FRB Governor Advocates for Cyclical Protections in Event of Economic Downturn

Board of Governors of the Federal Reserve System (“FRB”) Governor Lael Brainard urged the FRB and banking institutions to “safeguard” capital and liquidity protections as cyclical pressures increase.

In remarks at the Global Finance Forum in Washington D.C., Ms. Brainard stated that despite the overall strength of the banking system, there are areas of financial vulnerability. She stated that measures should be implemented to ensure that the system can withstand negative shocks. According to Ms. Brainard, areas of financial vulnerability include asset valuation and business leverage (in the non-financial business sector), that are high in comparison to “historic norms.”

Ms. Brainard summarized the FRB’s next regulatory steps. She reported that the FRB is close to (i) completing the net stable funding ratio to ensure that large banking firms maintain a stable funding profile past a one-year projection, and (ii) implementing Dodd-Frank Act limits on large counterparty exposures, which will reduce the ripple effect of financial distress. Ms. Brainard additionally advocated for efforts to improve the Volcker Rule so it can better serve its underlying purpose of prohibiting banking firms from certain speculative activities. She expressed her support for market-wide “minimum haircuts for securities financing transactions,” and for recalibrating the regulatory framework to reduce the burden on smaller banking firms.