WEBVTT - The Fed's Michael Barr on Real-Time Payments and the Basel Endgame 0:00:10.119 --> 0:00:13.200 Hello, and welcome to another episode of the All Thoughts podcast. 0:00:13.280 --> 0:00:16.800 I'm Tracy Alloway and I'm Joe Wisenthal. So you are 0:00:16.840 --> 0:00:19.959 about to listen to a very special episode. This is 0:00:20.040 --> 0:00:23.880 a live conversation that we recorded with Michael Barr, the 0:00:24.000 --> 0:00:28.800 fed's Vice Chair for Supervision, at the Clearinghouse Annual Conference 0:00:28.920 --> 0:00:30.920 in New York on November seventeenth. 0:00:31.240 --> 0:00:33.279 What should we talk about? There's nothing going on. 0:00:33.640 --> 0:00:36.000 It's not like there's been any development in payments or 0:00:36.080 --> 0:00:38.080 bank regulation. It's kind of boring. 0:00:38.440 --> 0:00:39.080 Yeah, I don't know. 0:00:39.520 --> 0:00:41.640 No, Okay, there is a lot to talk about, so 0:00:41.760 --> 0:00:43.560 I should get started right away. 0:00:44.159 --> 0:00:45.559 Why don't we start with payments. 0:00:45.640 --> 0:00:48.519 We are at the Clearinghouse conference, so that's probably a 0:00:48.520 --> 0:00:51.400 good place to start. You know, you launched FED now, 0:00:51.800 --> 0:00:55.280 the new real time payments clearing system, a few months 0:00:55.320 --> 0:00:56.560 ago in the summer. 0:00:57.040 --> 0:00:57.760 How's that going. 0:00:57.880 --> 0:01:00.000 What's the takeup been like and what have you learned 0:01:00.360 --> 0:01:01.160 since launching that? 0:01:01.640 --> 0:01:03.880 Well? I think it's going well. I think the important 0:01:03.880 --> 0:01:06.840 thing to remember about take up is that it's going 0:01:06.920 --> 0:01:09.560 to take a long time. When we've seen any payments 0:01:09.600 --> 0:01:13.039 innovation in our economy, it takes a long time for 0:01:13.200 --> 0:01:16.200 people to get used to the idea, to develop it, 0:01:16.400 --> 0:01:18.640 to figure out how they're going to use it. But 0:01:18.800 --> 0:01:21.200 right now, what we've done is built the rails, and 0:01:21.319 --> 0:01:23.840 those rails can be used by the making sector to 0:01:23.920 --> 0:01:28.520 provide new services to their customers, to households and businesses. 0:01:29.319 --> 0:01:32.800 Take up really requires banks to decide that their customers 0:01:32.840 --> 0:01:35.480 really want the service, and then they can innovate on 0:01:35.520 --> 0:01:37.360 top of it. And that's what we're looking forward to 0:01:37.400 --> 0:01:37.920 over time. 0:01:38.280 --> 0:01:41.880 Do you have any way of gauging sitting aside that 0:01:41.920 --> 0:01:45.160 it's going to take a while. It's what constitutes a 0:01:45.200 --> 0:01:48.120 benchmark that we should watch for of Okay, this is 0:01:48.720 --> 0:01:51.840 taking up again, sitting aside that we maybe decades, but 0:01:52.120 --> 0:01:54.760 what should we be looking out for to see is this. 0:01:54.760 --> 0:01:57.640 Going well again? I think the right way to think 0:01:57.640 --> 0:02:00.800 about this is over the very long term. If you 0:02:00.840 --> 0:02:03.840 look to think about any payments innovation, whether it's the 0:02:04.040 --> 0:02:07.280 development of banknotes or the rise of checks in the 0:02:07.320 --> 0:02:11.240 seventeen hundreds, or really any kind of innovation we've seen 0:02:11.760 --> 0:02:14.560 in payments, they take a very long time to build 0:02:14.600 --> 0:02:18.000 a network. Once that network gets built and you have scale, 0:02:18.680 --> 0:02:21.040 then it really takes off and everybody assumes it's been 0:02:21.040 --> 0:02:23.720 that way forever. So we're really at the very early 0:02:23.800 --> 0:02:24.560 stages of this. 0:02:25.360 --> 0:02:29.880 So speaking of development, I am not a payments expert. 