American - Public | February 4, 1953 -
We do take seriously our obligation to assess whether our reforms are achieving their desired effects without imposing unnecessary burden.
Jerome Powell
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The Federal Reserve is not charged with designing or evaluating proposals for housing finance reform. But we are responsible for regulating and supervising banking institutions to ensure their safety and soundness, and more broadly for the stability of the financial system.
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The overwhelming majority of new mortgages are issued with government backing in a highly concentrated securitization market. That leaves us with both potential taxpayer liability and systemic risk.
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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.
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We need a resilient, well-capitalized, well-regulated financial system that is strong enough to withstand even severe shocks and support economic growth by lending through the economic cycle.
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Loss-absorbing capacity among banks is substantially higher as a result of both regulatory requirements and stress testing exercises.
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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.
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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.
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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.
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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.
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We need a national focus on increasing the sustainable growth rate of our economy.
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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.
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