “makes no explicit mention of financial stability,” safe guarding stability is “deeply engrained in the mission and culture” of the regulator. She then noted that the Fed “faces limitations as a financial stability authority” and highlighted regulatory challenges that result from no federal agency currently having access to complete data on bank and non-bank financial activities. Brained stressed the importance of bank and market regulators working together and sharing information on system risks.
Brainard said the Fed will place a “strong emphasis on structural resilience” and strengthen “less-tested, time-varying tools to lean against the build-up of risks.” Over the course of her remarks, she explained that the “four pillars” of the Fed’s financial stability agenda are: 1) surveillance; 2) macroprudential policy; 3) working across the regulatory perimeter; and 4) monetary policy.
Surveillance efforts, Brainard explained, would assess financial vulnerabilities including asset valuations and risk appetite, leverage, maturity and risk transformation, and interconnectedness in the financial system. She added that this surveillance would be “buttressed” by bank examinations and loan reviews, periodic analyses of system-wide consequences of market shocks, and studying the behavior of markets and institutions.
Brainard then said that stress tests are a “powerful tool” to build resilience in the financial system but that they have limitations because it is difficult for the Fed to introduce new stress scenarios without adding “a lot of complexity.” She then added that the Fed’s progress on developing tools to counter the “buildup of excesses” is “less advanced.”
If there is another housing boom in the future, Brianard said, the Fed could impose higher risk weights to mortgages, but warned that these actions to address excesses would be narrow and would take up to a year to have an impact.
Brainard said the Fed’s monetary policy should be a “second line of defense” and a complement, rather than a substitute, for macro-prudential tools.
Moderated Q & A
David Wessel, Director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, then moderated a discussion with Brainard and Donald Kohn, Former Vice Chairman, Federal Reserve Board, and Senior Fellow at the Brookings Institution.
Macro-Prudential Tools
Wessel began by asking if the Fed may have to consider raising interest rates “more readily” than its international central bank counterparts because of its limited macro-prudential toolkit, and if the U.S. should grant the Fed more macro-prudential authorities.
Brainard replied that it is “too early to make a judgment” on the adequacy of the Fed’s macro-prudential powers but that comparing the Fed to other central banks is helpful.
Wessel then asked if the financial crisis would have been prevented if the Fed had stress tests, counter cyclical buffers, and other current regulatory requirements in place a decade ago.
Brianard said there is “no question” these requirements would have been helpful but that there is “no clear answer” if the crisis would have been entirely avoided. She added that things “would have been much better” if Title II of Dodd-Frank were in place to allow more orderly resolution of large financial institutions.
U.S. vs. UK Regimes
Wessel then asked Kohn what the U.S. can learn from the regulatory system in place in the United Kingdom. Kohn said the U.S. “has quite a bit to learn” from the UK’s system of fewer regulators, all with a financial stability mandate. He then highlighted the level of coordination amongst U.S. regulators as a shortcoming in comparison and said it would be helpful if consumer-based regulations could be carried out in a macro-prudential way.
Housing Policy
Wessel asked if the politics surrounding housing policy and objectives in the U.S. complicate the Fed’s decision to take certain actions that may restrict mortgage credit.
Brainard said the Fed needs to be “realistic and clear” about the tools it has available to address risks to the financial system stemming from the housing market, especially when “working on the borrower side.”
Kohn said he was surprised with how little reaction there has been in the UK about their actions to build resilience in their housing market. He said there would “probably be more fussing” in the U.S. but actions to improve stability “could be sold” more effectively if they are presented as way to avoid a repeat of the recent mortgage crisis.
Impacts on the Economy
Wessel asked if the Fed’s efforts to improve stability could “do too much” and ultimately constrain credit and hurt the broader economy.
Brainard said there recently has been substantial improvement in credit availability saying that credit conditions are generally “quite favorable,” however she worried that mortgage credit is still too tight. She added the Fed needs to have a “very clearly differentiated” and tiered approached to regulation based on the size of financial institutions. Brainard said the Fed can “get differentiation increasingly right over time.”
Bond Market Liquidity
Wessel asked if there are concerns with the level of liquidity currently in bond markets.
Brainard mentioned that the Fed is conducting a detailed analysis of the events that took place on October 15 in the bond market, when volatility was exceptionally high, to determine if there are any structural vulnerabilities in the system that may have caused these issues. She cited that potential sources of vulnerability may include effects of new regulations, new trading methods, new technology, or high-frequency trading practices.
ShadowBanking
Wessel asked about the risks and trade-offs of certain activities moving to the shadow banking sector as regulations restrict bank behavior.
Brainard said the Fed “think[s] very actively about that” and that it is trying to get “as much data” from the shadow bank sector as it can.
Regulatory Information Sharing
Wessel asked if the Fed can see data across different regulatory agencies after all the efforts and reforms of Dodd-Frank.
Brainard said data sharing initiatives are “taking some time” and highlighted that there are “legal impediments” to sharing certain information between regulatory agencies.
Audience Q & A
Impact on Small Banks
A member of the audience asked how the Fed takes into consideration smaller banks that are more affected by interest rate spreads for their businesses when determining when and how to raise rates.
Brainard said data gathered from small and large banks provides valuable insights on how regulations affect different size firms and again highlighted the Fed’s efforts to properly tailor regulation to firms based on the level of risk they pose to the financial system.
CountercyclicalBuffer
Another audience member asked how uncertainty about the impact of Fed actions is taken into consideration by the Board.
Brainard said the Fed is “humble” about how to identify potential asset booms and how a counter-cyclical buffer may be used. She said the Fed should look at historical examples of when Fed action was taken too late and consider if some tools should contain built-in “automaticity.” Brainard added that the next step for the Fed is to determine what set of indicators would be used to trigger the activation and de-activation of a counter-cyclical buffer.
Kohn said that a counter-cyclical buffer should be set to a high-enough level to allow the market to be comfortable in the event that it needs to be released.
Insurance Companies
When an audience member asked how the Fed will treat insurance companies deemed systemically important, Brainard said it is the Fed’s preference to differentiate capital requirements between banks and insurance companies. She noted that the Collins Amendment in Dodd-Frank would constrain the Fed’s ability to differentiate these requirements but said there is “reason to be hopeful” that legislation will be passed to fix this issue.
For more information on this event and to view an archived webcast, please click here.