0:02:30.120 --> 0:02:32.320 I used to know more about the space when I 0:02:32.360 --> 0:02:34.680 was a banking correspondent, but that was like more than 0:02:34.720 --> 0:02:37.360 ten years ago at this point. But I do remember 0:02:37.840 --> 0:02:41.960 ten years ago the Clearinghouse also developed its own real 0:02:42.000 --> 0:02:46.120 time payment system. Is it weird that we've ended up 0:02:46.400 --> 0:02:49.280 with two basically a publicly owned one and a sort 0:02:49.320 --> 0:02:50.679 of privately owned. 0:02:50.800 --> 0:02:53.400 We actually have a very long history in this country 0:02:53.400 --> 0:02:56.480 of having both public rails and private rails. That's the 0:02:56.520 --> 0:03:00.400 way most of our payments technology has evolved over time, 0:03:00.800 --> 0:03:04.160 and most of our payment systems today have both public 0:03:04.200 --> 0:03:07.280 aspects and private aspects. We really think of these things 0:03:07.280 --> 0:03:11.239 as complementary. We work really closely together. You know, David 0:03:11.280 --> 0:03:15.959 and Mark were taking selfies yesterday. These are close collaborations. 0:03:16.000 --> 0:03:19.000 Yes, glad we could be here to facilitate it. 0:03:19.280 --> 0:03:21.560 But just on this note, I mean, could you get 0:03:21.600 --> 0:03:24.960 a situation where, for instance, a lot of the higher 0:03:25.080 --> 0:03:28.799 volume payments from the big banks are traveling along the 0:03:28.840 --> 0:03:32.480 clearinghouse pipes, whereas a lot of the smaller payments from 0:03:32.520 --> 0:03:35.280 smaller banks are going along the public rails basically a 0:03:35.360 --> 0:03:37.480 fracturing or a fragmentation of the system. 0:03:37.960 --> 0:03:39.960 I don't think that if we ended up that way, 0:03:40.000 --> 0:03:41.600 I don't think that would be a fracturing. We have 0:03:41.680 --> 0:03:45.880 lots of systems now where larger volume payments travel one 0:03:45.960 --> 0:03:48.960 route and smaller volume payments travel the other. That could 0:03:49.080 --> 0:03:52.040 end up being the efficient way to do it. It would 0:03:52.080 --> 0:03:53.960 be fine if it ended up that way. It also 0:03:53.960 --> 0:03:56.840 would be fine if there were a mix of transactions 0:03:56.840 --> 0:03:59.800 on both kinds of rails. They really are complementary. I 0:04:00.080 --> 0:04:02.600 think that, you know, if you move forward many years, 0:04:02.640 --> 0:04:06.360 we would expect that banks would have access to both 0:04:06.520 --> 0:04:09.839 kinds of rails. They could choose which rail to send 0:04:09.840 --> 0:04:12.280 an individual payment on. That would be great. 0:04:12.520 --> 0:04:15.760 Why are they complementary because if they do roughly the 0:04:15.880 --> 0:04:18.560 same thing, and I would to it that most payment 0:04:18.600 --> 0:04:22.320 systems essentially benefit from network effects and the bigger one 0:04:22.440 --> 0:04:25.159 makes it more valuable to use that one. Why wouldn't 0:04:25.200 --> 0:04:27.880 we assume that it's just going to be one wins 0:04:27.920 --> 0:04:28.680 and one loses. 0:04:29.200 --> 0:04:30.840 Well, you know, if you again, if you look at 0:04:30.839 --> 0:04:35.520 existing payment systems today, we have private rails for ACCH, 0:04:35.560 --> 0:04:39.359 we have public rails for ACCH. I don't foresee this 0:04:39.520 --> 0:04:42.480 being a conflict. I really do think that banks are 0:04:42.480 --> 0:04:44.839 going to be able to have optionality in the systems 0:04:44.839 --> 0:04:47.680 that they use, and they might use different rails for 0:04:47.720 --> 0:04:49.000 different kinds of payments. 0:04:49.480 --> 0:04:51.920 Why did it take so long to develop a real 0:04:51.960 --> 0:04:55.000 time payment system? Because again, I mean I spent a 0:04:55.040 --> 0:04:56.760 lot of time in the UK. I think the UK 0:04:56.960 --> 0:05:00.159 had something equivalent in like two thousand and seven, and 0:05:00.279 --> 0:05:03.039 we're here in twenty twenty three just launching it. 0:05:03.040 --> 0:05:05.760 It has taken a long time. I would agree with that. Look, 0:05:05.960 --> 0:05:12.159 the Federal Reserve is a conservative institution, and I think 0:05:12.200 --> 0:05:16.479 that's appropriate. You know, people