Transcripts For CSPAN2 Federal Reserve Vice Chair On Modernizing Financial Institutions 20220910

David wessel director of the center on the fiscal and Monetary Policy at brookings. Its very good to see so many people in person. David we havent done an event like this in a two and half years and i am hoping this is the beginning of more of them. One of the things about the pandemic is that you do things that you used to think were a hassle and now they seem like a luxury and that is the weight felt when i got a suit on and my closet that have not worn in three years. I am very pleased today that the host, michael barr, federal chair for the ash he has a very distinguished resume. Clerk to the Supreme Court justice, he worked in the state department, the white house and the treasury and the Clinton Administration and he was the assistant secretary for Financial Institutions in the obama treasury where he played an Important Role in crafting the doddfrank act that created the position that he now feels. As you may know, congress created this position, vice chair for supervision so that congress would know to blame if the fed screwed up again. Michael, good luck with that. Michael first joined at the university of michigan faculty 20 years ago. He taught and written a bit about Financial Regulation. His most recent job was a dean of the Gerald Ford School of Public Policy at the university of michigan. Michael has a long relationship with brookings. He has participated in all sorts of events and run for a website, written for our website in 2012 book. It was published by the Brookings Press in 2012. But, was sent out to me in michaels background is patience. I recall when i was working for the law wall street journal was michaels name was floating around to be the first director of the Consumer Financial protection euro, that did not happen protection bureau. There came the buy item administration and his name was floating around that didnt happen. He stayed in michigan and he was patient and we have one of the most powerful jobs in Financial Regulation in the u. S. And he has a fouryear term. It doesnt even matter what happens in the 2024 president ial election. Michael will make remarks. I will join him on stage. I have questions, some of them have come in by email. We will have mics for people in the audience. If you are online and you want to ask a question you can do it at michaelbarr. Or you can put your question, i cant promise we will get all of them but i have a good sense from the emails we have already gotten about what is on peoples minds. With that, michael barr. [applause] michael thanks, david for that warm introduction. Patience is definitely a virtue. Thank you all to the Brookings Institution for the invitation to speak to you today. As most of you know on july 19 i had the honor of being sworn in as the vice chair for supervision of governors of the Federal Reserve system. This job was created after the Global Financial crisis to lead the feds work of a banks and in support of the Financial Stability mandate. In the 12 year since then, great progress was made in strengthening the Banking System and strengthening oversight. I look forward to building on that work by helping to make the Financial System safer and error fair support of an economy that supports households and businesses. On behalf of those who may be wondering what building of that work means, i will speak on some of my nearterm goals. Starting with the word building which means to mean more than it maintaining. Success in Financial Regulation and supervision does not mean standing still. Finance does not stand still. The regulatory and supervisory framework adopted after the crisis recognizes that innovation, change are constant in finance. That our understanding of existing and emerging risks can and should deepen over time. And regulation and supervision must evolving to be effective. Many issues at the forefront of making regulation today scarcely even existed a few years ago. Building means staying ahead of changes, evaluating how banks are managing risks and making a Financial System safer and fairer for households and businesses. When i say that one of my top goals is to make the Financial System safer, its because keeping it safe involves an active and never ending effort to analyze risks and make necessary adjustments. Theres no responsible alternative to their approach, because the stakes are too high to do otherwise. The Global Financial crisis caused a terrible recession and brought the u. S. To the brink of an economic collapse that could have been worse than the Great Depression of the 1930s. A significant cause was excessive risktaking by banks and inadequate regulation and supervision by the fed and other Bank Regulators. A hard learned lesson from the crisis is that the savings of every retiree, the payroll of every business and the wellbeing of every individual depends on a safe and stable Financial System. In addition to making a Financial System safer i am committed to making it fair. Fairness is fundamental to financial oversight. Im committed to using the tools and regulations to so that businesses and households have access to the services they need, the information necessary to make their Financial Decisions and protection from unnecessary treatment. Safety and fairness may seem like distinct goals but they are intertwined. Financially instability financial instability harms those that are economically vulnerable. Making a Financial System safer is making it fairer. Nothing is more basic to the safety and soundness of banks in the stability that Financial Systems than capital. Capital