For release on delivery
7:00 a.m. EDT (noon local time)
June 25, 2024

Perspectives on U.S. Monetary Policy and Bank Capital Reform

Remarks by
Michelle W. Bowman
Member
Board of Governors of the Federal Reserve System
at
Policy Exchange

London, England

June 25, 2024

I would like to thank Policy Exchange for the invitation to speak with you today. !
Engagement abroad is essential for gaining a better understanding of the common forces
shaping the global economy and financial system. It also promotes a better
understanding of the drivers of differences between the economic and financial
environments across countries and jurisdictions. My remarks will offer some
perspectives on recent developments in monetary policy and bank regulatory policy-
specifically, bank capital reform-in the U.S. These are two areas in which I am actively
engaged as a member of the Board of Governors of the Federal Reserve System.
Monetary Policy

I'll begin with monetary policy. The Federal Open Market Committee
(FOMC)-the monetary policymaking body of the Federal Reserve System-has been
keenly focused on restoring price stability following the surge in inflation during 2021
and in 2022 in the aftermath of the global COVID-19 pandemic. During this time,
inflation reached levels not seen in the U.S. since the 1970s and 1980s. The high
inflation experienced in the U.S. in the wake of the pandemic was also experienced in
many economies around the world, reflecting, in part, the common global nature of the
shocks that occurred during the COVID-19 pandemic.

In many economies during the pandemic, supply constraints related to social-
distancing measures, reduced labor supply, and supply chain disruptions, coupled with
strong demand for goods as economies emerged from pandemic restrictions, acted as
catalysts, pushing inflation up to very high levels. Aggregate demand was also supported

by accommodative monetary and fiscal policies, which served to bolster the balance

' The views expressed here are my own and are not necessarily those of my colleagues on the Federal Open
Market Committee or the Board of Governors of the Federal Reserve System.

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sheets of households, businesses, and local governments, and contributed to very tight
labor markets.

The global inflation experience since the pandemic was highly synchronized
across the major world economies, reflecting similar shocks that acted to reduce supply,
while fiscal and monetary policy interventions stimulated demand. Early in the
pandemic, many economic sectors, especially in services, were affected by lockdowns
and both mandatory and voluntary social distancing. Many workers also transitioned to
working remotely. Aggressive fiscal policies helped support personal and business
income, and monetary policy became highly accommodative. The large shift in the
composition of demand toward goods resulted in rising supply bottlenecks and higher
goods prices.

Reduced immigration and lower labor force participation led to very tight labor
markets as the economy reopened and demand recovered. Consumer spending was
supported by excess savings accumulated from extraordinary fiscal support and reduced
spending during lockdowns. Wage growth and services price inflation also picked up and
have remained persistently elevated, reflecting a tight labor market and the protracted
adjustment of prices and wages to the shocks during the pandemic.

A sharp rise in food and energy price inflation, and their pass-through to core
inflation, also contributed to a more synchronous inflation dynamic across major
advanced foreign economies in recent years. Food and energy prices are mostly set in
global markets, and their sharp increases also reflected the effects of Russia's invasion of

Ukraine in early 2022, especially for major European economies including the U.K.

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Many central banks facing these dynamics tightened monetary policy in an effort
to better balance demand and supply and to bring inflation back down to target. In the
USS., by late 2021, it became clear that the FOMC's monetary policy stance was too
accommodative in the presence of growing inflationary pressures, due to broader and
more persistent supply constraints, and that the Committee needed to move toward a
tighter policy. It seems likely to me that the U.S. experience during the years leading up
to the pandemic, when inflation was persistently low, made it hard for many to foresee
how quickly that situation could change. Additionally, the domestic inflation and labor
data did not accurately reflect the economic conditions prevailing at the time and were
subsequently substantially revised."

In my view, these factors, combined with new forward guidance introduced in the
September and December 2020 FOMC statements following the revisions to the
Committee's monetary policy strategy consensus statement in August 2020, contributed

to a delay in the removal of monetary policy accommodation in 2021.74 In late 2021, the

? For example, both the August and September 2021 employment reports suggested much lower job growth
than did consensus forecasts, and these initial estimates were subsequently sizably increased. Similarly,
total personal consumption expenditures (PCE) inflation for nearly all quarters in 2021 has been revised
higher than initially reported. See the real-time data on the Federal Reserve Bank of St. Louis's ALFRED
website at https://alfred.stlouisfed.org/series/downloaddata?seid=PA YEMS (job growth) and
https://alfred.stlouisfed.org/series/downloaddata?seid=PCECTPI (PCE inflation).