expect us to be able 0:05:16.520 --> 0:05:22.320 to provide trustworthy, reliable services, and we earn that trust 0:05:22.440 --> 0:05:26.120 by being very, very careful about everything we do, and 0:05:26.160 --> 0:05:27.600 that's true with FED now as well. 0:05:28.120 --> 0:05:31.200 Does the fact that there are these two competing payment 0:05:31.360 --> 0:05:35.640 systems or maybe complementary what ambiguity about which one will 0:05:35.680 --> 0:05:38.560 gather more volume and for which type of payments? Do 0:05:38.600 --> 0:05:41.559 you think it slows down adoption at all in terms 0:05:41.600 --> 0:05:44.039 of a bank having to decide which one they're going 0:05:44.080 --> 0:05:47.520 to invest their time and energy or turning into a 0:05:47.560 --> 0:05:51.599 retail facing application of it, and thinking about which one 0:05:51.640 --> 0:05:52.160 is going to win. 0:05:53.000 --> 0:05:55.800 You know what. My expectation is that banks will end 0:05:55.920 --> 0:05:59.880 up again over time, probably adopting both the public rails 0:05:59.880 --> 0:06:03.520 and the private rails and using them for complementary kinds 0:06:03.520 --> 0:06:06.320 of services. It's going to take a time, you know, 0:06:06.360 --> 0:06:09.440 I would say, especially for community banks. One of the 0:06:09.560 --> 0:06:13.320 key issues here is making sure that core service providers 0:06:13.720 --> 0:06:16.719 get up to speed quickly and offer the service to 0:06:16.800 --> 0:06:19.919 all the community banks in a fair and equal and 0:06:20.000 --> 0:06:23.240 accessible way. And so we are very focused on working 0:06:23.240 --> 0:06:26.159 with those service providers to make sure they're offering that 0:06:26.240 --> 0:06:27.560 service to community banks. 0:06:27.720 --> 0:06:29.600 Can you give us a sense of the take up 0:06:29.680 --> 0:06:30.920 and the expansion so far? 0:06:31.240 --> 0:06:33.920 Now, what I would say is you should be thinking 0:06:34.000 --> 0:06:38.000 about this. It's taking years to do. Take Up is 0:06:38.080 --> 0:06:41.320 always slow at the start. It's going according to what 0:06:41.360 --> 0:06:44.320 we thought, but that's very slow, and we expect it 0:06:44.360 --> 0:06:45.480 to be slow at the beginning. 0:06:45.480 --> 0:06:49.560 Will you come back on our podcasts ten years to us. 0:06:49.640 --> 0:06:51.840 I would be delighted to That would be really fun. 0:06:51.960 --> 0:06:57.360 Okay, well, I mean talking about long time scales. There 0:06:57.400 --> 0:06:59.200 is a sense of irony in that the FED was 0:06:59.200 --> 0:07:01.560 working on this for a long time and then they 0:07:01.600 --> 0:07:04.240 release it in the summer of twenty twenty three, right 0:07:04.279 --> 0:07:09.279 after we've seen essentially a bank run on Silicon Valley Bank, 0:07:09.800 --> 0:07:13.880 and I've seen some commentary about a potential tension here. 0:07:13.960 --> 0:07:18.600 You're making real time payments possible more instantaneous to posit 0:07:18.680 --> 0:07:22.360 withdrawals twenty four to seven at a time when deposit 0:07:22.400 --> 0:07:26.240 withdrawals have become problematic. I think Joe abat Over at 0:07:26.520 --> 0:07:29.440 Barclay's was talking about how you're basically allowing banks to 0:07:29.520 --> 0:07:33.480 kind of slim down their inventory in really efficient ways, 0:07:33.800 --> 0:07:36.440 but in a way that, as we learned from the pandemic, 0:07:37.000 --> 0:07:40.880 could be problematic if something happens. How are you balancing 0:07:41.080 --> 0:07:41.840 that tension? 0:07:42.440 --> 0:07:44.720 Well, you know, if you look at the situation today, 0:07:44.720 --> 0:07:50.440 Obviously Silicon Valley Bank failed without any new technology. People 0:07:50.440 --> 0:07:53.320 were able to withdraw it very, very quickly. The real 0:07:53.360 --> 0:07:57.440 issue in Silicon Valley Bank was deep mismanagement of interest 0:07:57.480 --> 0:08:01.760 rate risk and liquidity risk. The highly networked nature of 0:08:01.800 --> 0:08:07.520 their deposit base. The technology side of that made it 0:08:07.560 --> 0:08:10.040 possible for them to withdraw, but not in any fancy 0:08:10.080 --> 0:08:13.560 new technology technology that's been around since the nineteen seventies. 