William C Dudley: Opening remarks for the Transatlantic Economic
Interdependence and Policy Challenges Conference
Opening remarks by Mr William C Dudley, President and Chief Executive Officer of the
Federal Reserve Bank of New York and Chairman of the Committee on the Global Financial
System (CGFS), at the Transatlantic Economic Interdependence and Policy Challenges
Conference, Federal Reserve Bank of New York, New York City, 22 April 2013.
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It is my pleasure to welcome you to today's conference on transatlantic economic
interdependence and policy challenges. We have a great program today with many
distinguished speakers from academia, and the private and public sectors. In particular, I
would highlight the keynote speech following lunch by Olli Rehn, the vice president of the
European Commission.
We live in a global economy with a global financial system, yet macroeconomic policy and
regulation and supervision have a decidedly national orientation. This creates a challenge for
all of us as we seek to balance our domestic needs against the benefits from having a
harmonized and integrated global system. We can do better through international
cooperation and coordination both on macro policy and on regulation and supervision, rather
than trying to "go it alone."
As the two largest economies in the world, the United States and the European Union have a
shared stake in the vitality of the global economy. Without growth in both our regions, the
global economy will not prosper and we will not be able to satisfy the aspirations of our
citizens.
Today I want to focus on some of the challenges that we both face. As I see it, significant
progress has been made in the United States and Europe in recovering from the worst
financial crisis since the Great Depression and the deep recession that followed, but more
still needs to be done.
On the regulatory side, there is considerable good news worth highlighting. In particular,
substantial progress has been made in strengthening the global capital and liquidity
standards for internationally active banks. This should make the failure of large firms much
less likely. Also, the financial system is being rebuilt to make it more resilient and robust. For
example, the requirement that over-the-counter (OTC) derivatives be standardized and
centrally cleared whenever possible should strengthen the global financial system. Similarly,
the global set of principles for financial market infrastructures has been updated and
strengthened.
Moreover, some tentative steps have also been made so we can better deal with the failure
of systemically important financial firms on a cross-border basis. Key attributes for resolution
regimes have been promulgated by the Financial Stability Board. Efforts are underway to
implement national regimes consistent with these standards and that can work together in a
coordinated way on a global basis.
But more needs to be done. The impediments to an orderly cross-border resolution still need
to be fully identified and dismantled. This is necessary to eliminate the so-called "too big to
fail" problem. The Basel III capital and liquidity requirements need to be fully implemented.
Also, cross-border regulatory cooperation needs to be further enhanced. This includes
greater exchange of confidential supervisory information so that national regulators can be
fully informed about the conditions of the banks that operate within their borders. It also
requires efforts to ensure a level playing field across jurisdictions so that the focus is on
promoting safety and stability rather than trying to protect, favor, or shield national
champions.
In terms of the macroeconomy, there is both good and bad news. In the United States, the
good news is that the economic outlook appears to be gradually improving. The household
sector is far along in the deleveraging process, the housing sector is recovering, the banking
system is healthier and credit conditions are easing, the corporate sector is highly profitable
and awash in cash.
Monetary policy has been effective at fostering easier financial market conditions, even with
short-term rates pinned at the zero bound. To provide the appropriate degree of
accommodation, the Federal Reserve has recently moved to an outcome-based approach in
which the use of our tools is explicitly tied to developments in the economy and economic
outlook. Currently, as part of this strategy, we are purchasing $85 billion of longer-term
Treasuries and agency mortgage-backed securities each month. After reviewing the efficacy
and costs of this program, I have concluded that that efficacy has been as high or higher
than I expected at the onset of the program and costs the same or lower.
Nevertheless, the United States could be doing better. The U.S. fiscal policy program, for
example, does not appear well-calibrated to the current set of economic circumstances. We
have too much fiscal restraint in the short term, and too little consolidation in the long term.
The degree of fiscal restraint this year (about 13⁄4 percent of gross domestic product [GDP] in
2013) is quite large relative to the forward momentum of the economy. Thus, we have a
tugof-war between the improving economy and the current large negative fiscal impulse. How
this tug-of-war gets resolved - which force dominates - won't be known for some time. In
other words, the level of uncertainty about the near-term outlook in the United States remains
quite high.