enables firms to serve as a source of strength to the economy by continuing to length through good times and bad. To continue to perform these functions, the bank must have a sufficient level of capital to ensure that they can absorb losses and continue operations during times of stress in the Financial System one losses may be significant. An important principle of the capital framework is that it must evolve to a continuous process of incorporating new risks that may emerge. While history is a good guide to losses in the past, stresses of a bank that they may face the future may be different. Capital policy may be forwardlooking and responses to change in macroeconomic conditions, and financial activities. A second principle is that capital framework should be focused, and the capital regime should calibrate requirements to account for the risks of specific activities. At the same time, simpler, nonriskbased approaches can serve as a backstop, given the opacity of the. Approaches leverage ratios serve an Important Role in the framework. A third principle is that requirement should be tiered, as firms increase in systemic importance the social cost of the failure grows. Regulations should be designed to require firms to internalize the cost that there potential failure would impose on the broader Financial System, thats on businesses and households. This means firms must face higher costs to more stringent regulations as they grow in complexity, size and interconnection. Community banks face simpler regulations. We are looking holistically at our capital framework now to understand how they are supporting the resilience of the Financial System, individually and in combination. When calibrating requirements we will work to minimize unintended consequences, limited opportunities and avoid access complaints cost the do not result in risk reduction. Taking a holistic review, will take us to countercyclical buffers and stress testing. Im committed to enhancing regulatory standards that align with the final set of standards for the socalled endgame. This process will involve working with other federal banking agencies and soliciting public input. I will have more to say on that, later this fall. Sufficient capital and the Financial System help support the resilience of individual banks. Its also important to tune to ensure if a large form firm gets into trouble the doug frank act established a framework necessary to end those bailouts, and provides theft yes he authority to resolve fti see the authority to resolve. While ensuring large Financial Firms and not taxpayers bear the cost. The fed and the f tic require large banks to develop living wells on an annual basis for many of them to demonstrate that they can be resolved in an orderly way. Many gains have been made from this process while recognizing these gains we need to continue whether firms are taking appropriate steps to limit the cost of their potential failure. We will continue to work with the ftse to rigorously review plans making clear where firms do not meet our expectation and we are where remediation may be necessary. In addition beyond globally systemic important bags we will be looking at the resolve ability of some of the other largest banks as they grow and as of their significance and Financial System increases. As we consider future policy actions in this area, the fed will work with our colleagues at other banking agencies can seek Public Comment. Mergers are a future of great and vibrant industries but the advantages that firms seek to gain through mergers must be weighed against the risk that mergers can impose to competition, consumers and Financial Stability. Another priority of mine is to evaluate our approach to reviewing banks acquisitions. The board is required to consider a range of factors when reviewing proposed mergers. Institutions may be able to provide more products and services but it can also of the potential to reduce competition and access to Financial Services in a geographical area by raising prices and narrowing the range of Services Offered or reducing the supply of Small Business or Community Development loans that were loud local knowledge. Assessing these risks is a crucial component of reviewing oppose mergers. In addition we review the potential effects on the communities to be served by the merged entity particularly low income communities. We are required now to consider Financial Stability risks, these risks may be difficult to access but the consideration is critical. Im working with the staff to assess emerge analysis and where we could do better. Another priority of mine is a regulation of new forms of private money, creating through stable coins. Stable coins like other unregulated private money could pose Financial Stability risks. History shows that the absence of appropriate oversight private money is subject to destabilizing runs, financial instability, and the potential for widespread economic harm. In the 19th and early 20th century before the advent of Prudential Bank regulation and deposit insurance and before action was taken to ensure private money creation by banks was appropriately regulated, repeated crises did substantial damage to the u. S. Economy. I believe congress should work expeditiously to pass muchneeded legislation to bring stablecoins, particularly those designed to serve as a means of payment, inside the prudential regulatory perimeter. I look forward to continued partnership with other regulatory agencies and congress to address the risks of stablecoins. Before i move away from the discussion of making banks safer, let me say a few words about the potential