0:08:13.960 --> 0:08:15.600 So really, what we need to do is focus on 0:08:15.640 --> 0:08:18.400 the fundamentals for banks to make sure that they are 0:08:18.400 --> 0:08:23.240 appropriately managing their risks with respect to the new technology. 0:08:23.240 --> 0:08:27.360 With respect to fed now, the individual banks can set 0:08:27.400 --> 0:08:30.240 their own limits on the way in which they use 0:08:30.280 --> 0:08:33.280 the technology. They can set size limits if they want, 0:08:33.280 --> 0:08:36.079 they can cap it. So I don't think it'll introduce 0:08:36.679 --> 0:08:39.720 new significant risks into the system. The risks and the 0:08:39.760 --> 0:08:41.480 system that they're there, we need to make sure we 0:08:41.880 --> 0:08:42.880 manage appropriately. 0:08:43.200 --> 0:08:46.680 Setting aside, whether it's fed now or the private sector 0:08:46.760 --> 0:08:49.920 clearing house one in the US. Does the fact that 0:08:50.360 --> 0:08:53.600 arguably banks make a lot of money from the lack 0:08:53.600 --> 0:08:57.839 of real time payments, whether it's overdraft fees, laid fees, 0:08:57.960 --> 0:09:00.640 there's a lot of money in the business of people 0:09:00.720 --> 0:09:03.960 not making timely payments. I also wonder maybe it's off 0:09:04.000 --> 0:09:05.120 the mark, but I wonder, you know, we're in a 0:09:05.200 --> 0:09:07.880 high interest rate environment, so people want to hold on 0:09:07.960 --> 0:09:10.199 cash maybe for a few extra days. Does that when 0:09:10.240 --> 0:09:12.920 we're thinking about timelines, do you think that that affects 0:09:12.920 --> 0:09:16.480 the trajectory of these timelines the business of slow payments? 0:09:16.480 --> 0:09:19.839 Basically, I do think we have to, you know, look 0:09:19.880 --> 0:09:23.880 forward to a system in which businesses and households can 0:09:23.920 --> 0:09:26.840 get their funds right away we might end up in 0:09:26.880 --> 0:09:29.680 a situation where we can have a significant effect in 0:09:29.760 --> 0:09:35.920 reducing overdraft fees, insufficient fund fees, a situation where a 0:09:35.920 --> 0:09:38.240 small business can get paid right away for the work 0:09:38.280 --> 0:09:41.880 they've done. That would be a huge benefit for American society. 0:09:42.280 --> 0:09:44.840 And so I do think that one of the potential 0:09:44.960 --> 0:09:49.640 upside benefits have fed now is the ability to actually 0:09:49.679 --> 0:09:54.040 deliver for households and businesses the kinds of banking services 0:09:54.120 --> 0:09:57.840 that they want and that would reduce risk to them. 0:09:58.160 --> 0:10:00.000 I think that's a wonderful thing for society. 0:10:01.040 --> 0:10:02.560 Just in terms of the payment space. 0:10:03.040 --> 0:10:07.200 You've finally unveiled this what's on the agenda Now, what 0:10:07.320 --> 0:10:09.880 other payments improvements could be made for the US. 0:10:10.040 --> 0:10:12.400 Well, I think it's a great question. Look, I said 0:10:12.640 --> 0:10:15.840 before that we're a very conservative institution, and we are, 0:10:16.480 --> 0:10:19.000 but we also need to continue to think about innovation. 0:10:19.760 --> 0:10:22.920 Fed now will continue to be an important part of 0:10:23.000 --> 0:10:25.680 the way that we innovate. So we're looking to add 0:10:25.679 --> 0:10:29.920 additional features to fed now over time, and those features 0:10:29.920 --> 0:10:32.360 will make it easier for banks to use, better, for 0:10:32.440 --> 0:10:35.680 banks to use, better for banks to offer to households 0:10:35.720 --> 0:10:39.280 and businesses. I think those kinds of innovations are really important. 