governors of the federal reserve system, federal open market committee reaffirms its " " statement on longer - run goals and monetary policy strategy, january 25, 2022. 2ruchi avtar, rajashri chakrabarti, and maxim pinkovskiy, " was the 2021 - 22 rise in inflation equitable? " federal reserve bank of new york liberty street economics, june 20, 2022. 3 federal reserve bank of new york, global supply chain pressure index. 4 board of governors of the federal reserve system, federal reserve issues fomc statement, september 21, 2022. 5 board of governors of the federal reserve system, federal reserve board and federal open market committee release economic projections from the september 2021 fomc meeting, september 21, 2022. 6 board of governors of the federal reserve system, plans for reducing the size of the federal reserve's balance sheet, may 4, 2022. 7 board of governors of the federal reserve system, federal reserve issues fomc statement of longer - run goals and policy strategy, january 25, 2012. 8 federal reserve bank of new york, survey of consumer expectations. 4 / 5 bis - central bankers'speeches 5 / 5 bis - central bankers'speeches

of solution to this is to create a more diversified and contestable financing mix, such that if banks finance becomes too expensive or scarce, non - bank finance can efficiently substitute for it. this is what the ongoing agenda to deepen and integrate capital markets in europe aims to achieve – the so - called capital markets union. non - banks such a private equity investors or institutional investors can also play an important role in filling financing gaps, especially for the latter in long - dated lending such as infrastructure that matches their liability profile. but we also know that for certain types of lending that are the preserve of banks, in particular sme financing, asymmetric information problems and high costs of monitoring means banks cannot easily be replaced by non - banks. and perhaps even more importantly, such lending cannot quickly be replaced by other banks, as exit from the market tends to destroy the relationship networks – or “ soft information ” – that is crucial for small business lending. 3 in this way, exit can in fact create a form of hysteresis in the banking sector. what this shows is that, as policymakers, we cannot be agnostic as to how banks adapt to the current environment. we need to stay alert to the fact that actions by banks that are rational at the microeconomic level can create negative externalities at the macroeconomic level – analogous to the “ fire sales ” problem during financial crises. 4 and where those externalities risk becoming sufficiently large, there is a justification for policy actions. in my view there are two main areas today where this applies : first, ensuring that banks retain the incentives to lend in markets where to all intents and purposes they are irreplaceable, namely for smes ; and second, ensuring that they have capacity to do so. ensuring that banks ’ retain incentives to lend ensuring that banks retain the incentives to provide an elastic supply of credit to smes involves a variety of issues, but the priority in the current environment is addressing the factors that could drive unwanted adjustment in the sector : in particular, the cyclical, legacy and regulatory factors i described above. cyclical factors matter for banks ’ incentives because the longer weak demand conditions persist, the greater the risk that banks will shrink their balance sheets more than is necessary. thus, a stronger recovery with stronger credit demand is a key part of repairing the bank lending channel. achieving this means economic policies must do their utmost to bring the economy back to potential as quickly as possible, by strengthening both supply capacity and