tv Financial Stability Board Chair Randal Quarles on Global Financial Stability CSPAN April 4, 2021 2:08am-2:58am EDT
>> good morning everyone and welcome back to the peterson institute for international economics. i'm the said its president and it's our pleasure today to host a virtual speech by randall quarles chair of the financial stability board member of the board of governors of the federal reserve president feist chair for supervision of the system. we will introduce randy more properly in a moment. he has a long and distinguished career in the u.s. treasury and the federal reserve as well as the financial markets.
first i just want to orient this talk in the midst of what we are calling macroweek or marched macromadness here at peterson. yesterday we had the privilege to host the talks of the first public speech by dr. christopher walken is a member of the federal reserve where he spoke on issues of central banking particular you about emergency measures and the interaction between treasury and federal reserve and how should go and there will not be any consideration of financing issues at the federal reserve. tomorrow we are privileged to hear more and not to compare anybody but just very excited to have a gust to carson's at 10:00 a.m. washington time for a major speech of central bank digital currency. mr. carson's or i should say former governor karstens is a
distinguished academic career and long service as governor of the bank of mexico. we close macroweek on thursday april 1 at 10:00 a.m. with the economic prospects meeting which many of you know is the semiannual event coordinating and led by her colleague sharon dimond former assistant secretary of the treasury for economic policy and now a nonresident for peterson as well as they -- i'm delighted now today to welcome the arm will randy quarles. just let me make sure i get his bioright if i can remember it all. randy took office and december it is the board of governors and october 13th at 2017 and sworn in as vice chair for supervision of the same date as his term of
vice chair of supervision will end on october 132021 although his term as a member of the board continues for much longer. importantly for the world and partly for today's talk mr. quarles is the chair of the financial stability of ward and took that office december 2, 2018. the financial stability board is the body that gives recommendations about the global financial system and coordinate national financial authority to the bodies as they work towards developing strong regulatory supervisory policies. prior to his appointment to the federal reserve word and his partner previously he had a successful career as a hardware at the carlisle group private equity firm based in washington d.c.. in the term of president george w. bush mr. quarles served and afraid of senior roles as u.s.
treasury including undersecretary of u.s. department of treasury for u.s. finance and the secretary of the treasury for international affairs and director of the international monetary policy. previously in the early 90s the department of treasury for banking legislation and financial institutions. you can find on the web usually the pictures of jay powell and randall quarles nearly 30 years ago and their role and now of course they are leading the federal reserve and its critical. mr. quarles is a cum laude graduate of columbia and has those law degree from yale. so let me now turn to our friend and colleague the chair of the financial stability board will randall k. quarles.
randy. you are muted, randy. there we go, sorry. >> the new button was missing on my screen for a moment. sorry about that. and thank you, thank you adam for that introduction. it doesn't leave much time for the speak today but thank you for that. generous introduction and it's an honor and the pleasure to be here at the peterson institute which is a group that has driven much of the most important issues of international policy. i have always been engage with it. i only wish we could all be there in person. a little over 420 years ago a crowdpleasing local fellow on a lightly populated island in the north atlantic made a popular
phrase that enter their language. beware the ides of march. caesar ignored it and the results weren't good. if recent history is any indication maybe we should heed the warning as well. in march of 2008 significant domino fall a chain of events that sparked the global financial crisis. parts of the following year the 50% from over a year earlier in the dow and a liquidity crunch in march of 2020 or a salient echo the other ides of march for the romans the deadline for settling debt. it has an unsettling habit of coming in view in march in a recent history. in fact at this time last year both domestically and internationally the financial regulatory committee fortified itself as covid-19 and related
containment measures spread across the globe which i referred to as the covid -- financial stability board moved into high gear holding weekly usually daily meetings with the most senior leaders of the central bank market regulators to share information and to synchronize cool the global approach to the financial stability's challenges at hand. the stability to spring to action on short notice is exactly why the fse was established in the wake of the great financial crisis. this mandate to promote international stability by coordinating the development of regulatory supervisory and other financial sec or policies and actions of the global level reflected a recognition of the growing interconnectedness across market economies. i focused today on the future and the challenges we face going forward and in particular non-bank financial intermediation and cross-border payment. these are only a portion of the
