November 17, 2023 • 55 mins
Michael Barr is a busy man these days. As the Federal Reserve's vice-chair for supervision, he's looking at ways of making the financial system safer through the next-generation of US banking regulation, known as the Basel "endgame" proposal. In July, he also unveiled the central bank's new real-time payment settlement system for banks, called FedNow, after years of development. Of course, all of this is happening at an interesting time for banking. This year saw the collapse of three banks following deposit runs. There have been big losses on bond portfolios as interest rates rise, a cyberattack that briefly unsettled the US Treasury market, and there's still a lot of general uncertainty over the direction of the US economy. In this episode, which was recorded live onstage at The Clearing House annual conference in New York, we speak to Barr about how he's thinking about the payments space, big changes to bank regulation, and the macro outlook.
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:10):
Hello, and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. So you are
about to listen to a very special episode. This is
a live conversation that we recorded with Michael Barr, the
fed's Vice Chair for Supervision, at the Clearinghouse Annual Conference
in New York on November seventeenth.
Speaker 2 (00:31):
What should we talk about? There's nothing going on.
Speaker 1 (00:33):
It's not like there's been any development in payments or
bank regulation. It's kind of boring.
Speaker 3 (00:38):
Yeah, I don't know.
Speaker 1 (00:39):
No, Okay, there is a lot to talk about, so
I should get started right away.
Speaker 2 (00:44):
Why don't we start with payments.
Speaker 1 (00:45):
We are at the Clearinghouse conference, so that's probably a
good place to start. You know, you launched FED now,
the new real time payments clearing system, a few months
ago in the summer.
Speaker 2 (00:57):
How's that going.
Speaker 1 (00:57):
What's the takeup been like and what have you learned
since launching that?
Speaker 3 (01:01):
Well? I think it's going well. I think the important
thing to remember about take up is that it's going
to take a long time. When we've seen any payments
innovation in our economy, it takes a long time for
people to get used to the idea, to develop it,
to figure out how they're going to use it. But
right now, what we've done is built the rails, and
those rails can be used by the making sector to
(01:23):
provide new services to their customers, to households and businesses.
Take up really requires banks to decide that their customers
really want the service, and then they can innovate on
top of it. And that's what we're looking forward to
over time.
Speaker 4 (01:38):
Do you have any way of gauging sitting aside that
it's going to take a while. It's what constitutes a
benchmark that we should watch for of Okay, this is
taking up again, sitting aside that we maybe decades, but
what should we be looking out for to see is this.
Speaker 3 (01:54):
Going well again? I think the right way to think
about this is over the very long term. If you
look to think about any payments innovation, whether it's the
development of banknotes or the rise of checks in the
seventeen hundreds, or really any kind of innovation we've seen
in payments, they take a very long time to build
a network. Once that network gets built and you have scale,
(02:18):
then it really takes off and everybody assumes it's been
that way forever. So we're really at the very early
stages of this.
Speaker 1 (02:25):
So speaking of development, I am not a payments expert.
I used to know more about the space when I
was a banking correspondent, but that was like more than
ten years ago at this point. But I do remember
ten years ago the Clearinghouse also developed its own real
time payment system. Is it weird that we've ended up
(02:46):
with two basically a publicly owned one and a sort
of privately owned.
Speaker 3 (02:50):
We actually have a very long history in this country
of having both public rails and private rails. That's the
way most of our payments technology has evolved over time,
and most of our payment systems today have both public
aspects and private aspects. We really think of these things
as complementary. We work really closely together. You know, David
(03:11):
and Mark were taking selfies yesterday. These are close collaborations.
Speaker 2 (03:16):
Yes, glad we could be here to facilitate it.
Speaker 1 (03:19):
But just on this note, I mean, could you get
a situation where, for instance, a lot of the higher
volume payments from the big banks are traveling along the
clearinghouse pipes, whereas a lot of the smaller payments from
smaller banks are going along the public rails basically a
fracturing or a fragmentation of the system.
Speaker 3 (03:37):
I don't think that if we ended up that way,
I don't think that would be a fracturing. We have
lots of systems now where larger volume payments travel one
route and smaller volume payments travel the other. That could
end up being the efficient way to do it. It would
be fine if it ended up that way. It also
would be fine if there were a mix of transactions
on both kinds of rails. They really are complementary. I
(04:00):
think that, you know, if you move forward many years,
we would expect that banks would have access to both
kinds of rails. They could choose which rail to send
an individual payment on. That would be great.
Speaker 4 (04:12):
Why are they complementary because if they do roughly the
same thing, and I would to it that most payment
systems essentially benefit from network effects and the bigger one
makes it more valuable to use that one. Why wouldn't
we assume that it's just going to be one wins
and one loses.
Speaker 3 (04:29):
Well, you know, if you again, if you look at
existing payment systems today, we have private rails for ACCH,
we have public rails for ACCH. I don't foresee this
being a conflict. I really do think that banks are
going to be able to have optionality in the systems
that they use, and they might use different rails for
different kinds of payments.
Speaker 1 (04:49):
Why did it take so long to develop a real
time payment system? Because again, I mean I spent a
lot of time in the UK. I think the UK
had something equivalent in like two thousand and seven, and
we're here in twenty twenty three just launching it.
Speaker 3 (05:03):
It has taken a long time. I would agree with that. Look,
the Federal Reserve is a conservative institution, and I think
that's appropriate. You know, people expect us to be able
to provide trustworthy, reliable services, and we earn that trust
by being very, very careful about everything we do, and
(05:26):
that's true with FED now as well.
Speaker 4 (05:28):
Does the fact that there are these two competing payment
systems or maybe complementary what ambiguity about which one will
gather more volume and for which type of payments? Do
you think it slows down adoption at all in terms
of a bank having to decide which one they're going
to invest their time and energy or turning into a
retail facing application of it, and thinking about which one
(05:51):
is going to win.
Speaker 3 (05:53):
You know what. My expectation is that banks will end
up again over time, probably adopting both the public rails
and the private rails and using them for complementary kinds
of services. It's going to take a time, you know,
I would say, especially for community banks. One of the
key issues here is making sure that core service providers
(06:13):
get up to speed quickly and offer the service to
all the community banks in a fair and equal and
accessible way. And so we are very focused on working
with those service providers to make sure they're offering that
service to community banks.
Speaker 1 (06:27):
Can you give us a sense of the take up
and the expansion so far?
Speaker 3 (06:31):
Now, what I would say is you should be thinking
about this. It's taking years to do. Take Up is
always slow at the start. It's going according to what
we thought, but that's very slow, and we expect it
to be slow at the beginning.
Speaker 4 (06:45):
Will you come back on our podcasts ten years to us.
Speaker 3 (06:49):
I would be delighted to That would be really fun.
Speaker 1 (06:51):
Okay, well, I mean talking about long time scales. There
is a sense of irony in that the FED was
working on this for a long time and then they
release it in the summer of twenty twenty three, right
after we've seen essentially a bank run on Silicon Valley Bank,
and I've seen some commentary about a potential tension here.
(07:13):
You're making real time payments possible more instantaneous to posit
withdrawals twenty four to seven at a time when deposit
withdrawals have become problematic. I think Joe abat Over at
Barclay's was talking about how you're basically allowing banks to
kind of slim down their inventory in really efficient ways,
but in a way that, as we learned from the pandemic,
(07:37):
could be problematic if something happens. How are you balancing
that tension?
Speaker 3 (07:42):
Well, you know, if you look at the situation today,
Obviously Silicon Valley Bank failed without any new technology. People
were able to withdraw it very, very quickly. The real
issue in Silicon Valley Bank was deep mismanagement of interest
rate risk and liquidity risk. The highly networked nature of
their deposit base. The technology side of that made it
(08:07):
possible for them to withdraw, but not in any fancy
new technology technology that's been around since the nineteen seventies.
So really, what we need to do is focus on
the fundamentals for banks to make sure that they are
appropriately managing their risks with respect to the new technology.
With respect to fed now, the individual banks can set
their own limits on the way in which they use
(08:30):
the technology. They can set size limits if they want,
they can cap it. So I don't think it'll introduce
new significant risks into the system. The risks and the
system that they're there, we need to make sure we
manage appropriately.
Speaker 4 (08:43):
Setting aside, whether it's fed now or the private sector
clearing house one in the US. Does the fact that
arguably banks make a lot of money from the lack
of real time payments, whether it's overdraft fees, laid fees,
there's a lot of money in the business of people
not making timely payments. I also wonder maybe it's off
(09:04):
the mark, but I wonder, you know, we're in a
high interest rate environment, so people want to hold on
cash maybe for a few extra days. Does that when
we're thinking about timelines, do you think that that affects
the trajectory of these timelines the business of slow payments?
Speaker 3 (09:16):
Basically, I do think we have to, you know, look
forward to a system in which businesses and households can
get their funds right away we might end up in
a situation where we can have a significant effect in
reducing overdraft fees, insufficient fund fees, a situation where a
small business can get paid right away for the work
(09:38):
they've done. That would be a huge benefit for American society.
And so I do think that one of the potential
upside benefits have fed now is the ability to actually
deliver for households and businesses the kinds of banking services
that they want and that would reduce risk to them.
I think that's a wonderful thing for society.
Speaker 2 (10:01):
Just in terms of the payment space.
Speaker 1 (10:03):
You've finally unveiled this what's on the agenda Now, what
other payments improvements could be made for the US.
Speaker 3 (10:10):
Well, I think it's a great question. Look, I said
before that we're a very conservative institution, and we are,
but we also need to continue to think about innovation.
Fed now will continue to be an important part of
the way that we innovate. So we're looking to add
additional features to fed now over time, and those features
will make it easier for banks to use, better, for
(10:32):
banks to use, better for banks to offer to households
and businesses. I think those kinds of innovations are really important.
And then we're also doing very basic research in newer
technologies around distributed ledger technology using encryption techniques to send
payments back and forth. That very basic research might help
(10:53):
us to continue to innovate in our payment systems.
Speaker 4 (10:56):
Since you mentioned digital ledger technologies, people talk about other
site other types of payments, central bank digital currencies. I
always have a hard time wrapping my head around I
guess the why of some of this. I mean, I
understand these are interesting technologies maybe, but why, Like what
is what do you feel is the impulse when people
(11:18):
talk about exploring is some of these new I don't
know paradigms of money or paradigms of payments, what people
hope to accomplish some of that.
Speaker 3 (11:26):
You know, it's hard for me to say what lots
of other people think, but I'll just say just from
my perspective, you know, I think the research is important
because we might uncover ways to be much more efficient
with the payment system, and payment system efficiency can help
banks and households and businesses conduct their transactions in a
(11:46):
lower cost way. So I'm not super into all the
very large claims people make for Central Bank digital currency.
But I do think that the underlying technology, if it
can lower costs, improve efficiency, those things are worth researching.
Speaker 2 (12:18):
Joe, you want to talk about bank reg let's talk
about bankreg all right.
Speaker 1 (12:22):
So again, I used to be a former banking correspondent,
and I remember whenever I pitched a story about bank
regulation to my editors, their eyes would just sort of
glaze over. But now fix it now, Well, I don't
have to, because now you know there are adverts about basil.
Speaker 2 (12:37):
Playing during NFL games.
Speaker 4 (12:39):
Which is our own listeners are often our own listeners
of the podcast often talking about learning a lot about
basil endgames.
