##ized to refinance when mortgage rates decline below the rate on their current loan. in contrast, most market participants expect longer - term interest rates, including primary mortgage rates, to rise over policy normalization, and that therefore mortgage refinancing activity will be modest. as a result, most expect mortgage principal repayments to run below the level of the redemption cap set by the fomc. projections for these repayments, drawn from the july 2017 update to our annual report that i discussed earlier, are shown in lefthand side of panel 3. 6 / 15 bis central bankers'speeches the benefit of the cap, even though it is unlikely to bind, is that it limits the amount of variation in the pace at which securities, and particularly mortgages, will flow back into private hands. recall that the left - hand figure in panel 3 is based on rising interest rates over an ongoing economic expansion. for comparison, the right - hand figure in panel 3 shows the projected mbs principal repayments for a scenario in which interest rates come in two percentage points below market participants ’ expectations. in this scenario, the cap operates to constrain the flow of securities into the market. while such a lower - rate outcome is not a central expectation, it is certainly possible. by providing market participants some certainty that the pace of balance sheet decline will be gradual across economic scenarios, this plan should help mitigate the risk of unexpectedly sharp shifts in asset prices, liquidity, or market functioning should markets begin to put greater weight on lower interest rate scenarios. indeed, by promoting greater confidence in the stability and liquidity of the treasury and agency mbs markets across economic outcomes, the fomc ’ s plan should result in lower risk and liquidity premia on these assets relative to normalization plans that do not promote such confidence. the importance of predictability is underscored when one considers that in recent years, adverse economic shocks have generally been associated with sharp falls in longer - term interest rates. such declines would tend to bring about faster mbs repayments and, if the outflow from the federal reserve ’ s portfolio were not constrained by a cap, an unforeseen tightening effect on financial conditions, amplifying the adverse shock. prepared for the unexpected while i am confident that the fomc ’ s plan will work well, there ’ s always the risk that events unfold differently than expected. in my view, we best prepare for the unexpected in two ways :

for business. of course, this uncertainty remains after the initial capital has been raised, shareholders identified, and a management team is ready to begin work. these delays present unique challenges for de novo founders, including incurrence of more start - up expenses, difficulty recruiting and retaining qualified management to obtain approval, and challenges in raising additional start - up capital investment. in my view, the absence of de novo bank formation over the long run will create a void in the banking system, a void that could contribute to a decline in the availability of reliable and fairly priced credit, the absence of financial services in underserved markets, and the continued shift of banking activities outside the banking system. bank mergers and acquisitions another pressing area of concern is the rapidly shifting approach to bank mergers and acquisitions ( m & a ) by some prudential regulators. 4 m & a transactions allow banks to evolve and thrive in our dynamic banking system and can promote the long - term health and viability of banks. m & a also ensures that banks have a meaningful path to transitioning bank ownership. the absence of a viable m & a framework increases the potential for additional risks, including limited opportunities for succession planning, especially in smaller or rural communities, and zombie banks that continue to exist but have no competitive viability or exit strategy. the impact of a more restrictive m & a framework affects institutions of all sizes, including larger institutions that are vying to compete with the very largest global systemically important banks. they may choose to pursue m & a to remain competitive with larger peers who can achieve growth organically through sheer scale. m & a is an important part of a healthy banking system. so when considering changes to the framework, i think we need to first identify the problem that needs to be solved and then ask whether any proposed solution is fair, transparent, and consistent with applicable statutes - and, critically, whether the proposed solution has the potential to damage the long - term viability of the banking system. are there identified shortcomings in the current process or standards, and are the proposed reforms targeted and effective to address these shortcomings? one argument i have heard about the m & a regulatory approval process is that the lack of application denials demonstrates that regulators are failing to meaningfully review and pressure - 4 / 7 bis - central bankers'speeches test proposals and have effectively become a rubber stamp. i think this argument lacks a strong foundation. there is ample evidence that undermines this argument, including the resource