risks to banks posed by Climate Change. As our nation, and the world, grapple with how to respond to Climate Change, banks are increasingly focused on the risks that Climate Change brings brings to their balance sheets. The Federal Reserve is working to understand how Climate Change may pose risks to individual banks and to the Financial System. The Federal Reserves mandate in this area is important, but narrow, focused on our supervisory responsibilities and our role in promoting a safe and stable Financial System. In the nearterm, we intend to work with the office of the occ and the fdic to provide guidance to large banks on how we expect them to identify, measure, monitor, and manage the Financial Risks of Climate Change. In addition, we are considering how to develop and implement climate risk scenario analyses. In that regard, next year we plan to launch a pilot microprudential Scenario Analysis exercise to better assess the longterm, climaterelated Financial Risks facing the largest institutions. These are a few of my nearterm priorities to help make the Financial System safer. Ill have more to say about these, and other priorities for safety and soundness, in the coming weeks and months. Let me turn now more directly to my other major objective as vice chair, which is to make the Financial System fairer. In the past, i have described the three essential elements of fairness in the Financial System as a threelegged stool because all three are necessary for any aspect of fairness to work. The three are financial capability, Financial Access, and Consumer Protection. In terms of financial capability, an important component is transparency in the cost of services, which means making sure consumers have the information they need to make good decisions. Along with other Bank Regulatory agencies, the Federal Reserve has a role to play in ensuring banks disclose the costs and explain the conditions on the services they provide. More broadly, though, it means basing policy on a deeper understanding of human decisionmaking, and the contexts in which households and businesses make those choices. 6 under Financial Inclusion, one example would be promoting access to lowcost and safe Banking Services for low and moderate income consumers such , as through local bank on initiatives. And Consumer Protection involves using supervision and regulation to fully implement laws to promote fair lending, Consumer Protection, and transparency in the Consumer Financial services marketplace. Let me say a bit about where innovation plays into this goal of making the Financial System fairer. We should welcome financial innovation as a positive force that can increase access and lower costs for individuals and businesses. That said, innovation can also introduce new risks for consumers. We have already seen occasions when uses of new technologies and data can raise serious concerns about violations of fair lending laws. As Innovative Financial products develop and grow rapidly, excitement can outrun the proper assessment of risk. As we have seen with the growth of crypto assets, in a rapidly rising and volatile market, participants may come to believe that they understand new products only to learn that they dont, and then suffer significant losses. Cryptoasset related activity, both outside and inside supervised banks, requires oversight so that people are fully aware of the risks they face. We plan to work with other Bank Regulatory agencies to ensure that crypto activity inside banks is well regulated, based on the principle of same risk, same activity, same regulation, regardless of the Technology Used for the activity. I plan to make sure that the crypto activity of banks that we supervise is subject to the necessary safeguards that protect the safety of the Banking System as well as bank customers. Banks engaged in cryptorelated activities need to have appropriate measures in place to manage novel risks associated with those activities and to ensure compliance with all relevant laws, including those related to money laundering. At a more basic level, we need to focus on access to fast, efficient digital payments. This is a matter both of efficiency and of fairness. Lowincome households can ill afford to wait days for their income checks to clear, nor can Small Businesses. A threeday payment delay is an annoyance to someone with savings and ample credit, but it is a costly burden, and sometimes a serious problem for others. And overdraft and insufficient funds fees hit lmi households hard. I have been working on issues of Financial Inclusion for a significant portion of my career as a public official and as an academic. I am so pleased with the progress made toward instant payments under the leadership of vice chair brainard and chair powell, and i am looking forward to doing whatever i can to support this work, including the launch of the fednow service. The Federal Reserve has a responsibility to facilitate payments that work well for everyone, and we are committed to doing so. Rounding out my discussion of access to Financial Services, i will end my remarks today by touching on the importance of the Community Reinvestment act. The cra, first passed in 1977, encourages insured depository institutions to meet the credit needs of the communities in which they are chartered, including low and moderate income neighborhoods consistent , with the safe and sound operation of such institutions. The cra was designed to address past abuses of Financial Institution such as redlining. The cra sends the unequivocal message that there is no place for discrimination in the Financial System, and that every community