Speaker 1 (12:46):
Yeah, this is something I never thought I would see
in my lifetime. I feel like it's a slippery slope
to the point where everyone starts including their position on
the basil endgame proposals in their like Tinder profile or
something like that.
Speaker 2 (12:57):
It's a new talking point.
Speaker 1 (12:58):
But have you been surprised by the amount of discussion
that this is generating.
Speaker 3 (13:03):
I have been surprised by it. I mean, I do
think that some of the advertisements and things you're seeing
in the public are extremely unusual for bank regulation. Normally,
we issue a proposal and then we get very detailed
comment letters back, and we take those comment letters into
account and we finalize our rule. That's sort of the
(13:24):
normal process. So seeing ads at football games, that's that's
kind of unusual.
Speaker 4 (13:29):
How does it feed through to you? I'm always actually
curious when an industry group does something like this, or
even when I see an ad for some you know,
some sort of B to B software or something. I'm
not the how does it actually filter through you in
your job in terms of okay, actually decision and the
pressure that maybe builds on you.
Speaker 3 (13:49):
You know, like in the Peanuts when adults talk and
it goes.
Speaker 4 (13:54):
Yeah, that's what they're accomplishing. Money well, spend well.
Speaker 1 (14:00):
I mean, in fairness, this is a big deal for banks,
and I think there is some discussion around making the
cost of capital more expensive or less available for obvious reasons.
And one of the criticisms that you hear now is
this is going to make mortgages more expensive for Americans.
How would you tackle that particular issue or that particular criticism.
Speaker 3 (14:24):
Look, you know, any time that you change regulation, there
are costs and benefits to that regulation. The big benefit
of having higher capital is that you make the banking
system more resilient. You know, one of the things that
we saw in the global financial crisis is that it
really crushed the American economy. It caused millions of households
(14:45):
to lose their homes to go into foreclosure. That financial
crisis shuttered American businesses. It called massive unemployment, huge arm
of the economy. We want to make sure that the
banking system doesn't crush households and businesses again. At the
same time, when you have higher capital levels, that increases
the private cost to banks. Banks use more equity and
(15:09):
a little bit less debt to fund their mortgages or
their trading activity or the like. The capital propose that
we've put forward mostly changes the rules for trading and
other non lending activity. A very small portion is actually
related to lending. And when you look at that increased
(15:29):
cost to the banks with respect to capital, that translates
on average for a typical loan to an increase if
all of it is passed through to the borrow, or
if there's no competition at all and all of it
is passed through to the borrow, the average increase would
be zero point zero three percent. So it's a very
(15:52):
very small change in the cost of credit and a
significant increase in the resiliency of the banking system. Just
on the.
Speaker 1 (15:59):
Point about the different ways that big banks versus smaller
banks are treated. I mean, my understanding is the US
is one of the only jurisdictions that actually created carveouts
from basel for smaller banks. And I guess, going back
to the Silicon Valley Bank example, I mean, given where
trouble in the banking system was this year, is that
(16:21):
something we should still be doing.
Speaker 3 (16:23):
Well. You raise an excellent point, so you know what
we've done in this proposal is say that those stricter
capital requirements should not only apply to the top eight
banks in the country, but they should also apply to
banks that are over one hundred billion. So there are
thirty seven banks in the country that are over one
hundred billion. There aren't that many. We have over four
(16:45):
thousand banks in the banking system, so less than forty
out of four thousand are covered. And it would have
covered institutions like Silicon Valley Bank if we had had
this place in place before. And I think one of
the lessons from that experience was that it's important for
large banks that might have an effect more broadly on
(17:05):
the economy to have that real resilience to them. And
you know, with respect to Silicon Valley Bank, they didn't
have to account for the unrealized losses on their balance
sheet reduction in value of securities, and under our proposal
they those institutions at that size would need to account
(17:27):
for that.
Speaker 4 (17:27):
Now, I'd want to jump ahead too much. And it
was still a regulatory question. But at the FMC, at
the FED, do you think much about the interplay of
rate policy and financial stability because or regulation? Because I
feel like often we talk about these two different things.
There's the supervisory aspect of the FED, the regulation of
(17:48):
the banks, et cetera. And then there's monetary policy and
that's economics. But as we saw with SVB, they can
interplay and the loss is born on long term debt
or other holdings can become financial stability issues. How much
do those two conversations overseect in your that word over
sect in your world where you think about the stability
(18:08):
aspects of economic policy choices, I think you.
Speaker 1 (18:11):
Mean overlap and intersect.
Speaker 3 (18:13):
Over Yes, they both overlap and intersect. So no, I
think it's a great point. So you know, first of all,
I have two jobs. I'm a governor and therefore sit
on the Federal Open Markets Committee, and I'm the vice
chair for supervision, and so in my own you know,
personal responsibilities, those those are quite oversecting. But also more broadly,
(18:39):
for the FMC and for the Board, we care about
both both issues. Obviously, we have a clear monetary policy mission.
We're going to bring inflation down to two percent. That's
our job. We're going to do it, and we also
need to understand that, and do understand that as interest
rates rise, that changes dynamics in the banking system and
(19:01):
the financial system. We're really attentive to those changing dynamics. Obviously,
if we don't have a functioning financial system, we don't
have a functioning economy, and so we have to care
about financial stability risks and the system. We do regularly
monitor these. We have regular reports from our financial stability staff,
not only internally at the Board, but also to the FMC.
(19:24):
We have an opportunity for members of the FMC to
comment on financial stability issues as we have our discussions.
So these things really do go together.
Speaker 1 (19:35):
You know. Joe brought up the fact that there are
supervisory functions financial stability functions market functions. Just going back
to the example of Silicon Valley Bank, it seems like
part of the issue here was supervisory. So even though
you could see that there was a capital problem, you
could see the mark to market losses coming through on
the balance sheet some months before the bank actually went
(19:58):
down in four users didn't raise those concerns, and they
certainly didn't force a capital raised by SBB. Do you
think there's more to be done on the supervisory front,
maybe changing the culture of some of those supervisors so
that they feel more comfortable, more willing, whatever, for whatever reason,
to actually raise these concerns at the appropriate time.
Speaker 3 (20:21):
I think you raise a really important point. And you know,
we issued a report right after SVB failed, and one
of the findings of the report was that supervisors identified
the risks at the bank, but they didn't feel empowered
to push hard enough to get the bank to take action.
And so one of the things that we're making sure
of is that supervisors know that they should act with
(20:44):
speed and with force and with agility when risks weren't
that that kind of action. It does take a change
of culture, It does require us to really make sure
that that examiners feel supported and empowered to take that step.
We want to make sure that they're trained and that
they have guidance to to act forcefully. And I do
(21:07):
think that all these measures are really critical to making
sure we have a supervisory system that's effective. Now. You know,
of course, at the beginning and end of the day,
you know, bank management and the board of directors of
the bank are responsible for running the institution, and you know,
we're not able to come in and run the bank.
For bank managers, that's their job to do. And in
(21:28):
this case, in the case of SVB and some other banks,
the banks really sorely mismanaged both interest rate risk and
liquidity risk, and they did things that you know, in
retrospect you kind of are hedge scratchers. You know, they had,
for example, some hedges on some of their interest rate
risk and they took those off.
Speaker 1 (21:50):
I saw the internal presentation where they talked about doing that,
and it was basically like, well, we have these hedges,
they're expensive. We don't think the Fed's going to raise rates,
so why don't we make some more money.
Speaker 2 (22:01):
It was literally that.
Speaker 3 (22:02):
Yeah, and you know, it does go to this question
of you know, compensation they were really focused on short
term profits and not looking at all on long term risks,
and that really is inconsistent with the approach that we
require of banks to have compensation aligned not just with
how a bank is doing in the short term in
(22:23):
term profits, but also thinking long term about risk management.
Speaker 4 (22:26):
So, just on this point, particularly about culture of supervision,
can in you know, March twenty twenty four or March
twenty twenty five down the road, can you talk about
what specific is being done now such that in the
future the culture is better.
Speaker 3 (22:42):
Now this is there's a lot of work going on,
you know. One of the things that we're doing is
again making sure that examiners feel empowered to act on
the basis of the information they have in front of
them in a timely way. Make sure that they have
the tools to put in place mitigants if a firm
is getting itself into trouble and the like. We want
(23:05):
to make sure that we have a system that escalates
appropriately so that if there are significant risks, you don't
wait years before action is taken on those. We're making
sure that examiners have the training they need to take
action when they need it. And you know, in the
current environment. We're focused on things like interest rate risk,
(23:26):
liquidity risk, credit risk, particularly in the office sector, and cybersecurity,
which is just a fundamental risk that many banks are
exposed to.
Speaker 1 (23:36):
I definitely want to talk a little bit more about
some of those individual risks, but just on interest rates. So,
you know, we talked about Silicon Valley and the fact
that they didn't think the FED was going to raise rates,
even though I would argue looking at FED speeches for
most of twenty twenty two and into twenty twenty three,
there was a lot of discussion about we are raising rates.
Speaker 2 (23:58):
But that said, we have been in this.
Speaker 1 (24:00):
Sort of weird environment where the economic outcomes seem almost binary,
at least if you read financial commentary.
Speaker 2 (24:09):
So going into.
Speaker 1 (24:09):
Twenty twenty three, it felt like the two options were
either soft landing or massive recession, and I think if
you're a bank, it's kind of hard to juggle those
two things. Is there anything that the FED can do
more on the sort of forward guidance side to minimize
(24:30):
interest rate risk? So aside from the basel endgame proposals
in terms of communications, is there more.
Speaker 4 (24:36):
You can do?
Speaker 3 (24:37):
Well? You know, first let me just say, with respect
to interest rate risk. We expect banks to be able
to manage interestrate risk, whether rates are rising or falling.
That's part of prudent risk management. The feder Reserve does
communicate quite often about the communicating right now about the
path of interest rates. The FMC every other meeting puts
(24:57):
out a summary of economic projections that are designed to
show what each individual member of the FMC believes about
the path going forward for the economy. It's not a forecast,
it's not a collective judgment or consensus document, but it
does let the public know what each individual member of
(25:19):
the FMC is thinking about the future path for monetary policy.
I think Chair Pale has made it clear that we're
going to need to hold interest rates at their peak
level for some time in order to make sure that
we're on the right path to get inflation back to
two percent, and so I do think that kind of
communication can help the market, can help the economy, can
(25:41):
help businesses plan for the future. Of course, we're all
taking in information in real time. We do need to
be dependent on the data we receive. The data we
receive updates helps us update our forecasts for the future.
And we are living in an uncertain time endemic caused
(26:01):
significant changes to our economy, and those are still working
their way through the system.
Speaker 4 (26:07):
I think we were going to throw in a couple
of macro questions at the end, but just since we're
talking about diary. So in the last few weeks, we
had a non farm payrolls report that came in a
little bit weaker than expected, continuing continuous jobless claims, highest
level of the year, close to highest level in two years.
CPI report that came in pretty clearly cooler than expected.
(26:29):
As the FOMC member, how is your thinking on the
economy right now and the appropriateness of Fed's policy stance
where it is right now?
Speaker 3 (26:36):
Thank you. Look, we take all this data as it
comes in, and we're very data dependent, but we're also
not dependent on any one single data point. So I
said three, yes, So I think it's you know, I
think it's useful for us to take that information in.
You know, certainly, the information that we've had recently suggests
that we're moving into better balance on the risk between
(27:00):
overtightening and under tightening, and I think that's quite encouraging.
