for release on delivery 5 : 20 p. m. edt ( 11 : 20 a. m. hst ) march 14, 2023 the innovation imperative : modernizing traditional banking remarks by michelle w. bowman member board of governors of the federal reserve system at independent community bankers of america icba live 2023 conference honolulu, hawaii march 14, 2023 i would like to thank the icba for the invitation to speak with you today. it is a pleasure to be with you to discuss innovation in the u. s. financial system, the emerging trends that are shaping the industry, and the influence of regulatory approach on this evolution. 1 before turning to the main theme of my remarks, i would like to take a moment to acknowledge the events of the past week, and the actions taken by regulators in response. as you are aware, last friday, march 10, the california department of financial protection and innovation closed silicon valley bank. on march 12, the new york department of financial services closed signature bank. in both cases, the federal deposit insurance corporation ( fdic ) has been appointed as receiver. one significant factor leading to the stress and subsequent closure at each institution was the rapid outflow of deposits, specifically uninsured deposits above the fdic - guaranteed amount of $ 250, 000 per depositor, per account type. on sunday, several specific actions were announced that are intended to limit the direct and indirect risks to the u. s. financial system resulting from the closure of these two financial institutions. the federal reserve board announced that it will make additional funding available to eligible depository institutions through a newly created bank term funding program. 2 this program will offer one year loans to institutions that pledge u. s. treasury securities, agency debt and mortgage - backed securities, and other qualifying assets as collateral. the facility will provide an additional source of liquidity to banks and eliminate the need for institutions to quickly sell these securities during a time of stress. the fdic also took action to protect all depositors, including uninsured depositors, of both silicon valley bank and signature bank. the views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the board of governors of the federal reserve system or the federal open market committee. board of governors of the federal reserve system, “ federal reserve board announces it will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors, ” news

has made, it has fewer incentives to monitor that loan. besides, in periods of extensive securitisation, when the bank knows that new loans can be securitised – which in some countries can imply that the risk will be totally borne by investors outside the bank – the ex ante incentives for screening are notably reduced. all these important changes in the banking industry have taken place against an ostensibly benign but potential dangerous macroeconomic backdrop : the so - called great moderation. indeed, the protracted period of high economic growth and low short and long - term interest rates contributed to giving the banking sector some very good years. however, that is precisely when risk builds up – and it can be excessive. 6 moreover, we should not overlook that macro fragilities emerged during the benign macroeconomic context : for example, both the current account deficit and the share of the real estate sector activity were around 10 % of gdp in 2006. all these elements contributed to a credit boom throughout the spanish economy, particularly in the real estate sector. in this context, let me add that – crucially – the bank of spain reacted very well : notably by introducing a strict regulatory system for special purpose vehicles which significantly restricted regulatory capital arbitrage, and by introducing dynamic provisions, which may have reduced the very high credit supply in the good years. without those measures the credit boom could have been even bigger. 7 moreover, the provision see also stiglitz et al. ( 2000 ) ; matutes and vives ( 2000 ), and martinez - miera and repullo ( 2010 ). see kalemli - ozcan, pappaioannou and peydro ( 2010 ). see allen and gale ( 2000 ). see brunnermeier and petersen ( 2009 ). see mian and sufi ( 2009 ) ; maddaloni and peydro ( 2011 ) ; jimenez, mian, peydro and sufi ( 2011 ), altunbas, marques and gambacorta ( 2010 ). see perez - quiros ( 2000 ) ; adrian and shin ( 2009 ) ; allen and rogoff ( 2011 ) ; rajan and diamond ( 2009 ) ; jimenez et al. ( 2011 ) ; jimenez and saurina ( 2006 ). see jimenez, ongena, peydro and saurina ( 2011 ). bis central bankers ’ speeches buffers have been vital during the crisis as they have allowed banks to continue supporting