fsb's conference of work plan but they are prior to areas that love significant impact on the financial landscape going forward. to sense the crisis of 2008 the non-bank sector has grown and evolved considerably. accounts now as you all know from all tap of financial assets and did so at the start of the covid events. with this growth has come greater interconnectedness and intermediation? v.. even before the market turmoil of last marched the need to understand the liabilities arising from the non-banking sector as well as those from the banking sector as well as those inside the banking system was used as critical for maintaining financial stability. the march market turmoil focus their attention on pushing the fse to give prior notice -- a cousin of the way the diverse sectors structured developing a
perspective requires bringing together regulatory supervisory and market perspective and taking a broad view of how a financial ecosystem works. even ahead of the covid event at my world is chair of the esea form the high-level group of bankers and market regulator overseeing coordinate work which by march was a fortunate decision. under the direction of the senior group afsp carried out its holistic review the march market turmoil to examine not only the different sectors of the market were expected but how does it next were transmitted out the system and which aspects of the structure may have amplified the stress the dualistic review underscored a vulnerability in the financial system amplified by the covid event. in particular it highlighted the dependence of the system on readily available liquidity and fuller ability of liquidity
strains emerged. a money market funds and open-ended funds to korb on the markets. importantly the holistic review beside the high-level view on how these parts of the ecosystem operate in transmit risks while under stress they might be one of the most significant findings related to the money market funds the holistic review document of how the highly demanded liquidity commands a --for cash that his institutional prime money market funds particularly hard rate in the united states mont money market funds public effort into just additional efforts roughly 100000000000.30% of the funds out there over two weeks in mid-march. this was a faster run in terms of the percentage of gains and during the turmoil of september of 2008. similar patterns were also seen in your particular the u.s. dollar. other funds active and
short-term funding markets such as post-atari bonds also saw unprecedented output in march. the march market turmoil was the second time in roughly a decade that we have witnessed destabilizing runs on money market funds. more concerning this time however is that we have taken steps between these events precisely to reduce the likelihood of such a run. the fse will publish a report in july for consultation that will set up consequential policy proposals to improve money market fund resilience. the proposal should reduce the likelihood that government intervention in taxpayer support will be needed to hault future money market runs. it will consider the relationship between mms and short-term funding markets in a particular focus on commercial paper on deposit markets and the impact. continue work on the other open-ended funds part -- bond market liquidity will come on
the heels of the deliverables. as a first step the focus of van enhancing understanding of full abilities that could emanate from the sect years including risk transfers. addressing systemic risk in a dynamic sector continues to evolve is no small feat site specs discussions and recommendations to follow the analytical work and that will like late extend beyond this year. although we don't really have enough time this morning for me to provide deep detail i would like to note a disruption in the bond market also raises questions about the role of leverage investors and the willingness and capacity dealers to intermediate in times of stress. work is underway to gather data and analyze behavior to develop a conference if you have the impact on financial market functioning and to determine whether policy responses are necessary. turning to a different part of our work plan the march market turmoil demonstrated the
clearing of global financial securities that central counterparty demonstrated residency during his tomato terry that given the systemic imports we contained to move forward to improve resolve ability as set out in our 2020 resolution report. coordinating with chairs of the committee on payments and market infrastructures of the international organization security commission and the fsb steering group on shaping these details. expect the launch this year further strengthening the resilience and resolve ability for the fall the non-default loss including a session on new types of resources would be necessary for financial resolve ability. the fsb and other standard setting bodies will begin work in march on centra care to nonsense the cleared markets during the market followed till it is last year observed margin
calls by some met larger than expected and obviously will need to ensure that ttp are march and clearing members and their clients means significant transparency and predictability to manage their closure. to be successful this broad and comprehensive agenda would service the cornerstone of the fsb work program in 2021 and beyond and require strong cord nation commitment of resources to the regulatory community including fsb and other standard setting body spread further to ensure sound practical and effective way forward these will require transparency and engagement among the public. the fsb is therefore seeking the input of market -- another parties. as it would the élan and