So we're likely at or near the peak of where
we need to be in terms of having a sufficiently
restrictive stance of monetary policy that we'll sustainably bring inflation
down to two percent. And I think the recent economic
readings reinforce my view that that is probably correct.
Speaker 1 (27:24):
What's your favorite or most compelling indicator right now for
the direction of the economy. This is desert island indicators.
If you had to pick one, what would you.
Speaker 2 (27:34):
Bring with you?
Speaker 3 (27:35):
So you know, it's a terrific question that I'm not
going to answer.
Speaker 1 (27:40):
Those are always the best questions, the ones that don't
get answered.
Speaker 3 (27:42):
You know, because it really goes back to my point earlier.
The pandemic really did significantly disrupt our economy, and it
disrupted many of the ways that we think about economic
relationships in our economy, and so it does require us
to really look at a very broad range of indicators
as they come in and not just a single data
(28:06):
point as evidence of you know, now, I know that
we're in the right place. So we're very I would
say I am, and generally as a committee we are
cautious about overinterpreting anyone data point.
Speaker 4 (28:20):
Not that anyone ask, but mine would be claims because
I figure if I'm on a desert island. I don't know,
wait it to a whole month for a data point. I
figure once a week something something is something that something
that keep me entertained. Going back to the regulation question,
you know, you mentioned that in your view, cost of
lending cost would be pretty minimal with some of these
new capital capital constraints. But I'm curious. You know, when
(28:42):
we talk to regulators, in most regulator conversations, it's very
much centered around de risking constraints, et cetera. But I'm
wondering if you ever think about the opposite of building
out sort of affirmative capacity for lending at banks. And
the specific reason I asked is a few weeks ago
and I interviewed a Jiggershaw who runs the loan program
(29:03):
at the Department of Energy, a lot of lending to
clean energy companies and so forth who aren't in a
position to take to borrow money from banks, and even
actually cited basal rules as a reason that banks we're
not in a position to do a lot of this lending.
And I'm curious whether you worry about that. Essentially, banks
no longer building that in house knowledge of capacities of
(29:25):
specific sectors of the economy of different areas real estate, energy,
et cetera. And it all sort of ended up getting
outsourced to private credit public type banks, et cetera. And
how much of that you think ideally should be preserved
in house at the lending desks of banks.
Speaker 3 (29:41):
We do take all those kinds of issues into account.
You know, we're in the phase of our rulemaking where
we've issued a proposal, we're taking comment on that proposal.
We really are open to all kinds of input on
the proposal. We want to make sure we get it right.
If there are areas that we can improve it, we
certainly will. You know, one of the areas that you
mentioned is with respect to energy. Some people have come
(30:03):
to us and said, we think that the way you're
treating in the proposal tax credits equity tax credits doesn't
appropriately take into account the way in which repayment occurs
under the tax credit. Because in a normal equity investment,
the return of the investor is from the investment itself,
and in these tax credit deals, we should think of
(30:25):
those as having the return coming from the tax credit.
The tax credit is a regular source of payment, so
you should think about this tax credit differently from other
equity investments, and that's the kind of comment that is
useful to us. We'll look at that, we'll examine the analysis,
the empirics of it, and if that proves out to
be true, then we can make an adjustment.
Speaker 1 (30:47):
I mean it is true more broadly that your counterparts
in Europe, some European central banks have made accommodations for
green energy loans or investments. Is that it sounds like
that's something that you would consider, at least from a
tax credit perspective, that sort of change.
Speaker 3 (31:03):
We don't consider the you know, non risk factors I
would say related to tax credits. But if the risk
of those tax credits is lower, then that is exactly
something that I see.
Speaker 2 (31:16):
So it would still be industry neutral, correct. Okay.
Speaker 1 (31:19):
In terms of other changes that you may or may
not be considering, one of the big points of contention
with the basel endgame proposal has to be the change
to operational risk and the way that's calculated. And I've
seen some numbers floating out there saying that you know,
I've been watching NFL and I've heard the ads.
Speaker 3 (31:37):
And your listeners are willing to talk about operational risks.
Speaker 1 (31:41):
It's surprising, I know, But is that something that is
like up for debate or some briggle room or what
sort of conversations are you having right now with the
stakeholders about this particular issue.
Speaker 3 (31:54):
We also do look at again comments on any aspect
of the rule. We've heard comments already and I'm sure
I'm going to hear more of them soon that the
operational risk charges is too high for some categories of activity. Again,
we're open to comment that is evidence based, that's analytic,
that demonstrates that the risk calibration should be different. We
(32:17):
want to get the rule right and we're open to
those kinds of emments.
Speaker 4 (32:36):
Should we take a couple a couple audience questions? Yeah,
let's here's a question. Fed now Could it ever be
the backbone for a simple point of sale system?
Speaker 3 (32:45):
It's a great question. You know. One of the cool
things about setting up a structure like fed now is
that people can innovate in lots of different ways on it.
And I do think that that might be one of
the ways that people could innovate over time.
Speaker 2 (33:01):
Do you want to do another one? Or shall I
throw one in?
Speaker 3 (33:03):
Yeah? Throw in?
Speaker 1 (33:03):
Okay, I'll throw one in so in some respects, you know,
I hope this is one of the easier or more
relaxed conversations that you're having this week, because you were
talking to lawmakers and politicians, and you know, that's always
a sort of intense discussion I find. But when one
of the questions was are you aiming for consensus on
(33:27):
these new bank rules? And so I'm not going to
ask that question again, but what does consensus actually look
like to you?
Speaker 4 (33:35):
Can I just why was there a subtext there? Like
why were they There's so many questions on this consensus question,
like what was what were they really asking about?
Speaker 3 (33:45):
Too? So, you know, traditionally, one of the things that
is true of the FED, and that I really value
about the FED is that we're a very much a
collegial body. We spend a lot of time working with
each other, talking to each other, working through issues, and
to the greatest extent practical, we try and get most
or all of the board members in favor of any
(34:06):
particular thing that we're doing. So, you know, if I
look back over the last you know, year and a half,
not quite year and a half, but we've had about
fifty substantive either supervisory matters or rulemakings that I've brought
to the board for consideration, and almost all of those
have been unanimous decisions. It doesn't mean that they are
(34:29):
always unanimous. Sometimes we have descents, and I respect the descent.
So we have board members, one or two board members
on a handful of matters that have dissented from the
proposals that I've put forward. And I think it makes
us a better institution to have that, first of all,
the conversation and to try and to teach consensus, and second,
(34:49):
you know, if we can't get there, to have dissenting voices.
Speaker 4 (34:54):
Tracy already asked a question about, you know, capital requirements
a large and small banks, but one of the question
on audience question on the process and just sort of
the pure regulatory burden side setting aside capital requirements. Are
there concerns that just the higher cost of compliance in
any respect hurt smaller banks and will sort of accelerate
(35:15):
industry concentration.
Speaker 3 (35:17):
So you know, this rule only applies to the largest
thirty seven banks in the country, banks over one hundred billion,
So community banks are not affected at all. Smaller banks
are not affected at all. We do care about compliance burdens,
even for the very largest banks. We want to make
sure that they're commensurate with an increased resilience of the
(35:37):
banking system that results. But this is not affecting small
banks anywhere in the country.
Speaker 2 (35:44):
Should I do another one? Are we we're alternating? Okay?
Speaker 1 (35:48):
Well, I feel we've been very bank focused, which maybe
in some respects is unfair or makes complete sense given
our current venue. But maybe we could talk about non
bank entities for a bit. I have a couple questions
on this, So again posts two thousand and eight. When
we saw those initial BASL rules come in, a big
(36:10):
part of that was making banks safer for obvious reasons.
We saw, to your point, the destruction that the financial
system had had on the global economy at that time,
and it seemed like a lot of the risk was
pushed into non bank entities. Again for obvious reasons. You know,
they're less levered, they're more contained. Potentially, you don't want systemic,
(36:31):
systemically important banks to be taking all these risks because
it comes back to bite you, as we saw in eight.
But fast forward to twenty twenty three, it does feel
like the non bank sector of the economy has grown enormously,
And Joe and I had a conversation earlier this week
about private credit. I was shocked to find out that
(36:52):
the private credit market in the US is now as
big as the broadly syndicated market for junk created bonds.
I mean, that is huge, and even the junk rated
bond market has been growing exponentially in recent years up
until twenty twenty three. Anyway, So how are you looking
at those non bank risks nowadays?
Speaker 3 (37:11):
That's a great point. Look, we need a strong and
resilient banking system that's at the core of our financial system,
and we need to pay attention to the non bank sector.
But we can't have a weaker bank system because of
concerns about the non bank sector. We need a strong
banking system, and then we also need to pay attention
to the non bank risk. So we do spend a
(37:33):
lot of time at the FED and at our sister
agencies looking at and examining risks in the non bank sector.
You know, I gave a speech yesterday at the Treasury
Market Conference, and one of the things that I noted
is that the hedge funds are significant participants in the
treasury market that has lots of benefits in terms of
(37:53):
liquidity in that market, in terms of matching activity between
the cash part of that market and the future's part
of that market, in terms of helping asset managers to
get access to futures that they want. But there are
also risks because the activity is being conducted with in
many cases no margin at all, which means the trades
(38:15):
are extremely highly leveraged.
Speaker 1 (38:16):
Yeah, well, we saw what happened in March twenty twenty exactly.
Speaker 3 (38:19):
So in March twenty twenty, hedge funds were among the
contributors to the disruption and the treasury market, and so
we want to be sure that first of all, that
banks as they are providing credit to their clients the
hedge funds are thinking about those risks. And then we
also want to make sure that the treasury market is
(38:40):
resilient to those kinds of potential disruptions. So we look
very carefully at that. You know, we're looking very carefully
at other aspects of the non bank sector, and all
of that I think is important for financial stability reasons.
Speaker 4 (38:53):
On the looking carefully at other aspects of the non
bank financial sector, I mean, obviously, entities funds can lose
money but are there other ways in which you could
foresee the risks becoming systemic in a meaningful way? Or
is or is the hope or is the view that, well, yes,
risky investors can lose money, but that doesn't necessarily mean
(39:15):
systemic risk.
Speaker 3 (39:16):
Yeah, we we aren't really concerned. You know, when when
investors lose money or when they gain money, that's not
really any of our business. It's really about are there
disruptive events that could cause significant harm to the system.
You know, one area that I mentioned very briefly that
you know we're looking at very carefully is the way
in which cyber events might cause systemic disruptions. We had
(39:40):
a smaller event over the last couple of weeks that
we paid careful attention to, working with Treasury and other
federal regulators. But we want to make sure that banks
and other participants in the market are resilient to cyber
attack and that means both that they have good prevention
system in place and also they have good systems for
(40:03):
recovery in the event that cyber attacks are successful, which,
given the way the world is, you have to assume
that some of those attacks are going to get through.
And so we really are quite focused on making sure
that that kind of risk is appropriately attended to by
regulated identities.
Speaker 1 (40:20):
Just going back to treasury clearing for a second, I mean,
this has been a hotly debated topic, the degree to
which this actually poses a risk to the market, And
I did mention that it definitely became an issue in
March of twenty twenty. But there is an argument out
there that, you know, do we need to tailor our
(40:40):
day to day policy for an event that happens, you know,
once every like three hundred years or something like that.
And I think we asked Darryl Duffy this question in
Jackson Hole and he was adamant.
Speaker 2 (40:52):
He just said, yes, we absolutely do.