3 See Michelle W. Bowman (2024), "Risks and Uncertainty in Monetary Policy: Current and Past
Considerations," speech delivered at "Frameworks for Monetary Policy, Regulation, and Bank Capital"
Spring 2024 Meeting of the Shadow Open Market Committee, hosted by the Manhattan Institute, New
York, New York, April 5, https://www.federalreserve.gov/newsevents/speech/bowman20240405a.htm,

4 The new forward guidance in the September 2020 FOMC statement emphasized that the federal funds rate
would remain near zero until "inflation has risen to 2 percent and is on track to moderately exceed

2 percent for some time" (paragraph 4) and "labor market conditions have reached levels consistent with
the Committee's assessments of maximum employment" (paragraph 4). In the December 2020 FOMC
statement, the FOMC added forward guidance regarding asset purchases that stated that the Federal
Reserve would continue to purchase Treasury and agency mortgage-backed securities at the then current
pace of $80 billion and $40 billion per month, respectively, "until substantial further progress has been
made toward the Committee's maximum employment and price stability goals" (paragraph 4). (The
September and December 2020 FOMC statements are available on the Board's website at
https://www.federalreserve.gov/monetarypolicy/fomecalendars.htm.) The September and December 2020

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FOMC did begin to move toward tightening the stance of monetary policy and, beginning
in 2022, increased the policy rate rapidly to bring monetary policy into restrictive
territory. Since March 2022, the FOMC has raised the target range of the federal funds
rate by 5-1/4 percentage points. The target range has remained at 5-1/4 to 5-1/2 percent
since July 2023. Since June 2022, the Federal Reserve has also been reducing its
securities holdings, which had increased substantially during the pandemic period.

The tightening in monetary policy has had an effect. Over 2023, we saw
significant progress on lowering inflation in the U.S. while the economy and labor market
have remained strong. The 12-month change in core personal consumption expenditures
(PCE) prices slowed to 2.9 percent in December 2023, nearly 2 percentage points less
than one year earlier. The restrictive stance of monetary policy reduced demand-side
inflation pressures. Rising interest rates continued to act as a drag on growth of
residential and business investment, outside of an increase in construction of new electric
vehicle battery and microprocessor factories. Labor demand also moderated, contributing
to some loosening of labor market tightness. The job openings and quits rates fell and
payroll employment gains slowed significantly throughout last year.>

Some of the progress on inflation last year also reflected favorable supply-side

developments, including the resolution of supply chain disruptions and increased labor

forward guidance followed the August 2020 revisions to the FOMC's Statement on Longer-Run Goals and
Monetary Policy Strategy, which are described on the Board's website at

https://www. federalreserve.gov/monetarypolicy/guide-to-changes-in-statement-on-longer-run-goals-
monetary-policy-strategy.htm.

5 The Quarterly Census of Employment and Wages (QCEW) report for the fourth quarter of 2023 suggests
that the slowdown in payroll employment gains was likely more pronounced than currently reported by the
Current Employment Statistics (CES) establishment survey. The Q4 QCEW administrative data show
employment gains that are about 110,000 per month lower than what the CES survey reported from March
2023 to December 2023. Although the BLS benchmarks CES payroll employment based on the

QI QCEW, to be released on August 21, the Q4 QCEW data point to a substantial downward revision to
CES employment gains last year.

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supply-both from higher immigration and higher labor force participation of prime-age
workers-as well as lower energy prices.

Since the beginning of 2024, however, we have seen only modest further progress
on inflation. The 12-month measures of total and core PCE inflation have moved
roughly sideways or slightly down since December and remained elevated at 2.7 percent
and 2.8 percent, respectively, in April. The consumer price index (CPI) report for May
showed 12-month core CPI inflation slowing to 3.4 percent from 3.6 percent in April.
However, with average core CPI inflation this year through May running at an annualized
rate of 3.8 percent, notably above average inflation in the second half of last year, I
expect inflation to remain elevated for some time.