and every borrower deserve to be treated fairly. Earlier this year the occ, the fed, and the fdic jointly invited comment on a proposal designed to strengthen and modernize cra regulations to achieve the objectives of the law. I strongly support the goals of the proposal and look forward to contributing to the important work underway, again led by vice chair brainard. So, to wrap up, i have tried to lay out my approach and a bit of my nearterm agenda, as vice chair for supervision, for making the Financial System safer and fairer for households and businesses. As i said at the outset, i believe these goals are related and mutually reinforcing, so that progress in one area will advance efforts in the other. I have discussed a number of specific issues to illustrate these principles, but ill have more to say about these ideas, and other important reforms, in the coming weeks and months. Thank you. [applause] david thank you very much for that comprehensive agenda. What are you going to do in your second six weeks . Michael thats the right question. David i want to make sure people if im looking at my phone into the only way i can know the people asking questions online. I want to start with a question on Monetary Policy before we get to Financial Stability and it anchor regulations. It seems to me for much of the time, Monetary Policy is about leaving room for fixing mistake as the economy surprises as it often does. Its a business called risk management. Given that, what is your bigger worry now, that the fed will raise Interest Rates too much, hurt the economy and have to pull back sooner than planned or that you will not raise rates enough to restrain inflation and then end up having to raise them even more down the road . How do you weigh those . Michael i would say there is the basic fact that inflation in our country is far too high. Were not close to the Federal Reserves target for inflation. Im quite focused and the fed is focused on making sure we do the steps necessary, tempering inflation back down to its target. Im committed to doing that. I know my colleagues are committed to doing that. And we understand that in doing that, there may be a further slowdown in the economy or even as chair powell said some pain in the economy it is far worse where we are now let inflation continue to be too high. In terms of the balance of risk, i think the balance of risk on the side of making sure we keep at our commitment to fight inflation. David you have a review of how far the fed has to raise Interest Rates to bring inflation down . Michael im going to give you an answer that probably will not satisfy everyones curiosity about precise basis points that they should expect to see. But im going to be driven by the data as it comes in. And trying to understand the data, get a sense of where inflation is in a sense of where the labor market is and what is going on overall with prices. The information we have had todays conflicting. Ash today is conflicting today is conflicting. It will require humble work to figure it out. David ok. I think you pass that test. [laughter] i want to talk a bit about bank cap. In your footnotes to your speech, banks are a lot stronger than they were before the financial crisis that happened in 2008 and 2009. You talk about a holistic approach to capital, whether to review the supplementary leverage ratio which the fed promised to do in march 2021. Im curious, what are you looking at here . You think the level of capital is too low or eight is a question of reassigning how we assign capital requirements, what is this holistic review and is this a six week thing or a sixyear project . Michael its not a sixyear project. What we are doing is, this fall, taking a look at where we are with capital in the system, so that as we make judgments about the supplementary leverage ratio cyclical capital, its within an overall sense that, as capital in the system Strong Enough . Its stronger but the question is is it Strong Enough . We are looking at history. We are looking at models of what optimal capital levels look like in the literature. Were looking at responses to past crises. We are looking at what might be a better level or more appropriate level in the future. We will assess capital in that broader context. I have been very careful in my remarks not to comment on whether a rule in the future would need to be capital neutral. I dont think theres anything implicit in our review that would suggest that. We want to take the holistic view. David are you going to do one big package changing capital rules are you going to take that separately . Michael im not sure in terms of the approach with respect to our role or guidance or other measures, whether it will be altogether or sequenced. What we are trying to do were trying to do the review all at once. I will have some remarks i will give publicly at that point to lay out the direction i think capital should go in. We will do the rulemaking in that context. David remarks on that you are thinking about sometime this fall . So, much of the Financial Stress we have experienced in the last couple of years particularly at the beginning of the pandemic didnt involve the banks, but involve nonbanks financial to duchennes Financial Institutions. Im curious, what role you think you can play in that, in monitoring that part of the Financial System, whether we have adequate macro tools. Concentrating on the banks would not be sufficient. Michael i think we have to look at risks throughout the Financial System, not just with don not just within the banking sector. Its part of my job to help with that work. I think we have some