ambitious agenda it would further the other important elements but let me spend time talking about a core objective. in 2019 enhancing cross-border payments were key part in the fsb is dedicated to advancing this important work ever since. the challenges as i see with the cross-border payments are widely known and long-standing and prior attempt to make improvements struggled to gain traction. in october of 2020 the fsb delivered a multi-roadmap to the g20 liters and committed to advancing meaningful change and increase the efficiency and effectiveness of cross-border payments. ultimately we are focused on addressing the court challenges the accessibility and transparency. it goes without saying making improvements friction's underlying existing property
span multiple legal operational processing technological structural issues and those can differ greatly by region. the break down the magnitude of our task a roadmap -- roadmap includes specific topics which we refer to as building blocks. we are taking the of approach and a gauging the public and private sector because both need to be part of the solution if we are going to achieve the ambitious goal of success for ourselves. to begin with to decide if improvements are that we want to seek and how we will monitor progress in achieving them. these decisions will do fine in the arab -- and shape of the roadmap is put into operation of the global regional and national level. the first up the fsb is formed task force responsible for setting specific quantitative targets and these targets will set the time pace for the work that follows and among the most important of the deliverables
that will complete this year. they plan to publish the consultative -- and may. several groups are charged with advancing one or more of the building blocks in the up is the roadmap over the course of this year with the fsb providing an a lot age for the g20. we are collaborating closely with the committee on payments and market infrastructure and international -- was a key role to the payment system in addition to setting targets the fsb is leaving mall to elements of the roadmap itself advancing those building blocks that are more exploratory in nature for sample the soundness of -- and on this particular topic last year the fsb issued high-level recommendations for the regulation provision oversight of global stable coin and will report on the progress achieved at the international and national level. by their nature cross-border
payments are global and involved many other countries outside of the g20 membership. we therefore have to become inclusive in our approach while remaining well-organized for what we set while we suffer so that event and we have murder with the world bank and imf in their respective missions and global region of the importing import engaged with the financial situation service providers into seager's seager is practitioners and academics as we advance this work. they plan to mitigate information seek feedback to public consultation conferences and bilateral multilateral outreach. the roadmaps are passed but the practical reality is the consensus of action a any entity of competing stakeholder would achieve success awaited double in the roadmap opportunities to course-correct as expect to learn more as we go. the fsa report annually to the g20 summit in the public during progress in seeking confirmation on the next step and it's an
immensely important. what i just discuss covers a large portion of the sf bees 2021 work plan but i'd be remiss if i didn't at a few significant areas. we are contained to to close a mantra monitor vulnerability stemming from the covid event including the rise of non-international -- and measure of on inequity measure. april the fsb were porting key considerations involved in amending or unwinding the covid report measures as appropriate or the fsb will play an important role of measures again given its work to support international information sharing and covid-19 policy responses. we also plan to assess initial lessons learned from the covid event from that facility and share those with the g20 in july. the covid event has underscored the financial sectors accessibility to operational risk especially those related to cybersecurity. this bit of technological change and a growing reliance on
third-party technology-based services with increasingly injured is a new recent vulnerabilities to the sector. to begin to address those the fsb is focused on achieving greater convergence in areas such as regular tour reporting and deliver those to the g20 in october. next month the fsb will release the final reporter: its most ambitious of valuation of the great financial crisis banking reform and the too big to fail report and rigorous evaluation. when looking at these reforms indicators of systemic risk and moral hazard moving in the right direction and effective too big to fail reforms net benefits and at the beginning of the covid event we reserve the farmer resilient banking site or injured in the 2008 crisis but the benefits of the two big to fail reform were realized we outlined this work in the
forthcoming evaluation preferred analysis of reform international financial standards the g20 naafa speak commitment recommendations and other niches will provide better insight into whether the package reforms are working as intended or complicit and structured efficiently or in need of refinement. one last particular item to mention libor detransitioning way from libor six significant undertaking but the fsb has been engaged in it for almost a decade. the fsb said a roadmap for clear action that clients can take to ensure a smooth transition away from libor and this year the fsb report to the g20 ongoing progress on issues related to libor transition including supervisory issues related to the benchmarks. we think the confluence of events over last year the that demanded international coordination in several key areas and that's precisely why the fsb is was created more than 10 years ago a beacon at the end