Recent data suggest some moderation in economic activity early this year. First-
quarter gross domestic product growth was slower than in the second half of last year,
though private domestic final purchases continued to rise at a solid pace. Continued
softness in consumer spending and weaker housing activity early in the second quarter
also suggest less momentum in economic activity so far this year.

Payroll employment continued to rise at a solid pace in April and May, though
slightly slower than in the first quarter, partly reflecting increased immigrant labor
supply. Despite some further rebalancing between supply and demand, the labor market
remains tight. The unemployment rate edged up to 4.0 percent in May, while the number
of job openings relative to unemployed workers declined further to near its pre-pandemic
level. Labor force participation dropped back to 62.5 percent in May, which suggests no
further improvement in labor supply along this margin, as labor force participation

among those aged 55 or older has been persistently low.

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In contrast to the past two years, it is possible over the coming months that the
path of monetary policy in the U.S. will diverge from that of other advanced economies,
including the U.K., as the underlying economic developments and outlooks across
jurisdictions exhibit greater heterogeneity. Inflation and labor market developments in
the U.S. have unfolded differently in recent quarters compared to many other advanced
economies, likely reflecting a more open immigration policy and significantly larger
discretionary fiscal stimulus since the pandemic.

Economic activity in the U.S. has recovered considerably more than in other
advanced foreign economies, including in the U.K. This likely reflects higher levels of
fiscal support and productivity growth in the U.S. compared to other major economies.°
A more flexible labor market in the U.S. likely allowed for greater movement of workers
across sectors following the COVID-19 shock, with higher unemployment in the early
stages of the pandemic followed by stronger job creation during the recovery.

A rebound in new business formation in the U.S. also likely enhanced
productivity growth in recent years. With economic activity remaining weaker in other
advanced foreign economies than in the U.S. and given differing economic and inflation
outlooks in their own jurisdictions, central banks in these economies may ease monetary
policy sooner or more quickly than in the U.S.

Inflation in the U.S. remains elevated, and I still see a number of upside inflation
risks that affect my outlook. First, it is unlikely that further supply-side improvements

will continue to lower inflation going forward, as supply chains have largely normalized,

6 See Francois de Soyres, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace Lofstrom,
and Dylan Moore (2024), "Why Is the U.S. GDP Recovering Faster Than Other Advanced Economies?"
FEDS Notes (Washington: Board of Governors of the Federal Reserve System, May 17),
https://doi.org/10.17016/2380-7172.3495.

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the labor force participation rate has leveled off in recent months below pre-pandemic
levels, and an open U.S. immigration policy that added millions of new immigrants in the
U.S. over the past few years may become more restrictive.

Geopolitical developments could also pose upside risks to inflation, including the
risk that spillovers from regional conflicts could disrupt global supply chains, putting
additional upward pressure on food, energy, and commodity prices. There is also the risk
that the loosening in financial conditions since last year, reflecting considerable gains in
equity valuations, and additional fiscal stimulus could add momentum to demand, stalling
any further progress or even causing inflation to reaccelerate.

Finally, there is a risk that increased immigration and continued labor market
tightness could lead to persistently high core services inflation. Given the current low
inventory of affordable housing, the inflow of new immigrants to some geographic areas
could result in upward pressure on rents, as additional housing supply may take time to
materialize. With labor markets remaining tight, wage growth has been elevated at
around or above 4 percent, still higher than the pace consistent with our 2 percent
inflation goal given trend productivity growth.

In the U.S., the FOMC pursues monetary policy in support of price stability and
maximum employment. These goals mandated to the Federal Reserve by the U.S.
Congress are focused on domestic economic conditions. However, international
economic and financial developments can influence U.S. monetary policy to the extent
that these developments affect the economic outlook for the U.S. For example, weaker
foreign activity and an appreciation of the dollar driven by easier monetary policy abroad

would both reduce foreign demand for U.S. exports and lower the outlook for economic

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growth in the U.S. Likewise, geopolitical developments or trade restrictions could affect
the outlook for the prices of energy, food, and goods.

Looking ahead, I will be closely watching the incoming data as I assess whether
monetary policy in the U.S. is sufficiently restrictive to bring inflation down to our
2 percent goal over time. The extent and frequency of revisions to U.S. economic data
since the pandemic have made the task of assessing the current state of the economy and
the outlook even more challenging. My baseline outlook continues to be that U.S.
inflation will return to the FOMC's 2 percent goal, with the target range of the federal
funds rate held at its current level of 5-1/4 to 5-1/2 percent for some time. Should the
incoming data indicate that inflation is moving sustainably toward our 2 percent goal, it
will eventually become appropriate to gradually lower the federal funds rate to prevent
monetary policy from becoming overly restrictive.

