randal k quarles : parachute pants and central bank money speech by mr randal k quarles, vice chair for supervision of the board of governors of the federal reserve system, at the 113th annual utah bankers association convention, sun valley, idaho, 28 june 2021. * * * i have been reflecting recently, and in connection with this speech, on america ’ s centuries - long enthusiasm for novelty. in the main, it has served us and the world well, by making america the home of so many of the scientific and practical innovations that have transformed life in the 21st century from that of the 19th. but, especially when coupled with an equally american susceptibility to boosterism and the fear of missing out, it has also sometimes led to a mass suspension of our critical thinking and to occasionally impetuous, deluded crazes or fads. sometimes the consequences are in hindsight merely puzzling or embarrassing, like that year in the 1980s when millions of americans suddenly started wearing parachute pants. but the consequences can also be more serious. which brings us to my topic today : central bank digital currencies, or cbdcs. in recent months, public interest in a “ digital dollar ” has reached fever pitch. a wide range of experts and commenters have suggested that the federal reserve should issue — and in fact may need to issue — a cbdc. but before we get carried away with the novelty, i think we need to subject the promises of a cbdc to a careful critical analysis. in offering my views on this and other issues related to cbdcs, i am speaking for myself as a member of the board of governors, and not for the board itself or any other fed policymakers. and, indeed, you will all have seen chair powell ’ s recent announcement that we are preparing a comprehensive discussion paper on this issue that will be the first step in a thorough public process to conduct just this sort of critical analysis, which i do not want to prejudge. but i do want to give some sense of the issues i think we will need to grapple with in this process, how i will be thinking about them, and the high bar that i think any proposal to create a u. s. cbdc must clear. so, let ’ s begin with a basic question : what problem would a cbdc solve? to answer, we first need to define the term cbdc and assess the current state of the u.

regulators — understand and address these problems where they persist? to start, there are some areas where we need better data. for example, small business lending data required by section 1071 of the dodd - frank act, once implemented, will provide tangible insights into the availability and pricing of credit for minority small businesses. banks should also actively analyze their own data to identify areas where racial disparities occur. on - the - ground testing, using techniques such as mystery shopping, may also help to identify discriminatory practices. 18 and to the extent that a bank uses ai or other algorithmic systems in making lending decisions, they should review the underlying models, such as their credit scoring and underwriting systems, as well as their marketing and loan servicing activities, just as they should for more traditional models. 19 see rothstein ( 2017 ). see cook ( 2014 ). mystery shopping involves two individuals who are identical except for a protected class attribute ( such as race ), and has these individuals apply for credit products. the results are examined for disparate treatment based on that attribute. see sr letter 11 - 7. see also morse & pence ( 2020 ), which explores the potential of fintech to increase financial inclusion and attendant consumer protection risks. racial bias in the residential real estate market has long been noted as a source of concern. 20 in january, the federal financial institutions examination council ’ s appraisal subcommittee held a public hearing on appraisal bias in the residential real estate market. i look forward to working with my fellow regulators to help ensure that individuals are treated equally in the appraisal process regardless of race or the racial composition of neighborhoods. more generally, there is another, glaringly obvious reason for banks to do all they can to eradicate discrimination in lending. it is simply good business. ensuring that all would - be borrowers are treated equally means more customers, more loans, and better returns for banks. the federal reserve and our fellow regulators have a clear responsibility to use our supervisory and enforcement tools. 21 all firms have a responsibility to operate in a manner consistent with safety and soundness and in compliance with laws and regulations, including those related to consumer protection. congress provided regulators with supervisory and enforcement tools to help ensure that supervised firms resolve consumer protection weaknesses as well as the more pervasive risk management issues that often lead to those weaknesses. we have a close working relationship with the consumer financial protection bureau and other regulators and integrate other regulators ’ consumer - focused reviews