windows into the nonbank Financial Institution world that are quite good. And other areas where we do not really have a even basic data and we would have to work on that in the future. The tools that we have with respect to entities that are not regulated by the fed or by Bank Regulators depends a bit on the technicality of where they fall in the system. Are the under the supervision of the ftc, where there might be an inability to take effective action directly. Or do they fall further within the regulatory permit or where they are avoiding the subject of regulation, the effort to get after them are more complicated . I think the answer to your question is it is essential we look at risk throughout the Financial System, including outside the banking sector, our tools for addressing that is mixed. David limited. In odd frank you gave the Financial Stability Oversight Council the authority to designate some institutions to which would have brought them under the purview of the fed. A combination of legal decisions that the Trump Administration made, that power has basically been neutered. Do you think that that is an important cannot be reinvigorated . Is that an important step . Michael i think its important to have an and vigorous financial spillover Oversight Council process and to have a process that would permit designation of nonbank firms if they could pose a risk to Financial Stability. I will use a little bit of jargon, but it can also use existing authorities. For example if it believes that there is a systemic payment settlement or clearance activity that can also be designated for supervision. And it and make recommendations to member agencies with respect to activities going on across more than one agency for further action. Its important that that process be used when needed. David do you think it has the potential to do something here . So far it has not done a whole lot . Michael i think it has the potential to take action here. There was time in history where it was much more aggressive about using the authorities. And i think though should be in the toolkit. David let me ask you a bit about a tradeoff and heron regulation. He spoke quite a bit about your remarks you spoke quite a bit in your remarks about having a strong Financial System to protect individual can mers and businesses and individual consumers and businesses. If you have too much regulation, you get stability of the graveyard. When you think about these tradeoffs, how what is going through your mind, how do you decide what is too much and what is not enough . Michael im not sure i put it as too much or not enough, do you have the appropriate level of regulation addressing the right goal . There is a tradeoff in doing that but it is not so much about the level of regulation but have you tailored what you are trying to do to do what is achievable that make sense . Innovation is essential for our economy. You dont want to choke off innovation, particularly with regulation. Sometimes, incumbents use regulations to block new entrants into the system. You want to be careful you are not blocking in the power of the dinosaurs. So, innovation is absolutely critical. But for innovation to be successful in needs guardrails. Those guardrails have to be clear. After protect consumers and they they have to protect consumers and the safety of the Financial System. David youve spoken your remarks about how important the role you assigned to Financial Inclusion. There are a couple of examples that you gave, they had to do with making sure that banks and other regulated financial situations are serving the entire spectrum of american consumers. The bank on Community Reinvestment act and so forth. Im curious whether you think that broadly defined decentralized finance, crypto, is the way to either get better Financial Inclusion or provide the competition that forces to regulated system to do it . Michael thats a great question. Its constituted, these various systems of distributed finance, and also crypto are not really predominantly set up to serve and are not serving low and moderate income houses. It is not a Financial Access set of activities. And even worse, in some cases, where it is reaching individuals of modest means, theyre potentially subject to misrepresentation, defraud, theft of their assets, while the gyrations of the asset values of cryptocurrency wild at gyrations of the acid valleys of coda currency. Ash crypto currency cryptocurrency. The Underlying Technology may be used for the purposes of expanding access or of lowering the cost of financial or introducing competition. Theres a very large gap between the idealized form of what might happen with lower cost Payment System and what we currently have in the crypto markets which is not that. So, as your question, we are thinking about Financial Access issues as in the first 10 of ways to do that, for me first 10 ways to do that for me would not be starting with crypto. David you mention stable coins in your remarks and thought we needed legislation. Two questions on that. Is there anything that can be done to regulate stable coins, short of legislation . Secondly, how do you address the question of a centralbank Digital Currency, do we need one or not . Michael with respect to the first question there are existing authorities at the number of regulatory agencies to deal with these issues. I think it is preferable for congress to act and step in and describe the framework that Congress Make sense, balancing the risk and opportunities that coinbase table kueng represents stable coin represents. There is authority in the existing regulatory structure to address