However, we are still not yet at the point where it is appropriate to lower the
policy rate. In my view, we should consider a range of possible scenarios that could
unfold when considering how the FOMC's monetary policy decisions may evolve. I
remain willing to raise the target range for the federal funds rate at a future meeting
should progress on inflation stall or even reverse. Given the risks and uncertainties
regarding my economic outlook, I will remain cautious in my approach to considering
future changes in the stance of policy. Reducing our policy rate too soon or too quickly
could result in a rebound in inflation, requiring further future policy rate increases to

return inflation to 2 percent over the longer run.

Bank Capital Reform

I will now briefly touch on bank capital reforms, which are particularly important
when it comes to our global and interconnected banking and financial systems. The U.S.
has lagged its EU and U.K. counterparts in fully implementing the Basel III capital
standards. In July 2023, the U.S. federal banking agencies issued a public consultation
on implementing what we call the Basel III "endgame" capital reforms.'

The U.S. proposal was notable for a number of reasons, but I would highlight two
in particular. First, the U.S. proposal would significantly expand the scope of application
and calibration of these capital requirements. And, second, this proposal went beyond the
Basel framework in several areas, undermining the goal of increasing consistency in
capital standards across jurisdictions and potentially creating competitive concerns. The
response to the U.S. capital proposal was overwhelmingly negative from a broad range of
commenters.

Calibration and scope

A key consideration in evaluating reform efforts is whether the benefits of a
change outweigh the costs, both for the financial institutions subject to these reforms and
for the broader economy. The benefits of reform, like Basel III, are clear-on a basic
level, higher capital can make the banking system safer. At a minimum, this increased
safety comes at a cost; in its more extreme forms, it can actually increase financial

stability risks.

7 See Governor Bowman's dissenting statement on the proposed rule to implement the Basel III endgame
agreement for large banks; Michelle W. Bowman (2023), "Statement by Governor Michelle W. Bowman,"
press release, July 27, https://www.federalreserve.gov/newsevents/pressreleases/bowman-statement-
20230727. htm.

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The Basel III proposal in the U.S. is complex and, if it were to apply today as
proposed, could have very significant, detrimental impacts. Federal Reserve staff
estimated that the proposed changes would result in an aggregate 20 percent increase in
total risk-weighted assets across bank holding companies subject to the rule, with some
commenters projecting much greater effects.* And, instead of these standards applying
only to large, internationally active banks, the U.S. proposal would "push down" these
standards to a much broader range of domestic institutions.

A change of this significance could impact U.S. market liquidity and lending as
well as force firms that lack sufficient economies of scale to stop providing certain
products and services. Capital increases of this scale could reduce the cost and
availability of credit, particularly for certain types of loans, and could disproportionately
harm underserved markets, businesses, and communities. In my view, the proposal
insufficiently considered these direct costs. These are costs that would ultimately be
imposed on bank customers.

Of course, the evaluation of reforms should not end at their direct costs. Many of
the costs are indirect or unintended and may be substantial, creating further concerns,
including risks to financial stability. These reforms could create an exodus of activities
and products from the banking system due to the indirect costs and unintended

consequences.

8 See, for example, Financial Services Forum, American Bankers Association, Bank Policy Institute, and
Securities Industry and Financial Markets Association (2023), "Comments on Regulatory Capital Rule:
Large Banking Organizations and Banking Organizations with Significant Trading Activity,' December 22,
https://www. federalreserve.gov/SECRS/2023/December/2023 1229/R-1813/R-
1813122223 156400 337982526593 _1.pdf (noting that for the largest U.S. firms, the proposal would
result in a greater than 30 percent increase in capital requirements, and a greater than 33 percent increase in
risk-weighted assets).

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Over time, activity tends to migrate to where it can be conducted efficiently and at
the least cost. Capital requirements can play a significant role in determining where and
by whom an activity is conducted. Banks are often best positioned to provide financial
products and services due to their expertise and experience as well as their requirement to
operate safely and soundly. When the over-calibration of regulatory costs becomes too
significant, activities often migrate out of banks and into the nonbank financial system,
potentially leading to greater systemic risks.