Meanwhile, the long-term fiscal outlook for the United States is still troubling. So far, partisan
divisions in Washington have limited progress in reaching the type of "grand bargain" needed
to put the United States on a sustainable long-term fiscal path, though of late we have at
least seen some renewed talk about this. Nor have we yet deployed a comprehensive set of
policies to support the rebalancing of the U.S. economy toward a growth path based more on
business investment, trade and broad-based income gains than the type of asset price gains
and credit-fuelled consumption, which dominated the last business cycle.
For Europe, the near term macroeconomic outlook seems less bright. The good news is that
the peripheral countries have made substantial efforts to bring down their structural budget
deficits. They have also made some progress in improving their international
competitiveness, though there remains an opportunity for further structural reforms in labor
and product markets - and not just in the periphery - to increase productivity and strengthen
long term growth prospects.
The European Central Bank's (ECB) introduction of the outright monetary transactions
(OMT) program has reduced financial market tensions considerably in the peripheral
countries, so that sovereign debt funding costs in those countries are at more reasonable
levels. The risk that interest rates in the periphery could spiral upward has been significantly
diminished. Also, the commitment to European integration remains strong, a factor that
U.S.based analysts and investors do not always sufficiently appreciate. Over the past few years,
when the situation has been the most bleak, the choice in favor of the Union with the euro at
its core has always won out.
The bad news is that the eurozone is still in a recession and the political support for further
rounds of budget-tightening has clearly lessened. The eurozone financial system is being
fragmented and the partial easing of pressure on peripheral sovereign debt markets has not
translated into a corresponding easing in private-sector borrowing costs in these nations. If
growth does not resume relatively soon, then the political support for continued fiscal and
structural adjustment could further erode.
In Europe, a key challenge is to strengthen the economic foundations of monetary union at
the system level. This needs to be done in a way that combines deeper integration with good
incentives and governance so that it can be broadly supported by both the core and
peripheral countries. In this respect, it is important to recall that the architects of EMU from
the outset defined it as a project of Economic and Monetary Union.
I view the task of transitioning to a pan-European banking union with the ECB as the primary
overseer of the European banking system as a critically important next step. Successfully
moving to a pan-European banking union would generate a large number of benefits:
• It would demonstrate a commitment toward greater integration that would enhance
the credibility that monetary union is indeed irreversible.
• It would help to sever the link between the fiscal position of individual governments
and the health of their banks.
• By eliminating the scope for national bias, it would strengthen market confidence
that large hidden losses are not likely to be buried within the banking system.
• It would move against fragmentation and promote re-integration of the European
banking system.
•
It would help to make monetary policy more effective in supporting activity in the
peripheral countries. A critical problem in Europe right now is that private borrowing
costs are very low in countries like Germany where the economy is operating close
to full capacity, but quite high in countries like Italy and Spain - which are struggling
in terms of economic performance. The monetary policy transmission channels in
Europe are impaired. Banking union would make them work better.
•
It would underscore the fact that a euro is a euro and will remain a euro throughout
Europe, reducing perceptions of redenomination risk. This would make depositors
less prone to move their funds from the periphery to the core and strengthen the
resiliency of the system against shocks.
• It would help foster greater integration of the European economy, with potentially
significant macroeconomic benefits.
In short, banking union has the potential to make a powerful contribution to eurozone stability
and growth, both in the short term and in the long term.
Now, will moving to a pan-European banking system be easy? Of course not. It will require a
common set of standards to be applied across the whole system. This may well reveal
shortcomings among particular banks and the burden is not likely to fall evenly across the
European Union. It will be important to identify the sources of capital that will fill any such
holes in order to ensure ongoing stability and to avoid constraining the availability of credit.
The process of banking union appropriately begins with a single supervisory mechanism.
But, a common resolution authority and integrated deposit insurance framework that is both
credible and consistent with good incentives are likely to be required, as well. The task at
hand will likely require each country to give up a small amount of sovereignty with respect to
banking oversight so that the outcome is viewed as fully credible. In my view, this is a critical
next step in the "one money, one market" project underlying the EU agenda.
I'd now like to introduce Ambassador Vale de Almeida as our next speaker. The ambassador
has been here in his current role since August 2010. Prior to his current appointment, he
worked as a director general at the European Commission (EC) and has had a long and
distinguished career at the EC dating back to 1982. So he is extraordinarily well-versed to
speak on the issues of interdependence and the policy challenges we face. Welcome
Ambassador Vale de Almeida.