0:10:40.040 --> 0:10:43.960 And then we're also doing very basic research in newer 0:10:44.000 --> 0:10:50.080 technologies around distributed ledger technology using encryption techniques to send 0:10:50.080 --> 0:10:53.840 payments back and forth. That very basic research might help 0:10:53.920 --> 0:10:56.320 us to continue to innovate in our payment systems. 0:10:56.880 --> 0:11:01.480 Since you mentioned digital ledger technologies, people talk about other 0:11:01.720 --> 0:11:05.280 site other types of payments, central bank digital currencies. I 0:11:05.320 --> 0:11:08.600 always have a hard time wrapping my head around I 0:11:08.600 --> 0:11:10.520 guess the why of some of this. I mean, I 0:11:10.600 --> 0:11:15.600 understand these are interesting technologies maybe, but why, Like what 0:11:15.720 --> 0:11:18.160 is what do you feel is the impulse when people 0:11:18.200 --> 0:11:20.920 talk about exploring is some of these new I don't 0:11:20.920 --> 0:11:24.080 know paradigms of money or paradigms of payments, what people 0:11:24.120 --> 0:11:25.679 hope to accomplish some of that. 0:11:26.240 --> 0:11:28.839 You know, it's hard for me to say what lots 0:11:28.840 --> 0:11:30.640 of other people think, but I'll just say just from 0:11:30.679 --> 0:11:33.680 my perspective, you know, I think the research is important 0:11:33.679 --> 0:11:37.320 because we might uncover ways to be much more efficient 0:11:37.360 --> 0:11:41.440 with the payment system, and payment system efficiency can help 0:11:41.480 --> 0:11:46.319 banks and households and businesses conduct their transactions in a 0:11:46.360 --> 0:11:49.760 lower cost way. So I'm not super into all the 0:11:50.960 --> 0:11:54.160 very large claims people make for Central Bank digital currency. 0:11:54.200 --> 0:11:57.840 But I do think that the underlying technology, if it 0:11:57.880 --> 0:12:14.840 can lower costs, improve efficiency, those things are worth researching. 0:12:18.480 --> 0:12:20.760 Joe, you want to talk about bank reg let's talk 0:12:20.760 --> 0:12:21.719 about bankreg all right. 0:12:22.000 --> 0:12:24.840 So again, I used to be a former banking correspondent, 0:12:24.960 --> 0:12:27.840 and I remember whenever I pitched a story about bank 0:12:27.880 --> 0:12:30.160 regulation to my editors, their eyes would just sort of 0:12:30.160 --> 0:12:33.480 glaze over. But now fix it now, Well, I don't 0:12:33.520 --> 0:12:37.679 have to, because now you know there are adverts about basil. 0:12:37.600 --> 0:12:39.520 Playing during NFL games. 0:12:39.280 --> 0:12:42.480 Which is our own listeners are often our own listeners 0:12:42.480 --> 0:12:45.439 of the podcast often talking about learning a lot about 0:12:45.480 --> 0:12:46.360 basil endgames. 0:12:46.400 --> 0:12:48.360 Yeah, this is something I never thought I would see 0:12:48.400 --> 0:12:50.480 in my lifetime. I feel like it's a slippery slope 0:12:50.520 --> 0:12:53.080 to the point where everyone starts including their position on 0:12:53.120 --> 0:12:56.000 the basil endgame proposals in their like Tinder profile or 0:12:56.080 --> 0:12:56.719 something like that. 0:12:57.200 --> 0:12:58.400 It's a new talking point. 0:12:58.400 --> 0:13:01.840 But have you been surprised by the amount of discussion 0:13:01.920 --> 0:13:02.959 that this is generating. 0:13:03.160 --> 0:13:05.360 I have been surprised by it. I mean, I do 0:13:05.440 --> 0:13:09.840 think that some of the advertisements and things you're seeing 0:13:09.880 --> 0:13:13.840 in the public are extremely unusual for bank regulation. Normally, 0:13:13.880 --> 0:13:17.840 we issue a proposal and then we get very detailed 0:13:17.840 --> 0:13:21.240 comment letters back, and we take those comment letters into 0:13:21.280 --> 0:13:24.080 account and we finalize our rule. That's sort of the 0:13:24.120 --> 0:13:28.560 normal process. So seeing ads at football games, that's that's 0:13:28.679 --> 0:13:29.440 kind of unusual. 