Up until this point, I have focused primarily on the "cost" side of the analysis, and
I think it is fair to characterize the direct and indirect costs of the proposed Basel III rule
as substantial. But we must also measure these costs against the benefits such capital
increases could provide.

As a starting point for this analysis, we must evaluate the current state of the
banking system. In the U.S., given the increase in capital following the 2008 financial
crisis, I do not see undercapitalization of large banks as a current vulnerability. While
some have argued that large capital increases should be part of the regulatory response
following the 2023 U.S. banking stress, I think this argument lacks a solid foundation.

First, as we know, the Basel reforms were being developed long before last year's
banking stress. The U.S. proposal included regulatory changes that had previously been
considered and rejected as part of the Basel III implementation-specifically, a
significant accounting change regarding the treatment of unrealized losses on securities

portfolios.? While revisiting this one element of Basel III has been used to try tying the

° See Board of Governors of the Federal Reserve System and Office of the Comptroller of the Currency
(2013), "Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy,
Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market

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rulemaking initiative to the regulatory response to the bank failures last spring, the
majority of the proposed changes are unrelated to last spring's banking stress.

Second, linking this rulemaking to the banking stress implies that the causes of
individual bank failures in the spring of 2023 were in some way a signal of broader
banking system weakness, which could best be addressed by significant capital increases.

This argument seems to rely on the philosophy that more capital makes stronger
banks, regardless of costs and tradeoffs, or possible more efficient approaches. Linking
the proposed capital increases to the bank failures in the spring of 2023 should not be
used as a pretext to avoid the challenges of identifying and evaluating the tradeoffs
involved with setting capital requirements, nor should it excuse regulators from taking a
hard look at the root causes of the bank failures with the goal of identifying more targeted
solutions than across-the-board capital increases.

In the case of Silicon Valley Bank (SVB), both bank management and supervisors
failed to appreciate, appropriately identify, and mitigate the known, significant, and
idiosyncratic risks of a business model that relied on a highly concentrated, uninsured
base of depositors. They also overlooked the buildup of interest rate risk without
appropriate risk management. These management failures arguably support an honest
and critical look at how supervision was conducted in the lead-up to the firm's failure.
And it would then be appropriate to propose changes to remediate those deficiencies. But
the failures did not suggest either that "capital" was the major problem contributing to

SVB's failure or that undercapitalization was a broader problem in the banking system.

Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market Risk
Capital Rule," final rule, Federal Register, vol. 78 (October 11), pp. 62018-291.

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Basel III capital reforms and international consistency

Before discussing the path ahead, I will also address one of the factors that should
be a focus for regulatory reforms that may resonate in this forum: the issue of
international comparability and competitive disadvantages. One of the primary purposes
of the Basel capital standards is to promote minimum standards across jurisdictions that
not only improve competitive equity in banking markets, but also result in making the
financial system safer.

While I have expressed some skepticism of the U.S. Basel II proposal, I see
value in engaging in ongoing discussions about international coordination through
multilateral organizations like the Basel Committee on Banking Supervision. Some
degree of consistency in international banking and financial markets can be helpful in
fostering a cross-border level playing field for internationally active banking
organizations while establishing minimum standards that can help mitigate global
financial stability risks.

In internationally active banking and financial markets, there are often "choices"
about where activity can be conducted. Financial products and services are offered
around the world in different markets, and there is often some degree of flexibility as to
how a customer can access a product or service. This competitive "choice" aspect of
international banking and financial markets can itself create downward pressure on
regulatory standards and create opportunities for forum shopping.

In the absence of some degree of international coordination, there is a risk of
creating a regulatory "race to the bottom," as regulators compete to grow their banking

and financial systems by lowering regulatory and supervisory standards below levels that

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are appropriate based on risk. But this desire for greater international consistency can be
equally frustrated when U.S. regulators excessively calibrate requirements. As I
previously noted, the U.S. proposal was calibrated at a level well in excess of other
international jurisdictions as well as without sufficient analytical support and evidence
that the proposed increases were proportionate to risk.

This is not only a problem for international competitive equity, but also a concern
for global financial stability. Significant banking activities occur in the international and
cross-border context, and we know that financial stability risks can spread throughout
global financial markets. The U.S. Basel proposal reflects elements of the agreed-upon
standards, but it far exceeds them. Adjusting the calibration could have the important
secondary benefit of enhancing this international consistency.