these issues. They can be and should be used where appropriate. With active Digital Currency i think that is a separate category. Many of the potential use cases for centralbank Digital Currency are supplements to the kinds of things people are thinking about using, private currency for. Regardless of whatever once he uses are about private stable coins, you should think about centralbank Digital Currency on its own terms. I think what makes sense is what the fed is doing now. Setting the issue, getting deep in ed, looking at the technical issues, looking at what it will take to implement a centralbank Digital Currency if a decision were made to move forward to think about possible use cases and what those accents for. The what those make sense for. As jay powell has suggested, i agree it makes sense, i talked to the executive branch, make sure we are on the same page before undertaking something that is significant. David on have any urgent need for the fed you dont see an urgent need for the fed it michael i dont. The chinese are already deploying the former centralbank Digital Currency. They have been piloting for quite a while. They, for their own reasons will continue to do that for domestic reasons as well. It is their own views about the role of r b and the Global Economy ash of the role and the Global Economy. David the fed has made that point is it easier for the chinese to freeze their assets if they are digital . The line if they are digital . I want you to talk about your remarks on climate. Why exactly what exactly are you talking about doing here in terms of the stress scenarios on the Financial System . Michael next year we are going to launch this pilot. The pilot will be to examine how Financial Institutions manage their own risks with respect to Climate Change both with what people call transition risks and physical risks. Physical risk is what Climate Change does to our lived in environment and therefore to our economy. The transition risk is the risk that happens between now and some future point in time as we moved to as we move to a different world. We are going to be exploring both of those. In this Scenario Analysis, were going to be working with the just a handful of the very largest Financial Institutions in the country. It is going to be a very bottomup effort. If you think about stress testing today, and what we are thinking about doing over here, the spell of work. Stress testing is very topdown in terms of inputs from the Federal Reserve, modeling. It has direct implications for capital and for supervision. And its. A systematic effort what were talking about is very different from that. Its the beginning of beginning to understand how these risks are managed. Its going to be very bottomup. We are going to be working with the Financial Institutions to great scenarios. We will be looking at how the Financial Institutions model, very early stage. It will not have direct capital or supervisory applications. Its an exercise to help us understand how the Financial Institutions are thinking about these risks and help us begin developing capacity in the space. David as you know, a lot of people for good reason are worried about the risk that Climate Change poses and the inability of our political system to grapple with it in a fundamental way. Inflation reduction act, one move in the direction of dealing with it. Sometimes those people think, well, whats the point of having a Federal Reserve, an independent agency which is supposed to worry about the big picture if you dont do more on Climate Change . What is it that you see on Climate Change and what is it that you think is someone elses job . Michael i think we have important work to do here. But it is narrow work. We are going to be very focused on to what extent could Climate Change poses longterm risks to the Financial Institutions we supervise into the Financial Systems as a whole. Its risk focused we will not get into broader questions of climate policy. Thats for other agencies and for the congress and president to get involved with. You will not see us tell firms when run to the sector or do not run to the sector or do credit allocation, or try to put the thumb on the scale on how Financial Institutions about these issues. We want Financial Institutions to be thinking about financial risk and we will be supervising for how they think about it. David do you think the markets underestimate the risk . And the physical risks now or has it already factored in . Michael i think where such an early stage in this process that i could not begin to answer your question. One of the things were going to learn from this pilot exercises that at lease to how Financial Institutions think about these risks and we will be able to do that in a systematic way. David i want to turn to some questions from the audience. My colleagues have microphones. We will take two or three questions and we will let the vice chair enter them. If you have a question raise your hand. The question ends with a question mark. If you dont have any i have plenty more. One here. Identify yourself. Michael. Vice chair supervision you are a voting member, i am wondering if you should bring a unique regulatory experience to the Monetary Policy votes or do you think your job is more to focus on the regulatory issues and be more of a team player, with others on the committee for Monetary Policy . David you want to ask a question, stephanie . No . Hi, there. I wrote my question down so i could sit faster. You have mentioned fairness many times, it reminds me of my back on his refugee from iran. I get worried when a Government Entity or personal uses that as a justification for the reglet toward policies. Inflation has not gone up reglet toward policies, inflation is not gone down regulatory policies, inflation has not gone down. My question is, if you think these fair policies are worth the fact, they will make the fed crash the economy in six months to a year, using your Interest Rates and the Interest Rate is 2. 