0:13:29.920 --> 0:13:32.120 How does it feed through to you? I'm always actually 0:13:32.280 --> 0:13:35.880 curious when an industry group does something like this, or 0:13:36.200 --> 0:13:38.400 even when I see an ad for some you know, 0:13:38.640 --> 0:13:40.679 some sort of B to B software or something. I'm 0:13:40.720 --> 0:13:44.480 not the how does it actually filter through you in 0:13:44.520 --> 0:13:48.040 your job in terms of okay, actually decision and the 0:13:48.080 --> 0:13:50.880 pressure that maybe builds on you. 0:13:49.800 --> 0:13:53.400 You know, like in the Peanuts when adults talk and 0:13:53.440 --> 0:13:54.040 it goes. 0:13:54.040 --> 0:14:00.360 Yeah, that's what they're accomplishing. Money well, spend well. 0:14:00.400 --> 0:14:04.360 I mean, in fairness, this is a big deal for banks, 0:14:04.600 --> 0:14:07.280 and I think there is some discussion around making the 0:14:07.320 --> 0:14:11.439 cost of capital more expensive or less available for obvious reasons. 0:14:11.480 --> 0:14:14.280 And one of the criticisms that you hear now is 0:14:14.559 --> 0:14:18.280 this is going to make mortgages more expensive for Americans. 0:14:18.600 --> 0:14:23.680 How would you tackle that particular issue or that particular criticism. 0:14:24.400 --> 0:14:28.080 Look, you know, any time that you change regulation, there 0:14:28.120 --> 0:14:31.000 are costs and benefits to that regulation. The big benefit 0:14:31.400 --> 0:14:34.240 of having higher capital is that you make the banking 0:14:34.280 --> 0:14:36.840 system more resilient. You know, one of the things that 0:14:36.880 --> 0:14:40.560 we saw in the global financial crisis is that it 0:14:40.680 --> 0:14:45.400 really crushed the American economy. It caused millions of households 0:14:45.880 --> 0:14:50.040 to lose their homes to go into foreclosure. That financial 0:14:50.080 --> 0:14:54.680 crisis shuttered American businesses. It called massive unemployment, huge arm 0:14:54.680 --> 0:14:56.760 of the economy. We want to make sure that the 0:14:56.760 --> 0:15:01.240 banking system doesn't crush households and businesses again. At the 0:15:01.280 --> 0:15:04.840 same time, when you have higher capital levels, that increases 0:15:04.920 --> 0:15:09.200 the private cost to banks. Banks use more equity and 0:15:09.280 --> 0:15:13.240 a little bit less debt to fund their mortgages or 0:15:13.280 --> 0:15:18.080 their trading activity or the like. The capital propose that 0:15:18.120 --> 0:15:22.000 we've put forward mostly changes the rules for trading and 0:15:22.080 --> 0:15:26.120 other non lending activity. A very small portion is actually 0:15:26.120 --> 0:15:29.800 related to lending. And when you look at that increased 0:15:29.880 --> 0:15:34.359 cost to the banks with respect to capital, that translates 0:15:34.480 --> 0:15:38.760 on average for a typical loan to an increase if 0:15:38.960 --> 0:15:41.000 all of it is passed through to the borrow, or 0:15:41.000 --> 0:15:43.840 if there's no competition at all and all of it 0:15:43.920 --> 0:15:46.640 is passed through to the borrow, the average increase would 0:15:46.680 --> 0:15:52.080 be zero point zero three percent. So it's a very 0:15:52.280 --> 0:15:55.600 very small change in the cost of credit and a 0:15:55.680 --> 0:15:58.720 significant increase in the resiliency of the banking system. Just 0:15:58.760 --> 0:15:59.000 on the. 0:15:59.000 --> 0:16:02.880 Point about the different ways that big banks versus smaller 0:16:02.920 --> 0:16:06.400 banks are treated. I mean, my understanding is the US 0:16:06.520 --> 0:16:10.840 is one of the only jurisdictions that actually created carveouts 0:16:10.840 --> 0:16:14.520 from basel for smaller banks. And I guess, going back 0:16:14.520 --> 0:16:17.520 to the Silicon Valley Bank example, I mean, given where 0:16:17.600 --> 0:16:21.440 trouble in the banking system was this year, is that 0:16:21.480 --> 0:16:22.920 something we should still be doing. 