Inflation Alert! Fed's Michelle Bowman: "In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path"
"Calls for radical reform of the bank regulatory framework are incompatible with the fundamental strength of the banking system"
The Evolving Nature of Banking, Bank Culture, and Bank Runs Governor Michelle W. Bowman At the 21st Annual Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States, European Central Bank, Frankfurt, Germany
https://www.federalreserve.gov/newsevents/speech/bowman20230512a.htm
Highlights:
- "At our most recent meeting last week, in light of the ongoing unacceptably high inflation, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by 25 basis points. With this increase, the FOMC has raised the federal funds rate by 5 percentage points since March of last year. These increases, combined with the runoff of our balance sheet, are having the desired effect of tightening financial conditions."
- "In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain."
- "Some signs of slowing in aggregate demand, lower numbers of job openings and more modest gross domestic product (GDP) growth indicate that we have moved into restrictive territory."
- "But inflation remains much too high, and measures of core inflation have remained persistently elevated, with declining unemployment and ongoing wage growth. And, as senior loan officers signaled beginning last summer, credit has continued to tighten. I expect this trend will continue given increased bank funding costs and reduced levels of liquidity."
- "While the U.S. banking and financial system remains sound and resilient, the recent failures of three U.S. banks with unique risk profiles have added to the uncertainty surrounding the economic outlook. This uncertainty is further complicated by stock price movements among regional banks."
- "Should inflation remain high and the labor market remain tight, additional monetary policy tightening will likely be appropriate to attain a sufficiently restrictive stance of monetary policy to lower inflation over time."
- "I also expect that our policy rate will need to remain sufficiently restrictive for some time to bring inflation down and create conditions that will support a sustainably strong labor market."
- "In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path, and I will continue to closely monitor the incoming data as I consider the appropriate stance of monetary policy going into our June meeting."
- "The most fundamental banking risks include credit, concentration, interest rate, liquidity, cybersecurity, more recently operational risk and, of course, the risk of contagion."
- "Banking simply cannot work in its current and historical form without risk, so unless the goal is to change the nature of banking, the task of policymakers and regulators is not to eliminate risk from the banking system, but rather to ensure that risk is appropriately and effectively managed."
- "No efficient banking system can eliminate all bank failures. But well-designed and well-maintained systems can limit bank failures and mitigate the harm caused by any that occur."
- "Lapses in this effort are revealed when something breaks, which could include fragilities resulting from the emergence of unidentified risks and financial stability threats; banking practices that expose shortcomings in the supervisory framework; or policymakers, regulators, and/or examiners who have lost sight of the fundamental goal of encouraging prudent banking practices and appropriate risk management."
- "The need for maintenance of the U.S. bank regulatory and supervisory framework has come into stark relief with the failures of two large banks in March, followed by a third at the beginning of May. The future and current policy choices made in responding to these failures will have important consequences for the U.S. banking system. Including the extent to which bank regulation will continue to drive banking activities from regulated banks and into shadow banks. While shoring up the resiliency of the banking sector is important, it is also important that we consider the consequences of any regulatory change."
- "The most significant shift has been one of speed. This is where modern technology has played a significant role, both in facilitating the transfer of funds and in the access to, and expedited flow of, information among depositors."
- "Social media has also played a role in fueling stock price volatility, which can lead to other risks to a bank. In October of last year, rumors circulated about Credit Suisse's stock price conflating stock price with capital and liquidity strength. Despite Credit Suisse management's efforts to intervene and calm markets, its stock experienced significant volatility, resulting in an increase in the spreads on the firm's credit default swaps and a decrease in the value of its bonds. Credit Suisse had been dealing with significant issues for an extended period of time, but this incident highlighted how quickly investor sentiment can change in the age of social media."
- "Some innovators espouse an "ask for forgiveness, not permission" mentality when it comes to regulation and compliance. This is a particularly dangerous mindset when it comes to banking."
- "Providing time to remediate issues should not be a pretext for inaction or inattention to important supervisory issues. Ultimately, one of the primary goals of supervision is to hold the bank accountable for safety and soundness and consumer compliance. Accountability is critical for both the bank and for supervisors. Where regulators have failed in supervision, we must hold ourselves accountable."
- "These shifts impact supervision, in that we need to reevaluate the effectiveness of formal and informal enforcement mechanisms. If moral suasion as an informal tool is less effective, and bank management and boards are less attuned to hear and respond to supervisory messages, we need to reconsider our supervisory toolkit. This may mean taking more formal remediation measures, with definitive timelines, and imposing meaningful consequences for firms that fail to remediate issues in a timely way."
- "In response to the recent bank failures, it is tempting to engage in a wholesale revision of the bank regulatory framework. Before changing rules, we need to take a critical look at actual weaknesses, and acknowledge the strengths that should be preserved."
- "Prior to 2008, there were also no standardized, quantitative liquidity requirements for U.S. banks and their holding companies. Today, there are two: the Liquidity Coverage Ratio, which supports short-term resilience by requiring banks to have liquidity to cover net cash outflows in a 30-day stress period; and the Net Stable Funding Ratio, which requires firms to maintain stable funding over a one-year time horizon. There are also internal liquidity stress testing and liquidity buffer requirements."
- "In light of the extensive recent use of these tools and the lessons that can be learned, I think it is time to review these tools—which operate during limited, fixed hours and rely to some extent on dated technology—to determine whether they have kept up with the pace of change for the future payments landscape and expectations of liquidity planning."
- "I believe that the Federal Reserve should engage an independent third party to prepare a report to supplement the limited internal review to fully understand the failure of SVB. This would be a logical next step in holding ourselves accountable and would help to eliminate the doubts that may naturally accompany any self-assessment prepared and reviewed by a single member of the Board of Governors. This external independent report should also cover a broader time period, including the events of the weekend following the failure of SVB, and a broader range of topics beyond just the regulatory and supervisory framework that applied to SVB, including operational issues, if any, with discount window lending, Fedwire services, and with the transfer of collateral from the Federal Home Loan Banks."
- "I believe we need to do a better job identifying the most salient issues and moving quickly to remediate them. It is clearly evident that both supervisors and bank management neglected key, long-standing risk factors that should be an area of focus in any examination. These include concentration risk, liquidity risk, and interest rate risk."
"Finally, we should consider whether there are necessary—and targeted—adjustments we should make to banking regulation. This will likely include a broad range of topics, including taking a close look at deposit insurance reform, the treatment of uninsured deposits, and a reconsideration of current deposit insurance limits."
- "We should avoid using these bank failures as a pretext to push for other, unrelated changes to banking regulation. Our focus should be on remediating known, identified issues with bank supervision and issues that emerge from the public autopsy of these events."
- "Calls for radical reform of the bank regulatory framework—as opposed to targeted changes to address identified root causes of banking system stress—are incompatible with the fundamental strength of the banking system."
TLDRS:
- "In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain."
- "In my view, the most recent CPI and employment reports have not provided consistent evidence that inflation is on a downward path, and I will continue to closely monitor the incoming data as I consider the appropriate stance of monetary policy going into our June meeting."
- "In response to the recent bank failures, it is tempting to engage in a wholesale revision of the bank regulatory framework. Before changing rules, we need to take a critical look at actual weaknesses, and acknowledge the strengths that should be preserved."
- "Accountability is critical for both the bank and for supervisors. Where regulators have failed in supervision, we must hold ourselves accountable."
- "Calls for radical reform of the bank regulatory framework—as opposed to targeted changes to address identified root causes of banking system stress—are incompatible with the fundamental strength of the banking system."
Full Speech: https://www.federalreserve.gov/newsevents/speech/bowman20230512a.htm
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