Speaker 1 (40:55):
But I'd be curious to understand how you're sort of
balancing I guess the immediate trade offs versus like the
long term goal of having a more stable system.
Speaker 3 (41:05):
We absolutely have to have a reliable, a stable, a
resilient system for trading of treasuries. Treasuries are really at
the core of our financial system. They're the way that
individuals across the globe price other assets. They're the mechanism
for the government to raise funds. They're really at the
(41:27):
core of the system, and so we absolutely have to
have a reliable, resilient system, a deep system, and so
we do need to take the measures necessary to make
sure that it stays that way. I think that the
kinds of thing, kinds of steps that we've taken thus
far are useful. You know, for example, one of the
steps that the Federal Reserve took is to establish a
(41:51):
standing repo facility and a facility for foreign official counterparts,
so that if there's pressure in the system that can
be relieved through using repotransactions instead of outright sales that
might cause serious dislocations to the economy.
Speaker 4 (42:07):
Tracy mentioned our conversation with Darryl Duffy, and obviously when
we talk about just the sheer amount of debt that's
being issued, a lot of people talk about it in
terms of macro macro conditions and the financing costs, but
just in terms of infrastructure. Is there more in your
view that needs to be done, whether on sort of
private sector balance sheet, side market structure, central clearing, etc.
(42:29):
That would make the market more able to absorb the
have more capacity for all this issuings.
Speaker 3 (42:37):
I do think it's a really critical question. We do
need a system that can intermediate effectively for treasury securities.
There appears to be strong demand for treasury security, so
it really is question of making sure that securities can
efficiently get to the right to the right buyer. I
think that the SECS move towards central clearing of treasury
(43:00):
securities might be an additional appropriate next step. We're studying
lots of other ways. This is I would say, ongoing
work and will be ongoing work. It was just at
the as I mentioned at the Treasury conference yesterday, it's
an area that we're paying attention to all the time.
Speaker 1 (43:18):
So I realized we've hit a lot of different risks
in this discussion. So we've done interest rate risk, did
operational risksk cyber.
Speaker 2 (43:26):
Risk risks in the treasury market.
Speaker 1 (43:28):
One risk we haven't really talked about, maybe because it
isn't in the headlines quite as much anymore, is crypto risk.
And you know, we had a big slide in the
crypto market over the past year, so it doesn't seem
like that was a huge deal for the banking system,
except maybe you know, in respect to something like silver Gate.
(43:48):
But one aspect of crypto contagion, I guess, or like
one little crack that I think hasn't gotten that much attention,
even though the guy behind it certainly has has to
do with Sam Bankman Freed, who has been a guest
on this podcast a number of times and is now
in a lot of legal trouble for reasons I think
(44:08):
everyone knows. But he did buy or FTX appears to
have bought a US bank through a Cayman based company,
which seems like a pretty big channel through which crypto
could perhaps come into the US banking system. Is that
something that you and your supervisory role are looking at
(44:29):
or aware of, or how are you thinking about crypto
contagion and the risks posed there more broadly?
Speaker 3 (44:35):
Well, let me just say that in general, the banking
system is not deeply exposed to issues in the crypto space.
Most banks have been taking what I would describe as
careful and cautious approach to crypto. But we have been
paying attention to these issues very much since I arrived
(44:56):
at the board. We've established a Novel Activity Supervisory program
to bring experts from around the Federal Reserve system together
to help supervisors deal with issues at banks that are
engaging in some crypto related activity and that novel activities.
Supervisory program should help us wrap our arms around the issues,
(45:20):
should provide greater clarity and guardrails to banks that want
to be involved in this space. So we want to
enable banks to innovate using these new technologies, but to
do that in a way that is safe and sound,
that complies with consumer protection laws, that doesn't expose the
banking system to threats from illicit finance, terrorist financing, money laundering.
(45:46):
All those issues really need to be completely buttoned down,
and this supervisory program will help provide that kind of clarity.
Speaker 4 (45:53):
Speaking of crypto, while we're on the subject, one of
those things that we've sort of learned to appreciate over
the time is stomach risk seems to come from instruments
which are presumed not to be risky but to be safe.
And so whether we're talking about the money market funds
back in two thousand and eight or just the par
value of deposits at a bank in twenty twenty three,
(46:13):
and so that obviously when it comes to crypto, you know,
that leads you to the stable coin conversation. So I
kind of want to ask two questions. One is, you know,
what further do we need to do to make sure
that stable coins, at some point in the future don't
become a source of systemic risk. But also in the
positive sense, do you feel any optimism at all that
stable coins could be a big private issued stable coins
(46:36):
could be a meaningful and important part of the global
payments landscape going forward.
Speaker 3 (46:41):
Well, let me just say first of all, I think
that we have to be very careful with stable coins.
Stable Coins are a form of private money, and we've
seen throughout really history that private money, if it's not
well regulated, can be extremely explosive. People come to rely
on it. In the case of a stable coin linked
to the dollar, stable coins are really borrowing the trust
(47:05):
of the Federal Reserve. And if that's the case, we
need strong federal oversight of stable coins. We need oversight
of the issuers and the wallets. We need to make
sure that there's strong enforcement. They're strong rules of the
road because they can be quite explosive, and so I
do think we have to be really careful in the
stable coin space. I think that, you know, innovation is
(47:28):
hard to predict. It's hard to say that a particular
technology is the one that's going to be the next
technology of the future. I think it's appropriate for us
to let that innovation happen, but it's got to happen
within really, really clear guardrails.
Speaker 2 (47:46):
We just have a few minutes left. Shall we take
some more questions?
Speaker 3 (47:48):
Yeah?
Speaker 4 (47:49):
Sure, Okay, So this is a going back to the
FED now question question or asked, is the FED conflicted
as a regulator of debit card costs and an operator
of FED now potentially competing with debit card card cause?
And I also wonder, you know, sort of dumvetails back
to this question that I asked earlier about the degree
to which real time payments for various reasons haven't flourished
(48:10):
because the lack of real time payments.
Speaker 2 (48:13):
Service people make money.
Speaker 4 (48:14):
People make money on the existence a lot of money
has made on the existing payment system.
Speaker 3 (48:18):
Yeah. No, I look, first of all, on the second point.
I you know, we talked about this briefly before. I
do think that there are revenues in the banking system,
like overdraft fees and insufficient fund fees that some banks
have gotten used to. Many banks now are getting out
of that business entirely. They've announced that, you know, they're
(48:39):
not going to do overdrafts anymore. They're not going to
charge for them. I think that's positive for our economy
and for consumers. Overdraft fees are often really hard for
consumers to avoid, and so if we can get rid
of them because banks are deciding that that's not the
business they want to be in, I think that's a
net positive for households and the life, you know. With
(49:02):
respect to the existing payment system, I don't see a
conflict between the work that we're doing on debit cards
and the work that we're doing on FED now. Congress
has assigned us a very particular role with respect to
debit cards. Congress has said that we need to determine
that debit card interchange fees are reasonable and proportional in
(49:25):
relation to certain specified costs. That's our job. We do
the job Congress has assigned us. We recently issued a
proposal to update the rules in that space, and I
don't see that influencing or connecting in any way with
our work on FED now.
Speaker 1 (49:40):
Should I ask a super big picture question, go for it.
Speaker 2 (49:43):
We've been pretty micro.
Speaker 1 (49:45):
There was a brief moment this summer, sort of post SBB,
where it felt like there was a window to suddenly
have a sort of existential conversation about the US banking system,
there was discussion over what do we actually want this
to look like. Do we want a nation of small
banks where everyone knows their banker in it's a wonderful lifestyle.
(50:09):
Do we want something that's maybe more similar to Canada,
where we have like six huge banks that are highly
regulated and that sort of thing. When you're making bank rules,
when you're evaluating everything that we've discussed today, do you
have a vision of what you want the US banking
system to look like?
Speaker 3 (50:29):
Well, let me just say I very much value the
diversity that we have in the United States. So different
kinds of institutions. We have community banks that are very
very local. We have smaller regional banks. We have large
banks that are not the g sibs. We have very
large banks that are super complex and serve different kinds
of markets. I think that that diversity in our financial
(50:52):
system is actually really healthy. It makes for a stronger,
more vibrant economy. It makes our banking system more resilient
to shock, and so I do think that we do
take into account. I do think that it's important for
us to take into account that diversity of size and
type of institution.
Speaker 4 (51:11):
Can I ask just like a random question that's totally
out of now. Yeah, I should have asked this during
the more the macro part of the discussion. But you know,
and I think about where the FED is the policy
with the policy trajectory, you know, the one area of
the economy that I think everyone agrees that the FED
has real influenced on his housing and rate policy feeds
directly through to mortgage rates, and you can slow down.
(51:33):
It looks like, unambiguously, if there's one thing that rates
can do, it's slow down housing activity. But that cuts
both ways because it reduces demand for new mortgages, but
it can also impair supply. And we are in a
time in which many people feel like the United States
is perhaps millions of units under housed. How do you
think about the supply side aspect of monetary policy and
(51:55):
the point at which rate policy ends up constrain supply
when in theory more supplies what drivers prices down?
Speaker 3 (52:04):
Yes, So what I give you a technical answer and
then a maybe a broader answer, So you know, we
really are mostly working on the demand side of that
of the house, if you will, and that you know,
the elasticities of demand are faster and larger than the
elasticities of supply. So what we're really seeing is, you know, overall,
(52:28):
our country has not had enough housing supply for a
long time. We've been you know, behind that was true,
you know, before the raid hikes, it was true, before
the pandemic. It's been true for a while. So we
do need just overall in our society to see more
housing supply come in in order to catch up. But
right now, the major effect, the shortest term effect, is
(52:51):
really on tamping down aggregate demand so that supply has
a chance to catch up. And I think there is
evidence that we were talking about before in the day
at that supply and demand are coming into better balance overall.
Speaker 1 (53:04):
Well, Joe, I think we've effectively achieved a random walk
through a whole lot of.
Speaker 4 (53:09):
Topics, crossing back and forth.
Speaker 1 (53:11):
Yeah, thank you so much to Michael for being a
wonderful guest and you know, playing ball with us on
a wide variety of topics.
Speaker 2 (53:20):
Really appreciate it.
Speaker 3 (53:21):
It's my pleasure to join you on the show. I
really enjoyed.
Speaker 5 (53:23):
Thank you, Thank you.
Speaker 4 (53:46):
That was our conversation with Michael Barr, the fed's Vice
chair for Supervision at the Clearinghouse Conference in New York City.
Speaker 1 (53:54):
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (53:57):
And I'm Joe Wisenthal. You can follow me at the
Stall War. Follow our producers Carmen Rodriguez at Carmen Arman,
dash Ol Bennett at Dashbot, and Kelbrooks at Kelbrooks. And
thank you to our producer Moses Ondam. For more Oddlots content,
go to Bloomberg dot com slash odd Lots, where we
have a blog, transcript and a newsletter. And I'm sure
there's gonna be a lot of conversation about this episode
(54:20):
in the Odd Lots Discord one of my favorite places
to hang out online, Discord dot gg, slash offline.
Speaker 1 (54:27):
And if you enjoy odd Lots, if you like it
when we record these live conversations, then please leave us
a positive review on your favorite podcast platform.
Speaker 2 (54:36):
Thanks for listening.
Speaker 5 (55:06):
In e
Hello, and welcome to another episode of the All Thoughts podcast.