0:16:23.640 --> 0:16:26.200 Well. You raise an excellent point, so you know what 0:16:26.240 --> 0:16:29.480 we've done in this proposal is say that those stricter 0:16:29.600 --> 0:16:33.880 capital requirements should not only apply to the top eight 0:16:33.920 --> 0:16:37.040 banks in the country, but they should also apply to 0:16:37.600 --> 0:16:40.440 banks that are over one hundred billion. So there are 0:16:40.480 --> 0:16:42.480 thirty seven banks in the country that are over one 0:16:42.520 --> 0:16:45.360 hundred billion. There aren't that many. We have over four 0:16:45.400 --> 0:16:48.240 thousand banks in the banking system, so less than forty 0:16:48.280 --> 0:16:51.800 out of four thousand are covered. And it would have 0:16:51.920 --> 0:16:55.200 covered institutions like Silicon Valley Bank if we had had 0:16:55.200 --> 0:16:58.200 this place in place before. And I think one of 0:16:58.200 --> 0:17:02.920 the lessons from that experience was that it's important for 0:17:03.080 --> 0:17:05.800 large banks that might have an effect more broadly on 0:17:05.840 --> 0:17:10.840 the economy to have that real resilience to them. And 0:17:11.600 --> 0:17:14.959 you know, with respect to Silicon Valley Bank, they didn't 0:17:15.000 --> 0:17:18.399 have to account for the unrealized losses on their balance 0:17:18.400 --> 0:17:23.480 sheet reduction in value of securities, and under our proposal 0:17:23.560 --> 0:17:27.200 they those institutions at that size would need to account 0:17:27.200 --> 0:17:27.399 for that. 0:17:27.520 --> 0:17:30.760 Now, I'd want to jump ahead too much. And it 0:17:30.880 --> 0:17:34.479 was still a regulatory question. But at the FMC, at 0:17:34.520 --> 0:17:37.560 the FED, do you think much about the interplay of 0:17:37.640 --> 0:17:42.000 rate policy and financial stability because or regulation? Because I 0:17:42.000 --> 0:17:45.240 feel like often we talk about these two different things. 0:17:45.280 --> 0:17:48.119 There's the supervisory aspect of the FED, the regulation of 0:17:48.160 --> 0:17:50.440 the banks, et cetera. And then there's monetary policy and 0:17:50.480 --> 0:17:54.280 that's economics. But as we saw with SVB, they can 0:17:54.320 --> 0:17:57.120 interplay and the loss is born on long term debt 0:17:57.200 --> 0:18:01.400 or other holdings can become financial stability issues. How much 0:18:01.480 --> 0:18:05.000 do those two conversations overseect in your that word over 0:18:05.119 --> 0:18:08.600 sect in your world where you think about the stability 0:18:08.640 --> 0:18:11.480 aspects of economic policy choices, I think you. 0:18:11.480 --> 0:18:16.520 Mean overlap and intersect. 0:18:13.040 --> 0:18:19.800 Over Yes, they both overlap and intersect. So no, I 0:18:19.800 --> 0:18:22.840 think it's a great point. So you know, first of all, 0:18:22.840 --> 0:18:25.800 I have two jobs. I'm a governor and therefore sit 0:18:25.920 --> 0:18:28.640 on the Federal Open Markets Committee, and I'm the vice 0:18:28.720 --> 0:18:31.639 chair for supervision, and so in my own you know, 0:18:31.760 --> 0:18:39.240 personal responsibilities, those those are quite oversecting. But also more broadly, 0:18:39.280 --> 0:18:41.960 for the FMC and for the Board, we care about 0:18:42.119 --> 0:18:46.840 both both issues. Obviously, we have a clear monetary policy mission. 0:18:47.359 --> 0:18:50.320 We're going to bring inflation down to two percent. That's 0:18:50.359 --> 0:18:53.399 our job. We're going to do it, and we also 0:18:53.520 --> 0:18:57.280 need to understand that, and do understand that as interest 0:18:57.359 --> 0:19:01.119 rates rise, that changes dynamics in the banking system and 0:19:01.160 --> 0:19:06.119 the financial system. We're really attentive to those changing dynamics. Obviously, 0:19:06.440 --> 0:19:09.120 if we don't have a functioning financial system, we don't 0:19:09.119 --> 0:19:11.520 have a functioning economy, and so we have to care 0:19:11.560 --> 0:19:16.280 about financial stability risks and the system. We do regularly 0:19:16.359 --> 0:19:20.400 monitor these. We have regular reports from our financial stability staff, 0:19:20.800 --> 0:19:24.040 not only internally at the Board, but also to the FMC. 0:19:24.760 --> 0:19:27.199 We have an opportunity for members of the FMC to 0:19:27.280 --> 0:19:31.160 comment on financial stability issues as we have our discussions. 