The path forward

Notwithstanding what has brought us to this point, I do see a path forward to
implement Basel III, one that addresses not only the overall calibration as well as
international consistency and comparability, but also makes more granular changes that
will improve the effectiveness and efficiency of the rule.

In October 2023, the Federal Reserve launched a data collection to gather
information from the banks affected by the U.S. proposal. I am hopeful that this data will
allow regulators to better understand the impact of the proposal and to identify areas for
revision. Any next step in this rulemaking process will require broad and material
changes. It should also be accompanied by a data-driven analysis of the proposal and
informed by the significant public input received during the rulemaking process. This

should assist policymakers in creating a path to improve the rulemaking. My hope is that

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policymakers pay closer attention to the balance of costs and benefits and consider the

direct and indirect consequences of the capital reform.

I have previously identified a number of specific areas and procedural steps that

would be necessary to address in any future efforts to revise this proposal. Some of these

issues include

addressing redundancy in the capital framework (for example, between the new
market risk and operational risk requirements, and the stress capital buffer)
recalibrating the market risk rule specifically, where some of the biggest outlier
increases in risk-weighted assets would appear (for example, these revisions alone
will increase risk-weighted assets from $430 billion to $760 billion for Category I
and II firms, and from $130 billion to $220 billion for Category III and IV firms)
adopting a more reasonable treatment for non-interest and fee-based income
through the operational risk requirements, which could deter banks from
diversifying revenue streams, even though such diversification can enhance an
institution's stability and resilience

reviewing the impact of capital requirements, including leverage ratio
requirements, on U.S. Treasury market intermediation and liquidity

incorporating tailoring in the applicability of Basel III capital reforms, specifically
looking at whether each element of the Basel III capital proposal is appropriate

for non-G-SIB firms that are not internationally active

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e re-proposing the Basel III standards to address the broad and material reforms that

I believe should be included in any final rule, including granular changes to

address the specific issues raised by commenters, as appropriate. !°
While these steps would be a reasonable starting place, they are not a replacement for a
data-driven analysis and a careful review of the comments submitted. This would result
in a better proposal that includes changes to address not only these concerns, but also
many other concerns raised by the public.

Closing Thoughts

I would like to thank you again for the opportunity to speak with you today. My
experience over the past five and a half years at the Federal Reserve highlights the
enduring challenge of setting monetary policy amid a wide and evolving range of risks
and uncertainties in the global economy. An important question I will be considering is
how to make monetary policy durable to a wide range of possible shocks and changes in
the macroeconomy, such as those experienced globally during the pandemic.

We will continue to learn about the post-pandemic global economy, and, if history
is any guide, new shocks to and changes in the economy will eventually and inevitably
occur. While the economic outlook is uncertain, the FOMC's mandate of fostering price
stability and maximum employment in the U.S. remains very clear. Restoring price

stability is essential for achieving maximum employment over the longer run.

'0 See Bowman, "Statement by Governor Michelle W. Bowman," in note 7; Michelle W. Bowman (2023),
"Remarks on the Economy and Prioritization of Bank Supervision and Regulation," speech delivered at the
New York Bankers Association's Financial Services Forum, Palm Beach, Florida, November 9,
https://www.federalreserve.gov/newsevents/speech/files/bowman20231109a.pdf; Michelle W. Bowman
(2024), "The Path Forward for Bank Capital Reform," speech delivered at Protect Main Street, sponsored
by the Center for Capital Markets at the U.S. Chamber of Commerce, Washington, D.C., January 17,
federalreserve.gov/newsevents/speech/files/bowman202401 17a.pdf.

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I also look forward to ongoing international discussions about bank capital and
regulatory frameworks, and I hope that my brief remarks today relay both my support for
ongoing international discussions on these matters and my firm belief that we must
engage in regulatory reform efforts with our eyes wide open, acknowledging the benefits,
costs, and tradeoffs.

While our interconnected banking and financial system provides many benefits,
we must also continue to focus on the opportunities it creates for financial stability risks
to shift from domestic concerns to global vulnerabilities. Bank capital policy is an
important measure to control these risks, but we know that capital is only one of many
tools in our supervisory arsenal. And it is insufficient without the complement of other
regulatory tools.

So, as we