5, yum not even touched the market yet. Im wondering what is your take on that . Michael the first question is are you a Monetary Policy maker or regulator . Michael t that is an interesting way of thinking about it. I guess i dont really have the luxury of being only one way or the other. The drive is vice chair and governor on the Federal Reserve or the job is vice chair and governor on the Federal Reserve board. I have to think about both. Thats the way i think about my job. In terms of having an independent voice for being a team player, i think you can do both. The fed is a collaborative institution historically. I would like to keep it that way. One of the reasons it is an Effective Institution is that each of the government institutions has their own independent voice and ability to make their own decisions, and that makes for really good, respectful views and dialogue, and i think its more likely the federal the Federal Reserve will end up with the result that is more effective. Michael let me david let me reframe the question a little bit. When you think about fairness and Monetary Policy, what is the implication of one over the other . Michael i think that Monetary Policy, to be effective, has to meet the dual mandate that congress set out for the fed, which is to care about price stability and to care about employment. Both of those are really critical for having a functioning economy. We cannot have an economy that works for everybody and an economy that is fair if inflation is too high and running out of control. We cannot have an economy that works for everybody if we have super high unemployment, so it is the job of the Federal Reserve to take seriously both of those congressional mandates and that, to me, in terms of Monetary Policy, would be a fair way of thinking about Monetary Policy. Michael from the back . Thank you. You have said a couple times that Climate Change, you are very early on in the process, but your colleagues across the atlantic are a little farther ahead. I was wondering what you are taking away from their endings and their initial supervisory surveys and sort of what you are doing to use their weapons to accelerate the work youre doing on Climate Change. Michael thank you. Can you pass it to the woman to your right . Thank you. Following up, you have expressed concern for low and moderate income communities. You have expressed worry about Climate Change. It is clear in this context that Community Banks, smaller banks, regional banks are disproportionately threatened by Climate Change, and those are the banks these communities you have written about rely on most. At the end of the day, tackling the risks they face will require reducing emissions. It is pretty clear. They are limited in their capacity to deal with these risks otherwise. My question for you is what is the fed thinking about doing to deal with these finance emissions to help banks present transition away from that in a way that is financebased. Thank you. Michael two Great Questions on climate finance and Climate Change more broadly. Let me say at the outset at the fed we are definitely in conversation with the European Central bank and with the bank of england and with other regulators around the world about Climate Change issues. I was just in london at a meeting with one of the committees of the Financial Stability board, and we were talking about Climate Change as one of the issues that we are all working on. Different regulators have different statutory mandates. Some regulators have an explicit mandate with respect to the environment that changes the way they think about their role with respect to the broad range of issues that might be taken on. I would say in our conversations with others who have looked at Scenario Analysis that they, too, are also really early in their work. They, too, with think of their work as really provisional, so we are learning from it, but i would still describe it as early in the process. Let me say with respect to Community Banks, we are quite a way from being able to offer even good advice to Community Banks on the issue of Climate Change, so the work that we are focused on and will be focused on this coming year is really focused at the very largest institutions, a handful of the globally systemic important banks to begin to wrap our arms around this and to think in a more systematic way about the risk that Climate Change could post to the Financial System or to the individual banks. We will also be issuing guidance, joining with the fbi see and the otc, on how to help banks develop the risk and admit systems they need with respect to climate financing, and that will be for large institutions, so many more institutions in the country, and we want to be i think in doing this, cognizant, as you said, of the risks that Community Banks face and the risks that low and moderate income people face, but also cognizant of the burdens that Community Banks face when we decide to regulate any area, so we want to be appropriately cautious, but particularly as we are so early in our own work in this space. Michael a question from someone online asks do you worry at all that strengthening the Community Reinvestment bank will just become a burden and Community Bank will simply withdraw from communities