0:19:31.440 --> 0:19:34.000 So these things really do go together. 0:19:35.200 --> 0:19:37.520 You know. Joe brought up the fact that there are 0:19:37.560 --> 0:19:41.920 supervisory functions financial stability functions market functions. Just going back 0:19:41.960 --> 0:19:45.679 to the example of Silicon Valley Bank, it seems like 0:19:46.119 --> 0:19:49.760 part of the issue here was supervisory. So even though 0:19:49.760 --> 0:19:52.600 you could see that there was a capital problem, you 0:19:52.600 --> 0:19:54.800 could see the mark to market losses coming through on 0:19:54.840 --> 0:19:58.320 the balance sheet some months before the bank actually went 0:19:58.359 --> 0:20:02.640 down in four users didn't raise those concerns, and they 0:20:02.640 --> 0:20:07.159 certainly didn't force a capital raised by SBB. Do you 0:20:07.160 --> 0:20:10.520 think there's more to be done on the supervisory front, 0:20:10.640 --> 0:20:13.960 maybe changing the culture of some of those supervisors so 0:20:14.040 --> 0:20:17.680 that they feel more comfortable, more willing, whatever, for whatever reason, 0:20:18.000 --> 0:20:20.800 to actually raise these concerns at the appropriate time. 0:20:21.640 --> 0:20:23.600 I think you raise a really important point. And you know, 0:20:23.640 --> 0:20:27.680 we issued a report right after SVB failed, and one 0:20:27.720 --> 0:20:31.680 of the findings of the report was that supervisors identified 0:20:31.720 --> 0:20:35.360 the risks at the bank, but they didn't feel empowered 0:20:35.400 --> 0:20:37.720 to push hard enough to get the bank to take action. 0:20:38.440 --> 0:20:41.240 And so one of the things that we're making sure 0:20:41.240 --> 0:20:44.800 of is that supervisors know that they should act with 0:20:44.960 --> 0:20:49.320 speed and with force and with agility when risks weren't 0:20:49.680 --> 0:20:53.160 that that kind of action. It does take a change 0:20:53.160 --> 0:20:56.640 of culture, It does require us to really make sure 0:20:56.720 --> 0:21:00.760 that that examiners feel supported and empowered to take that step. 0:21:01.080 --> 0:21:02.960 We want to make sure that they're trained and that 0:21:03.000 --> 0:21:07.080 they have guidance to to act forcefully. And I do 0:21:07.119 --> 0:21:09.520 think that all these measures are really critical to making 0:21:09.560 --> 0:21:12.720 sure we have a supervisory system that's effective. Now. You know, 0:21:12.800 --> 0:21:15.240 of course, at the beginning and end of the day, 0:21:15.840 --> 0:21:18.200 you know, bank management and the board of directors of 0:21:18.240 --> 0:21:22.280 the bank are responsible for running the institution, and you know, 0:21:22.320 --> 0:21:24.720 we're not able to come in and run the bank. 0:21:25.000 --> 0:21:28.000 For bank managers, that's their job to do. And in 0:21:28.040 --> 0:21:31.600 this case, in the case of SVB and some other banks, 0:21:32.200 --> 0:21:36.800 the banks really sorely mismanaged both interest rate risk and 0:21:36.840 --> 0:21:40.639 liquidity risk, and they did things that you know, in 0:21:40.720 --> 0:21:44.400 retrospect you kind of are hedge scratchers. You know, they had, 0:21:44.840 --> 0:21:47.400 for example, some hedges on some of their interest rate 0:21:47.520 --> 0:21:49.879 risk and they took those off. 0:21:50.680 --> 0:21:54.399 I saw the internal presentation where they talked about doing that, 0:21:54.440 --> 0:21:56.720 and it was basically like, well, we have these hedges, 0:21:56.920 --> 0:21:59.480 they're expensive. We don't think the Fed's going to raise rates, 0:21:59.480 --> 0:22:01.160 so why don't we make some more money. 0:22:01.359 --> 0:22:02.320 It was literally that. 0:22:02.560 --> 0:22:05.160 Yeah, and you know, it does go to this question 0:22:05.240 --> 0:22:08.639 of you know, compensation they were really focused on short 0:22:08.720 --> 0:22:13.040