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