rather than comply . Michael that has not been my experience. I have been working on issues related to the Community Reinvestment act for a quartercentury, and my sense is that overall it has had a positive impact on both banks and on local communities. That is what the Research Shows to date. Some of it i have contributed to and some of it others have done. I think in looking at this proposal for strengthening the Community Reinvestment act, we got in lots of Public Comment on the draft, and we will take that into account. From the regulated sector, from Consumer Community groups, from low income communities, from civil rights organizations, and that Public Comment helps us. It makes us smarter and better, and we will use it to make sure that the final rule is as good as we can make it, but i think that when we are done, it will have a very positive impact on lending in low and moderate income communities. David are you at all concerned that the annual stress test, the conventional one on climate, may become too predictable . Michael i think stress testing is a critical part of our overall framework for testing the resilience of the Financial System and the capital banks need to be healthy and thrive. I think the tests need to continue to evolve. They are a lot different now than they were a few years ago. They are a lot different they were a lot different a few years ago than they were when they were first done in the middle of the Global Financial crisis, so i think it is critical that they continue to evolve. It is one of the areas as part of this holistic review im taking a careful look at. Make sure the stress test stays stressful. They are supposed to be stressful, they are supposed to be tough. David make that a little bumper sticker. Stress tests should be stressful. Got time for a couple more . Appreciate your remarks. Living wills resolution plans are one of the key pillars of god frank and Financial Stability overall. Banks went through the exercise, i guess 15 months ago they submitted them one of the key pillars of donfrank doddfrank. Not also overlaps a little bit with pending merger reviews. Two of the top 10 biggest banks have been approved by merger in the last couple of years. Another two are pending. Any consideration to apply question one, what do you do with living wills in your inbox . Question two, have you thought about applying a living will requirement in the merger review process . Michael i will not comment on any particular firm. We are looking broadly, as i mentioned in my prepared remarks, at the resolve ability of large banks, meaning banks that are not globally systemic banks but are large in relation to others in the system. We are doing that. We are also, as i mentioned in my remarks, taking a closer look at resolution plans. My inbox, as you can imagine, is filled, but certainly, that is near the top. As i said, i think resolveability of large banks is a really critical part of the postdoddfrank landscape. Some of the reforms that were put in place i want to make sure are working and working well and as intended. David you talked about rethinking merger review standards. Is there some timeline on that . Michael we are in the process of doing that right now. I have not decided yet what form we are going to take to enunciate a set of principles we might have learned, but i will have some public opportunity to do that. Some of the output of that might relate to how we look at individual firms. Some of it might relate to a broader set of guidance. Some of it might relate to resolveability, as dennis suggested. David i think theres a question right behind dennis. Want to stand up so they can see you . My question is about cbc c bdcs. My question is about digital euros. Europeans are more eager in terms of cbdcs, and do you think there is a chance digital euros might undermine u. S. Supremacy . Michael there are multiple reasons the u. S. Dollar dominates the world of returns, its global currency status, but it is not exclusive. There is a role for other currencies in global trade, but when you think about the u. S. Dollar, it depends on things like stable policy and a strong system of governance, and the fact that in international trade, most people want to negotiate their terms in dollars , so the factors that go into that, some of that are about might be related one day to the question, can i use a token in this transaction or not . But thats not day today or tomorrow issue. That might be an issue for some years down the road, so i think it is a good idea for the u. S. To explore a cbdc. Getting the research done, getting the technical capacity done, understanding the policy tradeoffs, thinking about issues of privacy, what would be appropriate and not appropriate in use cases. The Federal Reserve reports have focused on intermediated versions of the central bank Digital Currency rather than directly offering Digital Currency. I think that kind of distinction makes sense. Im all for doing the work, but im not feeling the need im not in crisis mode about the need to issue a cbdc. David is there anything you are in crisis mode about . [laughter] i want to thank michael for coming here today, for sharing his thoughts, for laying out his agenda for the next six speeches hes going to give. We welcome you back at any time, and i want to thank all of you for coming. As i said earlier, it is good to see so many people here at brookings in person. Thank you all. [applause] [captions Copyright National cable satellite corp. 2022] [captioning performed by the national captioning institute, which is responsible for its caption content and accuracy. Visit ncicap. Org]