I'm Tracy Alloway and I'm Joe Wisenthal. So you are
about to listen to a very special episode. This is
a live conversation that we recorded with Michael Barr, the
fed's Vice Chair for Supervision, at the Clearinghouse Annual Conference
in New York on November seventeenth.
Speaker 2 (00:31):
What should we talk about? There's nothing going on.
Speaker 1 (00:33):
It's not like there's been any development in payments or
bank regulation. It's kind of boring.
Speaker 3 (00:38):
Yeah, I don't know.
Speaker 1 (00:39):
No, Okay, there is a lot to talk about, so
I should get started right away.
Speaker 2 (00:44):
Why don't we start with payments.
Speaker 1 (00:45):
We are at the Clearinghouse conference, so that's probably a
good place to start. You know, you launched FED now,
the new real time payments clearing system, a few months
ago in the summer.
Speaker 2 (00:57):
How's that going.
Speaker 1 (00:57):
What's the takeup been like and what have you learned
since launching that?
Speaker 3 (01:01):
Well? I think it's going well. I think the important
thing to remember about take up is that it's going
to take a long time. When we've seen any payments
innovation in our economy, it takes a long time for
people to get used to the idea, to develop it,
to figure out how they're going to use it. But
right now, what we've done is built the rails, and
those rails can be used by the making sector to
(01:23):
provide new services to their customers, to households and businesses.
Take up really requires banks to decide that their customers
really want the service, and then they can innovate on
top of it. And that's what we're looking forward to
over time.
Speaker 4 (01:38):
Do you have any way of gauging sitting aside that
it's going to take a while. It's what constitutes a
benchmark that we should watch for of Okay, this is
taking up again, sitting aside that we maybe decades, but
what should we be looking out for to see is this.
Speaker 3 (01:54):
Going well again? I think the right way to think
about this is over the very long term. If you
look to think about any payments innovation, whether it's the
development of banknotes or the rise of checks in the
seventeen hundreds, or really any kind of innovation we've seen
in payments, they take a very long time to build
a network. Once that network gets built and you have scale,
(02:18):
then it really takes off and everybody assumes it's been
that way forever. So we're really at the very early
stages of this.
Speaker 1 (02:25):
So speaking of development, I am not a payments expert.
I used to know more about the space when I
was a banking correspondent, but that was like more than
ten years ago at this point. But I do remember
ten years ago the Clearinghouse also developed its own real
time payment system. Is it weird that we've ended up
(02:46):
with two basically a publicly owned one and a sort
of privately owned.
Speaker 3 (02:50):
We actually have a very long history in this country
of having both public rails and private rails. That's the
way most of our payments technology has evolved over time,
and most of our payment systems today have both public
aspects and private aspects. We really think of these things
as complementary. We work really closely together. You know, David
(03:11):
and Mark were taking selfies yesterday. These are close collaborations.
Speaker 2 (03:16):
Yes, glad we could be here to facilitate it.
Speaker 1 (03:19):
But just on this note, I mean, could you get
a situation where, for instance, a lot of the higher
volume payments from the big banks are traveling along the
clearinghouse pipes, whereas a lot of the smaller payments from
smaller banks are going along the public rails basically a
fracturing or a fragmentation of the system.
Speaker 3 (03:37):
I don't think that if we ended up that way,
I don't think that would be a fracturing. We have
lots of systems now where larger volume payments travel one
route and smaller volume payments travel the other. That could
end up being the efficient way to do it. It would
be fine if it ended up that way. It also
would be fine if there were a mix of transactions
on both kinds of rails. They really are complementary. I
(04:00):
think that, you know, if you move forward many years,
we would expect that banks would have access to both
kinds of rails. They could choose which rail to send
an individual payment on. That would be great.
Speaker 4 (04:12):
Why are they complementary because if they do roughly the
same thing, and I would to it that most payment
systems essentially benefit from network effects and the bigger one
makes it more valuable to use that one. Why wouldn't
we assume that it's just going to be one wins
and one loses.
Speaker 3 (04:29):
Well, you know, if you again, if you look at
existing payment systems today, we have private rails for ACCH,
we have public rails for ACCH. I don't foresee this
being a conflict. I really do think that banks are
going to be able to have optionality in the systems
that they use, and they might use different rails for
different kinds of payments.
Speaker 1 (04:49):
Why did it take so long to develop a real
time payment system? Because again, I mean I spent a
lot of time in the UK. I think the UK
had something equivalent in like two thousand and seven, and
we're here in twenty twenty three just launching it.
Speaker 3 (05:03):
It has taken a long time. I would agree with that. Look,
the Federal Reserve is a conservative institution, and I think
that's appropriate. You know, people expect us to be able
to provide trustworthy, reliable services, and we earn that trust
by being very, very careful about everything we do, and
(05:26):
that's true with FED now as well.
Speaker 4 (05:28):
Does the fact that there are these two competing payment
systems or maybe complementary what ambiguity about which one will
gather more volume and for which type of payments? Do
you think it slows down adoption at all in terms
of a bank having to decide which one they're going
to invest their time and energy or turning into a
retail facing application of it, and thinking about which one
(05:51):
is going to win.
Speaker 3 (05:53):
You know what. My expectation is that banks will end
up again over time, probably adopting both the public rails
and the private rails and using them for complementary kinds
of services. It's going to take a time, you know,
I would say, especially for community banks. One of the
key issues here is making sure that core service providers
(06:13):
get up to speed quickly and offer the service to
all the community banks in a fair and equal and
accessible way. And so we are very focused on working
with those service providers to make sure they're offering that
service to community banks.
Speaker 1 (06:27):
Can you give us a sense of the take up
and the expansion so far?
Speaker 3 (06:31):
Now, what I would say is you should be thinking
about this. It's taking years to do. Take Up is
always slow at the start. It's going according to what
we thought, but that's very slow, and we expect it
to be slow at the beginning.
Speaker 4 (06:45):
Will you come back on our podcasts ten years to us.
Speaker 3 (06:49):
I would be delighted to That would be really fun.
Speaker 1 (06:51):
Okay, well, I mean talking about long time scales. There
is a sense of irony in that the FED was
working on this for a long time and then they
release it in the summer of twenty twenty three, right
after we've seen essentially a bank run on Silicon Valley Bank,
and I've seen some commentary about a potential tension here.
(07:13):
You're making real time payments possible more instantaneous to posit
withdrawals twenty four to seven at a time when deposit
withdrawals have become problematic. I think Joe abat Over at
Barclay's was talking about how you're basically allowing banks to
kind of slim down their inventory in really efficient ways,
but in a way that, as we learned from the pandemic,
(07:37):
could be problematic if something happens. How are you balancing
that tension?
Speaker 3 (07:42):
Well, you know, if you look at the situation today,
Obviously Silicon Valley Bank failed without any new technology. People
were able to withdraw it very, very quickly. The real
issue in Silicon Valley Bank was deep mismanagement of interest
rate risk and liquidity risk. The highly networked nature of
their deposit base. The technology side of that made it
(08:07):
possible for them to withdraw, but not in any fancy
new technology technology that's been around since the nineteen seventies.
So really, what we need to do is focus on
the fundamentals for banks to make sure that they are
appropriately managing their risks with respect to the new technology.
With respect to fed now, the individual banks can set
their own limits on the way in which they use
(08:30):
the technology. They can set size limits if they want,
they can cap it. So I don't think it'll introduce
new significant risks into the system. The risks and the
system that they're there, we need to make sure we
manage appropriately.
Speaker 4 (08:43):
Setting aside, whether it's fed now or the private sector
clearing house one in the US. Does the fact that
arguably banks make a lot of money from the lack
of real time payments, whether it's overdraft fees, laid fees,
there's a lot of money in the business of people
not making timely payments. I also wonder maybe it's off
(09:04):
the mark, but I wonder, you know, we're in a
high interest rate environment, so people want to hold on
cash maybe for a few extra days. Does that when
we're thinking about timelines, do you think that that affects
the trajectory of these timelines the business of slow payments?
Speaker 3 (09:16):
Basically, I do think we have to, you know, look
forward to a system in which businesses and households can
get their funds right away we might end up in
a situation where we can have a significant effect in
reducing overdraft fees, insufficient fund fees, a situation where a
small business can get paid right away for the work
(09:38):
they've done. That would be a huge benefit for American society.
And so I do think that one of the potential
upside benefits have fed now is the ability to actually
deliver for households and businesses the kinds of banking services
that they want and that would reduce risk to them.
I think that's a wonderful thing for society.
Speaker 2 (10:01):
Just in terms of the payment space.
Speaker 1 (10:03):
You've finally unveiled this what's on the agenda Now, what
other payments improvements could be made for the US.
Speaker 3 (10:10):
Well, I think it's a great question. Look, I said
before that we're a very conservative institution, and we are,
but we also need to continue to think about innovation.
Fed now will continue to be an important part of
the way that we innovate. So we're looking to add
additional features to fed now over time, and those features
will make it easier for banks to use, better, for
(10:32):
banks to use, better for banks to offer to households
and businesses. I think those kinds of innovations are really important.
And then we're also doing very basic research in newer
technologies around distributed ledger technology using encryption techniques to send
payments back and forth. That very basic research might help
(10:53):
us to continue to innovate in our payment systems.
Speaker 4 (10:56):
Since you mentioned digital ledger technologies, people talk about other
site other types of payments, central bank digital currencies. I
always have a hard time wrapping my head around I
guess the why of some of this. I mean, I
understand these are interesting technologies maybe, but why, Like what
is what do you feel is the impulse when people
(11:18):
talk about exploring is some of these new I don't
know paradigms of money or paradigms of payments, what people
hope to accomplish some of that.
Speaker 3 (11:26):
You know, it's hard for me to say what lots
of other people think, but I'll just say just from
my perspective, you know, I think the research is important
because we might uncover ways to be much more efficient
with the payment system, and payment system efficiency can help
banks and households and businesses conduct their transactions in a
(11:46):
lower cost way. So I'm not super into all the
very large claims people make for Central Bank digital currency.
But I do think that the underlying technology, if it
can lower costs, improve efficiency, those things are worth researching.
Speaker 2 (12:18):
Joe, you want to talk about bank reg let's talk
about bankreg all right.
Speaker 1 (12:22):
So again, I used to be a former banking correspondent,
and I remember whenever I pitched a story about bank
regulation to my editors, their eyes would just sort of
glaze over. But now fix it now, Well, I don't
have to, because now you know there are adverts about basil.
Speaker 2 (12:37):
Playing during NFL games.
Speaker 4 (12:39):
Which is our own listeners are often our own listeners
of the podcast often talking about learning a lot about
basil endgames.
Speaker 1 (12:46):
Yeah, this is something I never thought I would see
in my lifetime. I feel like it's a slippery slope
to the point where everyone starts including their position on
the basil endgame proposals in their like Tinder profile or
something like that.
Speaker 2 (12:57):
It's a new talking point.
Speaker 1 (12:58):
But have you been surprised by the amount of discussion
that this is generating.
Speaker 3 (13:03):
I have been surprised by it. I mean, I do
think that some of the advertisements and things you're seeing
in the public are extremely unusual for bank regulation. Normally,
we issue a proposal and then we get very detailed
comment letters back, and we take those comment letters into
account and we finalize our rule. That's sort of the
(13:24):
normal process. So seeing ads at football games, that's that's
kind of unusual.
Speaker 4 (13:29):
How does it feed through to you? I'm always actually
curious when an industry group does something like this, or
even when I see an ad for some you know,
some sort of B to B software or something. I'm
not the how does it actually filter through you in
your job in terms of okay, actually decision and the
pressure that maybe builds on you.
