The Federal Reserve’s Framework for Monitoring Financial Stability
Chairman Jerome H. Powell
November 28, 2018
The New Approach to Financial Stability
This new approach can be divided into three parts. First, build up the strength and resilience of the financial system. Second, develop and apply a broad framework for monitoring financial stability on an ongoing basis. And third, explain the new approach as transparently as possible, so that the public and its representatives in Congress can provide oversight and hold us accountable for this work. Although I’ll focus mainly on the stability efforts of the Federal Reserve, a number of federal regulatory agencies have responsibilities in this area. All of these agencies are represented on the Financial Stability Oversight Council, or FSOC, which is chaired by the Treasury Secretary and which provides a forum for interagency cooperation in responding to emerging risks.
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Bottom Line: Financial Stability Risks Are Moderate
I have reviewed a few of the key facts that inform our thinking about financial stability, and you will find a great deal more detail in our new report. You will also find that the report does not come to a bottom line conclusion. As I noted earlier, we have limited experience with this monitoring, and there is no widely accepted basis for reaching a bottom line. Thus, the purpose of the report is to provide a common platform and set of readings from which policymakers and other interested parties can form their own views. Individual policymakers will sometimes differ in their assessments and on the relative weight they put on particular vulnerabilities. My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level.13
In my view, the most important feature of the stability landscape is the strength of the financial system. The risks of destabilizing runs are far lower than in the past. The institutions at the heart of the financial system are more resilient. The stress tests routinely feature extremely severe downturns in business credit, and the largest banks have the capital and liquidity to continue to function under such circumstances. Because this core resilience is so important, we are committed to preserving and strengthening the key improvements since the crisis, particularly those in capital, liquidity, stress testing, and resolution.
The full speech is available at https://www.federalreserve.gov/newsevents/speech/powell20181128a.htm