of another hateful march. the topics covered seem bewildering at times but i'm sure in the overview of just given and i covered only a few today but as the fsb gives its agenda for each coming year process is -- each topic i itself through series of complex data point and i'm stepping back with the interdependence of their settlements. the rule of the fsb is to orchestrate a unified image and a coherent approach to ensure that we continually monitor and address the shape and form of which we have identified while allowing for institutes like the covid event which arrived quickly with little notice them require extra -- there's little margin for error in doing this in achieving objective requires the utmost in diplomacy as well as rigorous analysis and in light of the challenges we faced with this extraordinary year in proud of what i colleagues at
the fsb have done to my fellow public servants from around the globe working on fsb topics have been steadfast in their pursuit to pose financial stability and they think the work we laid out for 21 -- 2020 and one will do just that. a big lead to take questions on federal reserve issues or anything else you have on your mind. thank you. >> thank you so much. the u.s. chair of the fsb and your colleagues around the world are doing with an incredible range of topics and technical issues. as a former central banker this is tough going for me. i'm going to ask you to go back through some things to explain more. in particular let's start with the fsb report on non-bank -- creation. part of what you refer to
disparagingly as shadow banking. what can you tell us about ideas about two buddies based versus firm based or judicial based regulation especially as you said there is this constellation of different entities in the same space and thinking of financing but they are very referring in nature. how do you view that issue? >> i think that's a great question. there have over the years been among folks who think about financial stability policies the academic policymakers, many and skepticism expressed about this sort of objectives and work of the activities-based approach but i think if you look at the
fault lines that were thrown in particularly march of 2020 and the nonbanking set your i thank it emphasizes that it wasn't that there was any particular globally systemic behemoth the failure of which we were concerned about potentially triggering further instability that we could have perhaps prevented had that team of ben designated as an entity in advance. there was a network of that committee's being conducted by many players none of which were probably systemic themselves but they activity which clearly was systemic i think it emphasizes particularly in non-banks and neck two buddies based approach
is going to be necessary perhaps in some cases supplemented with entity designation but principally focusing on the two buddies and the interconnectedness of nonsystem players that's going to be needed perhaps a response to instability of the non-bank sector. >> thank you. and certainly the flipside of that i was going to ask before your marks it looks like the traditional banking set your has led to this margin last march reasonably well. without asking you to compromise security on the up coming political report what do you think was different and how much is regulatory advisory changes since 2008 that may be different in particular you mentioned the idea that there doesn't seem to
have been beneficial effects against too big to fail as a moral hazard and for those of us understand those concepts, how can you tell? >> well i mean in some ways the proof is in the pudding. i mean the banking set your was a source of strength in this crisis. we took measures at the outset because of the high level of uncertainty and this was the first real test of the great financial crisis system if you will so we took some additional measures on top of those that the system itself would have required and i'm referring specifically to the return of capitol from the banks during the crisis itself. that it's clear that was a wise
thing to do given this was the first test and given it was a world historical event that we were facing but you have a system that was strongly enough capitalized that even when it took really quite dramatic reserves through the second quarter which was the five of those reserves in fact was driven by accounting through the bunny to crisis both rs nine abroad and in the united states. it's a very large reserve but under the accounting methodology the entire loss that could be extended and they still remain highly capitalized although those reserves are capitol. their capital grew over the course of the notwithstanding the large reserves. so i think the key reforms were the much higher capitol and
liquidity that required institution but i think the wisdom of that was borne out during the crisis. i would say as well there have been some and hammering sounds excessively dismissive so let's put it in the correct light which is to say there have been appropriate questions asked about the modification of the refinement and recalibration that we've been doing in the united states over the last 3.5 years to that post-crisis framework. we said that we intended to do that in order to improve efficiency without undermining the resilience of the system and i think again the performance of the system and the strong test is demonstrated. >> in that sense the capacity that the congress and the fed will then there's the counter-cyclical bond.