Speaker 3 (13:49):
You know, like in the Peanuts when adults talk and
it goes.
Speaker 4 (13:54):
Yeah, that's what they're accomplishing. Money well, spend well.
Speaker 1 (14:00):
I mean, in fairness, this is a big deal for banks,
and I think there is some discussion around making the
cost of capital more expensive or less available for obvious reasons.
And one of the criticisms that you hear now is
this is going to make mortgages more expensive for Americans.
How would you tackle that particular issue or that particular criticism.
Speaker 3 (14:24):
Look, you know, any time that you change regulation, there
are costs and benefits to that regulation. The big benefit
of having higher capital is that you make the banking
system more resilient. You know, one of the things that
we saw in the global financial crisis is that it
really crushed the American economy. It caused millions of households
(14:45):
to lose their homes to go into foreclosure. That financial
crisis shuttered American businesses. It called massive unemployment, huge arm
of the economy. We want to make sure that the
banking system doesn't crush households and businesses again. At the
same time, when you have higher capital levels, that increases
the private cost to banks. Banks use more equity and
(15:09):
a little bit less debt to fund their mortgages or
their trading activity or the like. The capital propose that
we've put forward mostly changes the rules for trading and
other non lending activity. A very small portion is actually
related to lending. And when you look at that increased
(15:29):
cost to the banks with respect to capital, that translates
on average for a typical loan to an increase if
all of it is passed through to the borrow, or
if there's no competition at all and all of it
is passed through to the borrow, the average increase would
be zero point zero three percent. So it's a very
(15:52):
very small change in the cost of credit and a
significant increase in the resiliency of the banking system. Just
on the.
Speaker 1 (15:59):
Point about the different ways that big banks versus smaller
banks are treated. I mean, my understanding is the US
is one of the only jurisdictions that actually created carveouts
from basel for smaller banks. And I guess, going back
to the Silicon Valley Bank example, I mean, given where
trouble in the banking system was this year, is that
(16:21):
something we should still be doing.
Speaker 3 (16:23):
Well. You raise an excellent point, so you know what
we've done in this proposal is say that those stricter
capital requirements should not only apply to the top eight
banks in the country, but they should also apply to
banks that are over one hundred billion. So there are
thirty seven banks in the country that are over one
hundred billion. There aren't that many. We have over four
(16:45):
thousand banks in the banking system, so less than forty
out of four thousand are covered. And it would have
covered institutions like Silicon Valley Bank if we had had
this place in place before. And I think one of
the lessons from that experience was that it's important for
large banks that might have an effect more broadly on
(17:05):
the economy to have that real resilience to them. And
you know, with respect to Silicon Valley Bank, they didn't
have to account for the unrealized losses on their balance
sheet reduction in value of securities, and under our proposal
they those institutions at that size would need to account
(17:27):
for that.
Speaker 4 (17:27):
Now, I'd want to jump ahead too much. And it
was still a regulatory question. But at the FMC, at
the FED, do you think much about the interplay of
rate policy and financial stability because or regulation? Because I
feel like often we talk about these two different things.
There's the supervisory aspect of the FED, the regulation of
(17:48):
the banks, et cetera. And then there's monetary policy and
that's economics. But as we saw with SVB, they can
interplay and the loss is born on long term debt
or other holdings can become financial stability issues. How much
do those two conversations overseect in your that word over
sect in your world where you think about the stability
(18:08):
aspects of economic policy choices, I think you.
Speaker 1 (18:11):
Mean overlap and intersect.
Speaker 3 (18:13):
Over Yes, they both overlap and intersect. So no, I
think it's a great point. So you know, first of all,
I have two jobs. I'm a governor and therefore sit
on the Federal Open Markets Committee, and I'm the vice
chair for supervision, and so in my own you know,
personal responsibilities, those those are quite oversecting. But also more broadly,
(18:39):
for the FMC and for the Board, we care about
both both issues. Obviously, we have a clear monetary policy mission.
We're going to bring inflation down to two percent. That's
our job. We're going to do it, and we also
need to understand that, and do understand that as interest
rates rise, that changes dynamics in the banking system and
(19:01):
the financial system. We're really attentive to those changing dynamics. Obviously,
if we don't have a functioning financial system, we don't
have a functioning economy, and so we have to care
about financial stability risks and the system. We do regularly
monitor these. We have regular reports from our financial stability staff,
not only internally at the Board, but also to the FMC.
(19:24):
We have an opportunity for members of the FMC to
comment on financial stability issues as we have our discussions.
So these things really do go together.
Speaker 1 (19:35):
You know. Joe brought up the fact that there are
supervisory functions financial stability functions market functions. Just going back
to the example of Silicon Valley Bank, it seems like
part of the issue here was supervisory. So even though
you could see that there was a capital problem, you
could see the mark to market losses coming through on
the balance sheet some months before the bank actually went
(19:58):
down in four users didn't raise those concerns, and they
certainly didn't force a capital raised by SBB. Do you
think there's more to be done on the supervisory front,
maybe changing the culture of some of those supervisors so
that they feel more comfortable, more willing, whatever, for whatever reason,
to actually raise these concerns at the appropriate time.
Speaker 3 (20:21):
I think you raise a really important point. And you know,
we issued a report right after SVB failed, and one
of the findings of the report was that supervisors identified
the risks at the bank, but they didn't feel empowered
to push hard enough to get the bank to take action.
And so one of the things that we're making sure
of is that supervisors know that they should act with
(20:44):
speed and with force and with agility when risks weren't
that that kind of action. It does take a change
of culture, It does require us to really make sure
that that examiners feel supported and empowered to take that step.
We want to make sure that they're trained and that
they have guidance to to act forcefully. And I do
(21:07):
think that all these measures are really critical to making
sure we have a supervisory system that's effective. Now. You know,
of course, at the beginning and end of the day,
you know, bank management and the board of directors of
the bank are responsible for running the institution, and you know,
we're not able to come in and run the bank.
For bank managers, that's their job to do. And in
(21:28):
this case, in the case of SVB and some other banks,
the banks really sorely mismanaged both interest rate risk and
liquidity risk, and they did things that you know, in
retrospect you kind of are hedge scratchers. You know, they had,
for example, some hedges on some of their interest rate
risk and they took those off.
Speaker 1 (21:50):
I saw the internal presentation where they talked about doing that,
and it was basically like, well, we have these hedges,
they're expensive. We don't think the Fed's going to raise rates,
so why don't we make some more money.
Speaker 2 (22:01):
It was literally that.
Speaker 3 (22:02):
Yeah, and you know, it does go to this question
of you know, compensation they were really focused on short
term profits and not looking at all on long term risks,
and that really is inconsistent with the approach that we
require of banks to have compensation aligned not just with
how a bank is doing in the short term in
(22:23):
term profits, but also thinking long term about risk management.
Speaker 4 (22:26):
So, just on this point, particularly about culture of supervision,
can in you know, March twenty twenty four or March
twenty twenty five down the road, can you talk about
what specific is being done now such that in the
future the culture is better.
Speaker 3 (22:42):
Now this is there's a lot of work going on,
you know. One of the things that we're doing is
again making sure that examiners feel empowered to act on
the basis of the information they have in front of
them in a timely way. Make sure that they have
the tools to put in place mitigants if a firm
is getting itself into trouble and the like. We want
(23:05):
to make sure that we have a system that escalates
appropriately so that if there are significant risks, you don't
wait years before action is taken on those. We're making
sure that examiners have the training they need to take
action when they need it. And you know, in the
current environment. We're focused on things like interest rate risk,
(23:26):
liquidity risk, credit risk, particularly in the office sector, and cybersecurity,
which is just a fundamental risk that many banks are
exposed to.
Speaker 1 (23:36):
I definitely want to talk a little bit more about
some of those individual risks, but just on interest rates. So,
you know, we talked about Silicon Valley and the fact
that they didn't think the FED was going to raise rates,
even though I would argue looking at FED speeches for
most of twenty twenty two and into twenty twenty three,
there was a lot of discussion about we are raising rates.
Speaker 2 (23:58):
But that said, we have been in this.
Speaker 1 (24:00):
Sort of weird environment where the economic outcomes seem almost binary,
at least if you read financial commentary.
Speaker 2 (24:09):
So going into.
Speaker 1 (24:09):
Twenty twenty three, it felt like the two options were
either soft landing or massive recession, and I think if
you're a bank, it's kind of hard to juggle those
two things. Is there anything that the FED can do
more on the sort of forward guidance side to minimize
(24:30):
interest rate risk? So aside from the basel endgame proposals
in terms of communications, is there more.
Speaker 4 (24:36):
You can do?
Speaker 3 (24:37):
Well? You know, first let me just say, with respect
to interest rate risk. We expect banks to be able
to manage interestrate risk, whether rates are rising or falling.
That's part of prudent risk management. The feder Reserve does
communicate quite often about the communicating right now about the
path of interest rates. The FMC every other meeting puts
(24:57):
out a summary of economic projections that are designed to
show what each individual member of the FMC believes about
the path going forward for the economy. It's not a forecast,
it's not a collective judgment or consensus document, but it
does let the public know what each individual member of
(25:19):
the FMC is thinking about the future path for monetary policy.
I think Chair Pale has made it clear that we're
going to need to hold interest rates at their peak
level for some time in order to make sure that
we're on the right path to get inflation back to
two percent, and so I do think that kind of
communication can help the market, can help the economy, can
(25:41):
help businesses plan for the future. Of course, we're all
taking in information in real time. We do need to
be dependent on the data we receive. The data we
receive updates helps us update our forecasts for the future.
And we are living in an uncertain time endemic caused
(26:01):
significant changes to our economy, and those are still working
their way through the system.
Speaker 4 (26:07):
I think we were going to throw in a couple
of macro questions at the end, but just since we're
talking about diary. So in the last few weeks, we
had a non farm payrolls report that came in a
little bit weaker than expected, continuing continuous jobless claims, highest
level of the year, close to highest level in two years.
CPI report that came in pretty clearly cooler than expected.
(26:29):
As the FOMC member, how is your thinking on the
economy right now and the appropriateness of Fed's policy stance
where it is right now?
Speaker 3 (26:36):
Thank you. Look, we take all this data as it
comes in, and we're very data dependent, but we're also
not dependent on any one single data point. So I
said three, yes, So I think it's you know, I
think it's useful for us to take that information in.
You know, certainly, the information that we've had recently suggests
that we're moving into better balance on the risk between
(27:00):
overtightening and under tightening, and I think that's quite encouraging.
So we're likely at or near the peak of where
we need to be in terms of having a sufficiently
restrictive stance of monetary policy that we'll sustainably bring inflation
down to two percent. And I think the recent economic
readings reinforce my view that that is probably correct.
Speaker 1 (27:24):
What's your favorite or most compelling indicator right now for
the direction of the economy. This is desert island indicators.
If you had to pick one, what would you.
Speaker 2 (27:34):
Bring with you?
Speaker 3 (27:35):
So you know, it's a terrific question that I'm not
going to answer.
Speaker 1 (27:40):
Those are always the best questions, the ones that don't
get answered.
Speaker 3 (27:42):
You know, because it really goes back to my point earlier.
The pandemic really did significantly disrupt our economy, and it
disrupted many of the ways that we think about economic
relationships in our economy, and so it does require us
to really look at a very broad range of indicators
as they come in and not just a single data
(28:06):
point as evidence of you know, now, I know that
we're in the right place. So we're very I would
say I am, and generally as a committee we are
cautious about overinterpreting anyone data point.
