Alignment of business strategy and risk appetite should minimize the firm's exposure to large and unexpected losses. In addition, the firm's risk management capabilities need to be commensurate with the risks it expects to take.
The only way to ensure that inflation expectations remain safely anchored near the FOMC's target is to keep inflation close to that target on a consistent basis.
We do take seriously our obligation to assess whether our reforms are achieving their desired effects without imposing unnecessary burden.
Congress created Fannie Mae in 1938 and Freddie Mac in 1970. For many years, these institutions prudently pursued their core mission of enhancing the availability of credit for housing.
Higher capital requirements increase bank costs, and at least some of those costs will be passed along to bank customers and shareholders. But in the longer term, stronger prudential requirements for large banking firms will produce more sustainable credit availability and economic growth.
Against this backdrop of technological change and heightened expectations, it is worth remembering our broad public policy objectives, which are driven by the fundamental importance of the payments system in our society.
Legislative reforms in the 1990s and the public/private structure led managements to expand the GSEs' balance sheets to enormous size, underpinned by wafer-thin slivers of capital, driving high shareholder returns and very high compensation for management.
A risk-insensitive leverage ratio can be a useful backstop to risk-based capital requirements. But such a ratio can have perverse incentives if it is the binding capital requirement because it treats relatively safe activities, such as central clearing, as equivalent to the most risky activities.
We need a system that provides mortgage credit in good times and bad to a broad range of creditworthy borrowers.
The Government Securities Act gave the Treasury Department some rulemaking authority over all government securities brokers and dealers. But the act also required these firms to register with the SEC.
If investors avoid the Treasury market, we could be unable to pay off maturing securities, which would mean an immediate default. Market participants generally agree that even a brief default would create potentially catastrophic risks to the financial system, like the meltdown of 2008.
A digital currency issued by a central bank would be a global target for cyber attacks, cyber counterfeiting, and cyber theft.
Liquidity problems can occur in central clearing, even if all counterparties have the financial resources to meet their obligations, if they are unable to convert those resources into cash quickly enough.
Regulatory changes have forced banks to closely examine their liquidity planning and to internalize the costs of liquidity provision. The costs of committed liquidity facilities will be passed on to clearing members. These costs are perhaps highest in clearing Treasury securities, where liquidity needs can be especially large.
While the move to central clearing has made the system safer, we need to make sure that the central counterparties have the resources and risk-management practices to withstand plausible but severe shocks.
The sale of Treasury bonds, notes, and bills finances the U.S. government, and those securities are, in turn, a primary vehicle for savings for a wide range of U.S. households. Treasury securities are also an important source of collateral within the financial system.
My colleagues on the Board of Governors and I understand the value of having a diverse financial system that includes a large and vibrant contingent of community banks.
The revenue stream for Social Security benefits comes from payroll taxes, which are credited to the Social Security Trust Fund - accounting for the program's finances separately from the rest of the budget.
An increase in the debt ceiling should be accompanied by fundamental policy reforms, substantial budget savings, and a strong enforcement mechanism to tie the hands of any future Congress.
The United States has never prioritized or failed to pay any obligation when due during a debt limit impasse. Despite the institutional risks and the lack of clear legal authority, we assume that Treasury will attempt to prioritize payments in a last-ditch effort to avoid default.