are there periods in which not legally but a jury -- when would it come into play? >> that's an interesting question in which is cause might be used to evolve somewhat. in the united states at least we had our capitol levels are very high so the way i took the framing that issue was effectively we had turned their counter-cyclical measures on because our capitol levels were the highest in the world and our problem was going to be turning it down in a time of stress because we had done that are
calibrating through the cycled measures as opposed to adding it countercyclical buffer on top of that because every time we looked at the situation we shouldn't be increasing capital further at this point. i think that's exactly outplayed out. we had to take emergency measures in order to ensure in order to help ensure proper market functions such as the changes they made to the supplemental leverage ratio which were helpful there and that serves the function the closeted turning down of the trans-little having been in a position where through the cycle capitol levels have been lower and we had turned on that buffer and have been able to turn it down. as was the case in many jurisdictions in the reason i say my thinking has evolved is that when you look at some of
those other jurisdictions that were in a position to have turned on the counter-cyclical capitol offer going into distress and then turned it down it didn't actually prove to be that useful in creating the space for those institutions could to contain to lend through the crisis. there were her i would say that topic on the international agenda currently that they are looking at and where interested in on the use of capitol buffers and buffers generally in a period of stress because it seemed it was clear and this is reticulated the case internationally where they had turned the buffer up and turned it down, you stood in still do now thanks it were willing to get into their capitol buffers in order to expand lending and
things will go back to normal pretty quickly and the market will punish us if we do it. if writing concerns that led to this framework not really to be that affect if an encouraging lending in a time of stress. we had gone into a lot of that is united states. there is not currently significant problems with unsatisfied credit demand from creditworthy are worse but have there have been the excess demand with other might have been one of the reasons for that is the very significant amount of fiscal stimulus that has been put into the economy and has the banking sector has to pull through more about in terms of providing that support. we might have run into the same issues here so i don't know what the answer to that is and we are wrestling with that but that is
more color around counter-cyclical capitol buffer is it really going to be -- >> thank you for explaining that. we have 10 minutes left so we aren't going quite to a lightning round but there so many topics who want your views on. one thing from this crisis a year ago was that the fed never had a swap line with other international banks and in my view it was a huge success in preventing old a liquidity problem with a high impact of the covid pandemic. is there any feeling that you have the fsb or you all at the fed are thinking about that institution to make it more regular and i don't mean more frequent but less ad hoc in the
future or is it something that you are happy with and -- >> it's a not really a topic at the fsb currently although i agree with you it was critical in maintaining global financial stability on the event. we are always looking at ways to improve the efficiency of what we do but i myself think that we have seen the use of the swap lines in the crisis of 2008 and in march of 2020 works pretty well. ..
we have been able to roll up pretty quickly especially in 2020. so i guess i will just leave it at that. >> in the financial stability, as well. i could ask you to comment on the issue of currencies. the 2 largest are arguably largest monetary zones after the dollar, the people's bank of china, the year old area. are both doing central banks in the plc are doing pretty out there public intent to develop their own central bank or digital currencies it's not governor brainard is spoken on this issue, tomorrow we have as i mentioned that. [inaudible] with your financial stability hat on, at the fsb and at the
fed, how do you view central banks stepping into this realm? >> i think that, but me speak about this mostly from the fed point of view. that is my position as a governor. i think that is something that technological developers or something should be on top of. we certainly should be looking at that at the fed. i think we have to be clear in doing so that we have framed the issue we are trying to address with central bank digital currency. i do think that a lot of the efforts globally, to look into this issue that fundamental question of what are we trying to do with this? that is not clearly answered.
the benefits in countries like the united states, they certainly, they may exist. and we should be actively looking into them. but i do not see an emergent flaw in our system that a central banker digital currency, central bank digital currency would fix. spin make them just going to pressure a little bit my own personal views are similar to what you just said. there is a concern which your colleagues, landau and harold james have raised, among others that if we start having very solid central bank digital currencies that could suck money out of more fragile currencies in emerging markets and other countries.
again, and a sense that is not narrowly your message transmission at the fed but something to at least consider. his essay topic you worry about at all? has this come up in your discussions? >> it is a relevant topic. it's a relevant issue to consider in the broad range of issues to be considered. obviously i think our primary concern has to be the usefulness and benefits, as well as disadvantages and costs of central bank, they are not unmindful of the potential knock on consequences read some of those are for other countries, some are for the financial system itself.