Speaker 4 (28:20):
Not that anyone ask, but mine would be claims because
I figure if I'm on a desert island. I don't know,
wait it to a whole month for a data point. I
figure once a week something something is something that something
that keep me entertained. Going back to the regulation question,
you know, you mentioned that in your view, cost of
lending cost would be pretty minimal with some of these
new capital capital constraints. But I'm curious. You know, when
(28:42):
we talk to regulators, in most regulator conversations, it's very
much centered around de risking constraints, et cetera. But I'm
wondering if you ever think about the opposite of building
out sort of affirmative capacity for lending at banks. And
the specific reason I asked is a few weeks ago
and I interviewed a Jiggershaw who runs the loan program
(29:03):
at the Department of Energy, a lot of lending to
clean energy companies and so forth who aren't in a
position to take to borrow money from banks, and even
actually cited basal rules as a reason that banks we're
not in a position to do a lot of this lending.
And I'm curious whether you worry about that. Essentially, banks
no longer building that in house knowledge of capacities of
(29:25):
specific sectors of the economy of different areas real estate, energy,
et cetera. And it all sort of ended up getting
outsourced to private credit public type banks, et cetera. And
how much of that you think ideally should be preserved
in house at the lending desks of banks.
Speaker 3 (29:41):
We do take all those kinds of issues into account.
You know, we're in the phase of our rulemaking where
we've issued a proposal, we're taking comment on that proposal.
We really are open to all kinds of input on
the proposal. We want to make sure we get it right.
If there are areas that we can improve it, we
certainly will. You know, one of the areas that you
mentioned is with respect to energy. Some people have come
(30:03):
to us and said, we think that the way you're
treating in the proposal tax credits equity tax credits doesn't
appropriately take into account the way in which repayment occurs
under the tax credit. Because in a normal equity investment,
the return of the investor is from the investment itself,
and in these tax credit deals, we should think of
(30:25):
those as having the return coming from the tax credit.
The tax credit is a regular source of payment, so
you should think about this tax credit differently from other
equity investments, and that's the kind of comment that is
useful to us. We'll look at that, we'll examine the analysis,
the empirics of it, and if that proves out to
be true, then we can make an adjustment.
Speaker 1 (30:47):
I mean it is true more broadly that your counterparts
in Europe, some European central banks have made accommodations for
green energy loans or investments. Is that it sounds like
that's something that you would consider, at least from a
tax credit perspective, that sort of change.
Speaker 3 (31:03):
We don't consider the you know, non risk factors I
would say related to tax credits. But if the risk
of those tax credits is lower, then that is exactly
something that I see.
Speaker 2 (31:16):
So it would still be industry neutral, correct. Okay.
Speaker 1 (31:19):
In terms of other changes that you may or may
not be considering, one of the big points of contention
with the basel endgame proposal has to be the change
to operational risk and the way that's calculated. And I've
seen some numbers floating out there saying that you know,
I've been watching NFL and I've heard the ads.
Speaker 3 (31:37):
And your listeners are willing to talk about operational risks.
Speaker 1 (31:41):
It's surprising, I know, But is that something that is
like up for debate or some briggle room or what
sort of conversations are you having right now with the
stakeholders about this particular issue.
Speaker 3 (31:54):
We also do look at again comments on any aspect
of the rule. We've heard comments already and I'm sure
I'm going to hear more of them soon that the
operational risk charges is too high for some categories of activity. Again,
we're open to comment that is evidence based, that's analytic,
that demonstrates that the risk calibration should be different. We
(32:17):
want to get the rule right and we're open to
those kinds of emments.
Speaker 4 (32:36):
Should we take a couple a couple audience questions? Yeah,
let's here's a question. Fed now Could it ever be
the backbone for a simple point of sale system?
Speaker 3 (32:45):
It's a great question. You know. One of the cool
things about setting up a structure like fed now is
that people can innovate in lots of different ways on it.
And I do think that that might be one of
the ways that people could innovate over time.
Speaker 2 (33:01):
Do you want to do another one? Or shall I
throw one in?
Speaker 3 (33:03):
Yeah? Throw in?
Speaker 1 (33:03):
Okay, I'll throw one in so in some respects, you know,
I hope this is one of the easier or more
relaxed conversations that you're having this week, because you were
talking to lawmakers and politicians, and you know, that's always
a sort of intense discussion I find. But when one
of the questions was are you aiming for consensus on
(33:27):
these new bank rules? And so I'm not going to
ask that question again, but what does consensus actually look
like to you?
Speaker 4 (33:35):
Can I just why was there a subtext there? Like
why were they There's so many questions on this consensus question,
like what was what were they really asking about?
Speaker 3 (33:45):
Too? So, you know, traditionally, one of the things that
is true of the FED, and that I really value
about the FED is that we're a very much a
collegial body. We spend a lot of time working with
each other, talking to each other, working through issues, and
to the greatest extent practical, we try and get most
or all of the board members in favor of any
(34:06):
particular thing that we're doing. So, you know, if I
look back over the last you know, year and a half,
not quite year and a half, but we've had about
fifty substantive either supervisory matters or rulemakings that I've brought
to the board for consideration, and almost all of those
have been unanimous decisions. It doesn't mean that they are
(34:29):
always unanimous. Sometimes we have descents, and I respect the descent.
So we have board members, one or two board members
on a handful of matters that have dissented from the
proposals that I've put forward. And I think it makes
us a better institution to have that, first of all,
the conversation and to try and to teach consensus, and second,
(34:49):
you know, if we can't get there, to have dissenting voices.
Speaker 4 (34:54):
Tracy already asked a question about, you know, capital requirements
a large and small banks, but one of the question
on audience question on the process and just sort of
the pure regulatory burden side setting aside capital requirements. Are
there concerns that just the higher cost of compliance in
any respect hurt smaller banks and will sort of accelerate
(35:15):
industry concentration.
Speaker 3 (35:17):
So you know, this rule only applies to the largest
thirty seven banks in the country, banks over one hundred billion,
So community banks are not affected at all. Smaller banks
are not affected at all. We do care about compliance burdens,
even for the very largest banks. We want to make
sure that they're commensurate with an increased resilience of the
(35:37):
banking system that results. But this is not affecting small
banks anywhere in the country.
Speaker 2 (35:44):
Should I do another one? Are we we're alternating? Okay?
Speaker 1 (35:48):
Well, I feel we've been very bank focused, which maybe
in some respects is unfair or makes complete sense given
our current venue. But maybe we could talk about non
bank entities for a bit. I have a couple questions
on this, So again posts two thousand and eight. When
we saw those initial BASL rules come in, a big
(36:10):
part of that was making banks safer for obvious reasons.
We saw, to your point, the destruction that the financial
system had had on the global economy at that time,
and it seemed like a lot of the risk was
pushed into non bank entities. Again for obvious reasons. You know,
they're less levered, they're more contained. Potentially, you don't want systemic,
(36:31):
systemically important banks to be taking all these risks because
it comes back to bite you, as we saw in eight.
But fast forward to twenty twenty three, it does feel
like the non bank sector of the economy has grown enormously,
And Joe and I had a conversation earlier this week
about private credit. I was shocked to find out that
(36:52):
the private credit market in the US is now as
big as the broadly syndicated market for junk created bonds.
I mean, that is huge, and even the junk rated
bond market has been growing exponentially in recent years up
until twenty twenty three. Anyway, So how are you looking
at those non bank risks nowadays?
Speaker 3 (37:11):
That's a great point. Look, we need a strong and
resilient banking system that's at the core of our financial system,
and we need to pay attention to the non bank sector.
But we can't have a weaker bank system because of
concerns about the non bank sector. We need a strong
banking system, and then we also need to pay attention
to the non bank risk. So we do spend a
(37:33):
lot of time at the FED and at our sister
agencies looking at and examining risks in the non bank sector.
You know, I gave a speech yesterday at the Treasury
Market Conference, and one of the things that I noted
is that the hedge funds are significant participants in the
treasury market that has lots of benefits in terms of
(37:53):
liquidity in that market, in terms of matching activity between
the cash part of that market and the future's part
of that market, in terms of helping asset managers to
get access to futures that they want. But there are
also risks because the activity is being conducted with in
many cases no margin at all, which means the trades
(38:15):
are extremely highly leveraged.
Speaker 1 (38:16):
Yeah, well, we saw what happened in March twenty twenty exactly.
Speaker 3 (38:19):
So in March twenty twenty, hedge funds were among the
contributors to the disruption and the treasury market, and so
we want to be sure that first of all, that
banks as they are providing credit to their clients the
hedge funds are thinking about those risks. And then we
also want to make sure that the treasury market is
(38:40):
resilient to those kinds of potential disruptions. So we look
very carefully at that. You know, we're looking very carefully
at other aspects of the non bank sector, and all
of that I think is important for financial stability reasons.
Speaker 4 (38:53):
On the looking carefully at other aspects of the non
bank financial sector, I mean, obviously, entities funds can lose
money but are there other ways in which you could
foresee the risks becoming systemic in a meaningful way? Or
is or is the hope or is the view that, well, yes,
risky investors can lose money, but that doesn't necessarily mean
(39:15):
systemic risk.
Speaker 3 (39:16):
Yeah, we we aren't really concerned. You know, when when
investors lose money or when they gain money, that's not
really any of our business. It's really about are there
disruptive events that could cause significant harm to the system.
You know, one area that I mentioned very briefly that
you know we're looking at very carefully is the way
in which cyber events might cause systemic disruptions. We had
(39:40):
a smaller event over the last couple of weeks that
we paid careful attention to, working with Treasury and other
federal regulators. But we want to make sure that banks
and other participants in the market are resilient to cyber
attack and that means both that they have good prevention
system in place and also they have good systems for
(40:03):
recovery in the event that cyber attacks are successful, which,
given the way the world is, you have to assume
that some of those attacks are going to get through.
And so we really are quite focused on making sure
that that kind of risk is appropriately attended to by
regulated identities.
Speaker 1 (40:20):
Just going back to treasury clearing for a second, I mean,
this has been a hotly debated topic, the degree to
which this actually poses a risk to the market, And
I did mention that it definitely became an issue in
March of twenty twenty. But there is an argument out
there that, you know, do we need to tailor our
(40:40):
day to day policy for an event that happens, you know,
once every like three hundred years or something like that.
And I think we asked Darryl Duffy this question in
Jackson Hole and he was adamant.
Speaker 2 (40:52):
He just said, yes, we absolutely do.
Speaker 1 (40:55):
But I'd be curious to understand how you're sort of
balancing I guess the immediate trade offs versus like the
long term goal of having a more stable system.
Speaker 3 (41:05):
We absolutely have to have a reliable, a stable, a
resilient system for trading of treasuries. Treasuries are really at
the core of our financial system. They're the way that
individuals across the globe price other assets. They're the mechanism
for the government to raise funds. They're really at the
(41:27):
core of the system, and so we absolutely have to
have a reliable, resilient system, a deep system, and so
we do need to take the measures necessary to make
sure that it stays that way. I think that the
kinds of thing, kinds of steps that we've taken thus
far are useful. You know, for example, one of the
steps that the Federal Reserve took is to establish a
(41:51):
standing repo facility and a facility for foreign official counterparts,
so that if there's pressure in the system that can
be relieved through using repotransactions instead of outright sales that
might cause serious dislocations to the economy.
