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April 03, 2018

The FED Governor Lael Brainard provided an update on the financial stability agenda of FED in New York. According to her, the primary focus of financial stability policy is tail risk (unlikely but severely damaging outcomes), as opposed to the modal outlook (the most likely path of economy). She highlighted that FED’s financial stability work has four interdependent pillars: systematic analysis of financial vulnerabilities, prudential policies to safeguard individual banking organizations, macro-prudential policies that build resilience in the large, interconnected institutions, and countercyclical policies to address cyclical risks.

She discussed the improvements in the health of banking sector since the financial crisis, highlighting the increased regulatory capital, design of stress-testing framework, and subdued risks (by historical standards) associated with leverage in the financial sector. Issuance of securitized products remains well below the pre-crisis levels for most asset classes, with few signs of securitizations that involve maturity or liquidity transformation and limited issuance of complex securities whose opaque structures can contain significant leverage. Additionally, the available data suggest that leverage at nonbank financial firms has been stable. On December 01, 2017, with overall risks assessed as moderate and with the other routinely monitored measures sending a similar signal, FED announced its decision to leave the countercyclical capital buffer (CCyB) at its minimum value of zero. She added that assessment of financial vulnerabilities is a key input into the FED decisions on the setting of the CCyB, along with a variety of other model-based and judgmental criteria. "It is worth noting that, although U.S. structural buffers are on the stronger end of the range internationally, the U.S. banking system is also among the healthiest and most competitive in the world. Credit growth is robust, and banks are registering strong profitability relative to their international peers," said Ms. Brainard.

Finally, she reiterated that “We undertake systematic assessment of financial vulnerabilities as an important input into our policymaking processes--helping to calibrate the prudential, macro-prudential, and countercyclical policies that are our first lines of defense, in addition to informing Federal Open Market Committee, or FOMC, deliberations because of the important feedback loops between financial conditions and our dual-mandate goals.” She added that this work is complemented by the efforts of FED’s domestic (FSOC and FFIEC) and international partners (FSB and IMF).

 

Related Link: Speech

Keywords: Americas, US, Banking, Financial Stability, CCyB, FED

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