William C Dudley: Evolving consumer behavior Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the National Retail Federation Annual Convention, New York City, 17 January 2017. * * * Andrew Haughwout, Joseph Tracy and Wilbert van der Klaauw assisted in preparing these remarks. Good morning. It is a pleasure to have the opportunity to speak at this year’s gathering of the National Retail Federation. Retail activity plays a key role in the U.S. economy, with consumption comprising about two-thirds of total gross domestic product. As such, understanding what is happening in your sector is critical in assessing the economic outlook—and, with that, the outlook for employment, inflation and interest rates. As always, what I have to say reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System This morning, I will be focusing on retail spending—an important element of household consumption. But, I will do so in a way that’s perhaps somewhat different from the usual approach, focusing in particular on the connections between housing and retail sales. I will argue that there have been some dramatic changes that have taken place in the way that households finance their consumption. I believe—and hope to convince you—that changes in the housing and mortgage markets have affected the willingness and ability of households to borrow, and that this, in turn, has had important consequences for the dynamics of consumption over the last decade.

Regulatory emphasis has shifted towards a more risk sensitive regulatory capital framework and the assessment of risk management systems and processes in financial institutions. Extensive investment has been made by the industry to adopt a comprehensive and robust internal risk management infrastructure. In Islamic banking, the requirement to manage risks becomes more important due to the special nature of the financial intermediation process that is guided by the Shariah. Islamic financial institutions have a multi-facet role. On the asset side, Islamic financial institutions enter into diverse modes of Islamic financial contracts, each with its own peculiar risk characteristics. Basel II, has to a certain extent, incorporated the identification of credit, market and operational risks that can be assimilated by Islamic financial institutions. However, Islamic financial institutions need to be ahead in exploring other dimensions of risks in these Islamic financial contracts. The risk management infrastructure in Islamic financial institutions must therefore be in place to identify, unbundle, measure, monitor and control all the specific risks in Islamic financial transactions and instruments to provide for their effective quantification and management. Strong risk management capabilities become more pertinent in view of the different contractual arrangements entered into by the Islamic financial institutions with the different classes of depositors. Demand deposits, under the guaranteed custody contract and investment deposits, under the Mudharabah contract, each has its own unique risk and return attributes. Islamic financial institutions must ensure that demand depositors are protected from the risks of Islamic banking business.