Speaker 4 (42:07):
Tracy mentioned our conversation with Darryl Duffy, and obviously when
we talk about just the sheer amount of debt that's
being issued, a lot of people talk about it in
terms of macro macro conditions and the financing costs, but
just in terms of infrastructure. Is there more in your
view that needs to be done, whether on sort of
private sector balance sheet, side market structure, central clearing, etc.
(42:29):
That would make the market more able to absorb the
have more capacity for all this issuings.
Speaker 3 (42:37):
I do think it's a really critical question. We do
need a system that can intermediate effectively for treasury securities.
There appears to be strong demand for treasury security, so
it really is question of making sure that securities can
efficiently get to the right to the right buyer. I
think that the SECS move towards central clearing of treasury
(43:00):
securities might be an additional appropriate next step. We're studying
lots of other ways. This is I would say, ongoing
work and will be ongoing work. It was just at
the as I mentioned at the Treasury conference yesterday, it's
an area that we're paying attention to all the time.
Speaker 1 (43:18):
So I realized we've hit a lot of different risks
in this discussion. So we've done interest rate risk, did
operational risksk cyber.
Speaker 2 (43:26):
Risk risks in the treasury market.
Speaker 1 (43:28):
One risk we haven't really talked about, maybe because it
isn't in the headlines quite as much anymore, is crypto risk.
And you know, we had a big slide in the
crypto market over the past year, so it doesn't seem
like that was a huge deal for the banking system,
except maybe you know, in respect to something like silver Gate.
(43:48):
But one aspect of crypto contagion, I guess, or like
one little crack that I think hasn't gotten that much attention,
even though the guy behind it certainly has has to
do with Sam Bankman Freed, who has been a guest
on this podcast a number of times and is now
in a lot of legal trouble for reasons I think
(44:08):
everyone knows. But he did buy or FTX appears to
have bought a US bank through a Cayman based company,
which seems like a pretty big channel through which crypto
could perhaps come into the US banking system. Is that
something that you and your supervisory role are looking at
(44:29):
or aware of, or how are you thinking about crypto
contagion and the risks posed there more broadly?
Speaker 3 (44:35):
Well, let me just say that in general, the banking
system is not deeply exposed to issues in the crypto space.
Most banks have been taking what I would describe as
careful and cautious approach to crypto. But we have been
paying attention to these issues very much since I arrived
(44:56):
at the board. We've established a Novel Activity Supervisory program
to bring experts from around the Federal Reserve system together
to help supervisors deal with issues at banks that are
engaging in some crypto related activity and that novel activities.
Supervisory program should help us wrap our arms around the issues,
(45:20):
should provide greater clarity and guardrails to banks that want
to be involved in this space. So we want to
enable banks to innovate using these new technologies, but to
do that in a way that is safe and sound,
that complies with consumer protection laws, that doesn't expose the
banking system to threats from illicit finance, terrorist financing, money laundering.
(45:46):
All those issues really need to be completely buttoned down,
and this supervisory program will help provide that kind of clarity.
Speaker 4 (45:53):
Speaking of crypto, while we're on the subject, one of
those things that we've sort of learned to appreciate over
the time is stomach risk seems to come from instruments
which are presumed not to be risky but to be safe.
And so whether we're talking about the money market funds
back in two thousand and eight or just the par
value of deposits at a bank in twenty twenty three,
(46:13):
and so that obviously when it comes to crypto, you know,
that leads you to the stable coin conversation. So I
kind of want to ask two questions. One is, you know,
what further do we need to do to make sure
that stable coins, at some point in the future don't
become a source of systemic risk. But also in the
positive sense, do you feel any optimism at all that
stable coins could be a big private issued stable coins
(46:36):
could be a meaningful and important part of the global
payments landscape going forward.
Speaker 3 (46:41):
Well, let me just say first of all, I think
that we have to be very careful with stable coins.
Stable Coins are a form of private money, and we've
seen throughout really history that private money, if it's not
well regulated, can be extremely explosive. People come to rely
on it. In the case of a stable coin linked
to the dollar, stable coins are really borrowing the trust
(47:05):
of the Federal Reserve. And if that's the case, we
need strong federal oversight of stable coins. We need oversight
of the issuers and the wallets. We need to make
sure that there's strong enforcement. They're strong rules of the
road because they can be quite explosive, and so I
do think we have to be really careful in the
stable coin space. I think that, you know, innovation is
(47:28):
hard to predict. It's hard to say that a particular
technology is the one that's going to be the next
technology of the future. I think it's appropriate for us
to let that innovation happen, but it's got to happen
within really, really clear guardrails.
Speaker 2 (47:46):
We just have a few minutes left. Shall we take
some more questions?
Speaker 3 (47:48):
Yeah?
Speaker 4 (47:49):
Sure, Okay, So this is a going back to the
FED now question question or asked, is the FED conflicted
as a regulator of debit card costs and an operator
of FED now potentially competing with debit card card cause?
And I also wonder, you know, sort of dumvetails back
to this question that I asked earlier about the degree
to which real time payments for various reasons haven't flourished
(48:10):
because the lack of real time payments.
Speaker 2 (48:13):
Service people make money.
Speaker 4 (48:14):
People make money on the existence a lot of money
has made on the existing payment system.
Speaker 3 (48:18):
Yeah. No, I look, first of all, on the second point.
I you know, we talked about this briefly before. I
do think that there are revenues in the banking system,
like overdraft fees and insufficient fund fees that some banks
have gotten used to. Many banks now are getting out
of that business entirely. They've announced that, you know, they're
(48:39):
not going to do overdrafts anymore. They're not going to
charge for them. I think that's positive for our economy
and for consumers. Overdraft fees are often really hard for
consumers to avoid, and so if we can get rid
of them because banks are deciding that that's not the
business they want to be in, I think that's a
net positive for households and the life, you know. With
(49:02):
respect to the existing payment system, I don't see a
conflict between the work that we're doing on debit cards
and the work that we're doing on FED now. Congress
has assigned us a very particular role with respect to
debit cards. Congress has said that we need to determine
that debit card interchange fees are reasonable and proportional in
(49:25):
relation to certain specified costs. That's our job. We do
the job Congress has assigned us. We recently issued a
proposal to update the rules in that space, and I
don't see that influencing or connecting in any way with
our work on FED now.
Speaker 1 (49:40):
Should I ask a super big picture question, go for it.
Speaker 2 (49:43):
We've been pretty micro.
Speaker 1 (49:45):
There was a brief moment this summer, sort of post SBB,
where it felt like there was a window to suddenly
have a sort of existential conversation about the US banking system,
there was discussion over what do we actually want this
to look like. Do we want a nation of small
banks where everyone knows their banker in it's a wonderful lifestyle.
(50:09):
Do we want something that's maybe more similar to Canada,
where we have like six huge banks that are highly
regulated and that sort of thing. When you're making bank rules,
when you're evaluating everything that we've discussed today, do you
have a vision of what you want the US banking
system to look like?
Speaker 3 (50:29):
Well, let me just say I very much value the
diversity that we have in the United States. So different
kinds of institutions. We have community banks that are very
very local. We have smaller regional banks. We have large
banks that are not the g sibs. We have very
large banks that are super complex and serve different kinds
of markets. I think that that diversity in our financial
(50:52):
system is actually really healthy. It makes for a stronger,
more vibrant economy. It makes our banking system more resilient
to shock, and so I do think that we do
take into account. I do think that it's important for
us to take into account that diversity of size and
type of institution.
Speaker 4 (51:11):
Can I ask just like a random question that's totally
out of now. Yeah, I should have asked this during
the more the macro part of the discussion. But you know,
and I think about where the FED is the policy
with the policy trajectory, you know, the one area of
the economy that I think everyone agrees that the FED
has real influenced on his housing and rate policy feeds
directly through to mortgage rates, and you can slow down.
(51:33):
It looks like, unambiguously, if there's one thing that rates
can do, it's slow down housing activity. But that cuts
both ways because it reduces demand for new mortgages, but
it can also impair supply. And we are in a
time in which many people feel like the United States
is perhaps millions of units under housed. How do you
think about the supply side aspect of monetary policy and
(51:55):
the point at which rate policy ends up constrain supply
when in theory more supplies what drivers prices down?
Speaker 3 (52:04):
Yes, So what I give you a technical answer and
then a maybe a broader answer, So you know, we
really are mostly working on the demand side of that
of the house, if you will, and that you know,
the elasticities of demand are faster and larger than the
elasticities of supply. So what we're really seeing is, you know, overall,
(52:28):
our country has not had enough housing supply for a
long time. We've been you know, behind that was true,
you know, before the raid hikes, it was true, before
the pandemic. It's been true for a while. So we
do need just overall in our society to see more
housing supply come in in order to catch up. But
right now, the major effect, the shortest term effect, is
(52:51):
really on tamping down aggregate demand so that supply has
a chance to catch up. And I think there is
evidence that we were talking about before in the day
at that supply and demand are coming into better balance overall.
Speaker 1 (53:04):
Well, Joe, I think we've effectively achieved a random walk
through a whole lot of.
Speaker 4 (53:09):
Topics, crossing back and forth.
Speaker 1 (53:11):
Yeah, thank you so much to Michael for being a
wonderful guest and you know, playing ball with us on
a wide variety of topics.
Speaker 2 (53:20):
Really appreciate it.
Speaker 3 (53:21):
It's my pleasure to join you on the show. I
really enjoyed.
Speaker 5 (53:23):
Thank you, Thank you.
Speaker 4 (53:46):
That was our conversation with Michael Barr, the fed's Vice
chair for Supervision at the Clearinghouse Conference in New York City.
Speaker 1 (53:54):
I'm Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4 (53:57):
And I'm Joe Wisenthal. You can follow me at the
Stall War. Follow our producers Carmen Rodriguez at Carmen Arman,
dash Ol Bennett at Dashbot, and Kelbrooks at Kelbrooks. And
thank you to our producer Moses Ondam. For more Oddlots content,
go to Bloomberg dot com slash odd Lots, where we
have a blog, transcript and a newsletter. And I'm sure
there's gonna be a lot of conversation about this episode
(54:20):
in the Odd Lots Discord one of my favorite places
to hang out online, Discord dot gg, slash offline.
Speaker 1 (54:27):
And if you enjoy odd Lots, if you like it
when we record these live conversations, then please leave us
a positive review on your favorite podcast platform.
Speaker 2 (54:36):
Thanks for listening.
Speaker 5 (55:06):
In e
Hosts And Creators
Joe Weisenthal
Tracy Alloway
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Cardiac Cowboys
The heart was always off-limits to surgeons. Cutting into it spelled instant death for the patient. That is, until a ragtag group of doctors scattered across the Midwest and Texas decided to throw out the rule book. Working in makeshift laboratories and home garages, using medical devices made from scavenged machine parts and beer tubes, these men and women invented the field of open heart surgery. Odds are, someone you know is alive because of them. So why has history left them behind? Presented by Chris Pine, CARDIAC COWBOYS tells the gripping true story behind the birth of heart surgery, and the young, Greatest Generation doctors who made it happen. For years, they competed and feuded, racing to be the first, the best, and the most prolific. Some appeared on the cover of Time Magazine, operated on kings and advised presidents. Others ended up disgraced, penniless, and convicted of felonies. Together, they ignited a revolution in medicine, and changed the world.
The Joe Rogan Experience
The official podcast of comedian Joe Rogan.