continue to play an important role in the u. s. economy by extending credit, providing banking and payment services, and participating in u. s. securities and derivatives markets. context matters, and when we discuss changes to the bank regulatory framework - including through changes to capital requirements - we need to understand the direct and indirect consequences that may result. potential consequences of capital reform one of the key questions i ask when considering regulatory proposals is whether the benefit of the change outweighs the costs of implementation, both for the financial institutions subject to the proposal and for the broader economy. on a simplistic level, higher capital levels make the banking system safer. but this must be the beginning of the analysis, not the definitive end. increased safety comes at a cost, and the business of banking is built upon risk. the complete elimination of risk would transform a bank into a public utility. assuming this is not the desired end state of the banking system, we must evaluate a proposal's merit by thoroughly understanding the balance between these benefits and the resulting costs. as i noted earlier, the u. s. banking system continues to be much better capitalized than before the 2008 financial crisis. that capital cushion has broadly enhanced the resiliency of the banking system through business, economic, and interest rate cycles, enabling the banking system to continue supporting the u. s. economy, even throughout the pandemic and the related economic stress. while the full extent of " costs " under the proposal are not entirely clear, in the aggregate, those costs - including the direct costs experienced by banks, and the indirect costs experienced by bank customers and the u. s. economy - would be substantial. capital increases of this magnitude are likely to have a detrimental impact on u. s. market liquidity and lending, and firms without sufficient scale are likely to exit certain markets. increased capital requirements for certain types of loans may also lead to reduced credit availability or increased cost of credit, which could disproportionately harm underserved markets, businesses, and communities. ultimately, bank customers will bear the cost of these increases. the path forward for capital reform what does the path forward entail? the agencies have received substantial initial public feedback, and in response, have extended the comment period into mid - january 2024. the agencies have also engaged in a parallel effort to gather more information about the potential impact of the proposal's approach and calibrations. these actions reflect an important recognition of the

that sharp movements in asset prices will have serious negative consequences for the economy. instead of trying to preemptively deal with the bubble - which i have argued is almost impossible to do - a central bank can minimize financial instability by being ready to react quickly to an asset price collapse if it occurs. one way a central bank can prepare itself to react quickly is to explore different scenarios to assess how it should respond to an asset price collapse. this is something that we do at the federal reserve. indeed, examinations of different scenarios can be thought of as stress tests similar to the ones that commercial financial institutions and banking supervisors conduct all the time. they see how financial institutions will be affected by particular scenarios and then propose plans to ensure that the banks can withstand the negative effects. by conducting similar exercises, in this case for monetary policy, a central bank can minimize the damage from a collapse of an asset price bubble without having to judge that a bubble is in progress or predict that it will burst in the near future. another way that a central bank with bank supervisory authority can respond to possible bubbles is through prudential supervision of the financial system. if elevated asset prices might be leading to excessive risk - taking on the part of financial institutions, the central bank, as in the case of the united states, can ask financial institutions if they have the appropriate practices to ensure that they are not taking on too much risk. working through supervisory channels has the advantage not only of helping make financial institutions better able to cope with possible asset price declines but possibly also of indirectly restraining extreme asset prices if they have been stimulated by excessive bank financing. also, reminding institutions to maintain risk - management practices appropriate to the economic and financial environment could potentially help lessen a buildup of excessive asset prices in the first place. even if the central bank is not involved in the prudential supervision directly, it can still play a role through public communication, particularly if it has a vehicle like the financial stability reports that some central banks publish. in these reports, central banks can evaluate whether rises in asset prices might be leading to excessive risk - taking on the part of financial institutions or whether distortions from inappropriate tax or regulatory policy may be stimulating excessive valuations of assets. if this appears to be happening, the central bank's discussion might encourage policy adjustment to remove the distortions or encourage prudential regulators and supervisors to more closely monitor the financial institutions they supervise. large run - ups in prices of assets such as houses present serious