Fed's Miran Calls for a Reworking of Bank Regulations

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00:00The Federal Reserve is actively revising its banking regulations, a project that I strongly

00:04support. For many years, financial regulation mostly moved in one direction, increasingly

00:08restricting the banking sector. Because the interactions of regulation with financial

00:13markets, the economy and monetary policy implementation are too often underappreciated,

00:17this led to adverse consequences and lots of head-scratching as to their causes.

00:21In some respects, regulations enacted to shore up financial stability have constrained the Fed's

00:26control over some elements of monetary policy transmission and the size of the balance

00:30sheet. Regulatory dominance of the balance sheet must be considered and accounted for to ensure

00:35the Federal Open Market Committee, through its statutory mandate, has autonomy over conducting

00:39monetary policy. My goal in today's remarks is to share the core principles that will help

00:44guide my decision-making in this area, including how regulation affects the Fed's balance sheet,

00:48as well as current efforts to reform bank leverage requirements. While discussions about bank reserve

00:53balances and interest paid on reserves, the composition of the balance sheet and Treasury

00:57market intermediation are flourishing, I believe that many of these conversations are downstream

01:01of the bank regulatory framework. Once we properly tailor the regulatory framework, we can address

01:05questions that are more pertinent to monetary policy implementation. As we right-size regulations,

01:10my hope is that it will allow us to further reduce the size of the balance sheet, relaxing the grip of

01:14regulatory dominance. Given emerging funding market signals, I supported ending runoff of the Fed's

01:21balance sheet immediately at the FOMC's October meeting, rather than waiting until December 1st.

01:26Though the difference between October 29th and December 1st is not enormous. Indeed, as we make

01:31more progress peeling back regulations, I expect the optimal level of reserves may drop below where it is

01:36now, at least relative to GDP or the size of the banking system. It is possible that in the future,

01:42it will be appropriate to resume shrinking the balance sheet. Stopping runoff today does not necessarily

01:46mean stopping it forever. That would also enable us to reduce our interest payments and reserves.

01:50If we go far enough with removing regulations, we may be able to limit perceptions that the Fed is

01:55picking winners and losers through regulations, asset purchases, and credit allocation decisions.

02:00But before further reductions in the balance sheet, we first have to get the regulations right and

02:04ensure that bank balance sheets are flexible enough for an environment with a smaller Federal Reserve

02:08footprint.