janet l yellen : pursuing financial stability at the federal reserve speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the fourteenth annual international banking conference, federal reserve bank of chicago, chicago, illinois, 11 november 2011. * * * i am indebted to federal reserve board staff members rochelle edge, andrea kusko, andrew levin, and nellie liang for their assistance in preparing these remarks, which reflect my own views and not necessarily those of others in the federal reserve system. let me begin by thanking the federal reserve bank of chicago for inviting me to participate in this important conference on the role of central banks in financial stability. as you know, the dodd - frank wall street reform and consumer protection act of 2010 ( dodd - frank act ) assigned the federal reserve a central role in the new framework for achieving and maintaining financial stability. i am grateful for this opportunity to explain how we, together with other regulators, have been moving forward to fulfill our new responsibilities. the dodd - frank act instituted substantial changes to financial - sector supervision and regulation in the united states in direct response to the serious deficiencies in the regulatory framework that were revealed, all too painfully, by the financial crisis and the associated deep recession. one key change was the requirement that u. s. financial regulators take a “ macroprudential approach ” to supervision and regulation. in my remarks today, i want to describe how this approach is being put into practice at the federal reserve. i will touch on both our own regulatory and supervisory responsibilities and our responsibilities as a member of the multiagency financial stability oversight council ( fsoc ), which the dodd - frank act established to promote a more comprehensive approach to monitoring and mitigating systemic risk. i should note that an important part of putting the macroprudential approach into practice is establishing a new regulatory infrastructure, including the fsoc and its working - committee structure. in addition, individual regulatory agencies have made organizational changes needed to fulfill their new responsibilities. at the federal reserve, we have reoriented our supervision of large bank holding companies, and we have created a new office called the office of financial stability policy and research, which plays a key role in monitoring financial risks, analyzing the implications for financial stability, and identifying approaches for mitigating identified risks. overview of the macroprudential approach the explicit incorporation of macroprudential considerations into our structure for financial regulation and oversight represents a major innovation

routinely used to address cyclical risks to financial stability, and that moretargeted micro - and macroprudential tools should be used to address these risks. i agree that targeted prudential policies should be the first line of defense against threats to financial stability. however, because their effectiveness in practice is not yet proven, i would not rule out the possibility that monetary policy could be used directly to support financial stability goals, at least on the margin. identifying and addressing structural forms of systemic risk i want to turn now to structural sources of systemic risk and discuss how macroprudential policy can be used to mitigate them. structural vulnerabilities may go largely unnoticed until they are exposed in financial crises – and at considerable cost. indeed, many of the regulations now being implemented under the dodd - frank act, as well as the international agreements relating to bank capital and liquidity standards, are a reaction to the events of 2007 through 2009. such responses include regulations and reforms that address risks resulting from the existence of sifis and systemically important financial market utilities ( fmus ) as well as other efforts to improve the resilience of important financial markets and infrastructure. because the material distress or failure of a sifi can have outsized effects on the financial sector and the real economy, the dodd - frank act empowers the federal reserve to reduce the probability of such events through tougher prudential standards, including enhanced riskbased capital and leverage requirements, liquidity requirements, an early remediation regime, and restrictions on activities. the act also requires the federal reserve to consider systemic risk effects when reviewing and ruling on applications for mergers among financial firms. in addition, to ensure that the failure of a sifi can occur without serious damage to the financial system, the act gives the federal reserve and the federal deposit insurance corporation new tools, such as improved resolution planning by firms and an orderly liquidation authority. the act also requires centralized clearing of standardized over - the - counter ( otc ) derivatives and introduces margin requirements for noncleared derivatives and other measures to strengthen the integrity and functioning of financial markets. efforts to develop these rules have been progressing well. the federal reserve will soon release for comment its proposed rule on enhanced prudential standards that would apply to large bank holding companies and systemically important nonbank financial firms. it also bis central bankers ’ speeches recently approved a final rule implementing the resolution plan requirement. let me note that in these instances, as in