of the financial system and the financial stability might be. and, again i think we just, 1 of the most important would be coming to a clear and shared understanding of what exactly will be trying to achieve. i don't think that is either clear or shared yet. >> thank you for being frank. one of your roles the fed's role is interacting with other u.s. regulatory supervising agencies first financial ability oversight. coordination among the regulations seemed to go pretty well at a time when the trump treasury had cut back a lot on the staffing and support. how do you see that developing over the next couple of
years? is it a priority to rebuild that? or is it push comes to shove some not going to worry about it? >> the interesting point i had not even focused on that. so, i think the can be a useful mechanism, it is particularly a useful mechanism though for, and i support whatever direction secretary yellen wants to take it in. i suspect she will be more active or it will be more active or take on a broader range of topics. i think it can be very useful. i think it's particularly useful in peace time.
just the nature of the organization is very long. give all the people around the table that feels the secretaries large conference room. and you have got a lot of -- there are lots of folks there with varying levels of engagement on particular crisis action. in a time of crisis i do not know that an agency like that is really a crisis management mechanism. it's going to be a lot more, that's going to depend a lot more on bilateral agency to agency action. the core group of agencies most involved with whatever the core generator of a particular crisis. but in peace time and ensuring they are looking at the broader financial sector and thinking about what risk there might be and how regulation or
supervision can be refined or improved to enhance the resilience of the system. there are questions like are you designating it non- finance activity? that's not a crisis response. by that time it's way too late to think about designating an activity ought to have been doing that before to ensure that you are ready for weakness in that activity. so i think in my view at least it is a useful organization more of a peacetime organization that a crisis organization. i think you're absolutely right. crisis management from last year was largely non- and was largely very effective. >> thank you. just as a final question, we have covered so much. but of course part of your day job, 1 question about your
views on, you and your community members, your fellow committee members announced a new strategic framework for military policy at the end of august last year to discuss with the counterparts vice chair at that time. so how does the new framework imply any difference in your planning as you consider raising rates at a future date? how do you view the framework constraining or enabling differently? and just 1 more thing if i could. how is it credible that the committee is going to allow it overshoot of the 2% target for any period of time, is that credible commitment from the committee? >> so, let me take, there are number of things there. let me take them all.
and let me take them in order. so, the framework does change how i at least will respond -- i am what are the on the committee, very optimistic about the likely evolution of the economy over the coming years. probably in that near term as well but certainly over the coming years of the horizon that we project in the economic protections for example. and under a prior framework that level of optimism about the outlook and about the projections for lowering unemployment rates as well as some other views that i have about possibilities and likelihood goes to the
previous decade. sooner rather than later and beginning to draw accommodations under old framework. under the new framework optimists like me optimistic and i see that, i would project the unemployment rate will fall pretty quickly and substantially would argue for it to be getting to act now. under the new front side under the new framework we would wait to see that we actually see movement. we see that actually comes down the fact that i'm an optimist is not really relevant under the new framework.
it says i believe it will get to that point where we are seeing this outcomes sooner than others. but we should not jump the gun. let's wait until we see this outcomes. clearly the performance of that monetary policy of the last decade, really even 15 -- 20 years would argue that, that leads to superior outcomes. i've said this publicly before, i will say it now. one of the major achievements of janet yellen when she was chair of the fed, and i was very skeptical of this i'm not on the fed board at the time very skeptical of allowing sort of the unemployment rate to fall as low as it did and continue to fall as low as it did we'll been quite gradual about raising interest rates, not raising them for a long time. resolve the benefits of the labor market of doing that. we did not see inflation, and there were many more people
particularly from the lower echelons of the labor market that were drawn in and benefited from that stance. i'm very of that outcome based framework. and really, i think that will be true of the committee pretty think it is very credible to expect the committee to be comfortable with inflation somewhat over our 2% target. myself i don't believe we have some sort of mathematical equivalency of waco 3 years below by 20 bases you've got a 3 years above by basis points. and the framework very expressly does not states that kind of mathematical averaging. at that over time we will look to average.
and they think that is a very credible commitment. i'm certainly supportive of it as a semi- the optimists on the committee. >> thank you share of financial stability board, thank you so much for your depth of knowledge, you're sharing your insights with this, your willingness to make clear your views. and especially for your current and past years public service. we are very proud to have you with us here today. >> thanks much adam's great to