jerome h powell : government securities settlement opening remarks by mr jerome h powell, member of the board of governors of the federal reserve system, at the evolving structure of the us treasury market : second annual conference, federal reserve bank of new york, new york city, 24 october 2016. * * * this panel will focus on the settlement infrastructure for u. s. government securities — a vital component of the treasury market and one that is undergoing an important transition. this segment of the industry has been in a period of slow but steady consolidation for several decades now. thirty years ago, there were six banks providing a full suite of settlement services for u. s. government securities. due to mergers and exits, two firms, bank of new york mellon ( bnym ) and j. p. morgan chase ( jpmc ), have been the two dominant providers of these services since the 1990s. and soon there will be just one, given jpmc ’ s planned exit. given the importance of these services, the official sector has had a long involvement as the market structure has evolved. after the terrorist attacks of september 11, 2001, the federal reserve convened the private - sector working group on government securities clearance and settlement to recommend steps to mitigate risks to the financial system from a disruption to these services. that work led to the “ newbank ” proposal. 1 although the proposal was ultimately put aside, newbank would have been a dormant financial institution that could spring into action in the event of potential disruptions from an exit from this business by either of the clearing banks. some of today ’ s panelists were actively involved in that work. of course, at that time, the business was roughly evenly split between the two providers. today ’ s situation is very different — bnym now has over 80 percent market share, due mainly to consolidation among end users. the federal reserve has been working closely with the department of the treasury to ensure a smooth transition as jpmc prepares to exit. jpmc has said that it recognizes the need for, and its own interest in, ensuring that its exit does not disrupt the market. indeed, jpmc will itself need to rely on these services going forward. the timeline set for a gradual transition over the next two years should be sufficient to avoid significant dislocations ; however, if unexpected complications arise, that timeline may need to be adjusted. in the near term, this exit will leave bnym as the sole provider of u. s. government securities settlement and

by sales spirals and queues at the exit, which may have a knock - on effect across asset classes. a shortage of liquidity in the market could further accelerate the process. there are currently no indications that major systemic risks have built up in the danish financial system. all the same, there is reason to be on guard. credit institutions should ensure that they are able to withstand both direct losses due to price adjustments for financial assets and the derived effects of the potential market turmoil triggered by such adjustment – e. g. because market access becomes more difficult. turning to the real economy, the danish economy has grown since the end of 2012 if we adjust for falling output of north sea oil and gas these years. growth has been driven mainly by domestic demand. developments in the labour market have been positive over the last year. employment has risen sharply, and unemployment has fallen. according to danmarks nationalbank ’ s estimate, the current unemployment gap is only around 10, 000, so if the recovery continues, bis central bankers ’ speeches it will soon close. the potential for increasing the labour force is greater, but this is also more difficult. inflation is also low in denmark due to factors such as falling oil prices. in the coming months, price inflation will remain low, but looking ahead we can expect inflation to pick up as the effect of falling energy prices fades away. interest rates in denmark have continued to fall, to historical lows, and the low level of interest rates is set to continue for some time yet. in spite of this, investment activity is low and corporate savings high. this is the case not only in denmark but in most advanced economies and no - one can really say when this circle of restrained private consumption and low investment appetite will be broken. it is not purely bad that corporate savings are high. other things being equal, a firm is more robust to economic shocks the higher its equity is relative to its total assets. that reduces the risk that the firm will fail. it also reduces the probability that the firm ’ s bankers will suffer losses on their lending to the firm. hence, a high solvency ratio has a positive impact on financial stability. a high solvency ratio also gives the individual firm greater flexibility when choosing between alternative sources of funding and greater certainty of obtaining the desired funding. an analysis by danmarks nationalbank shows that since the financial crisis erupted, loan capital in the danish banking system has to a large extent flowed to the soundest, most profitable and productive