janet l yellen : fiscal responsibility and global rebalancing speech by ms janet l yellen, vice chair of the board of governors of the federal reserve system, at the committee for economic development 2010 international counterparts conference, new york, 1 december 2010. * * * good morning. thank you for inviting me to be with you today. the committee for economic development has a long and distinguished record in identifying and addressing crucial issues related to our nation ’ s economic growth and productivity. and today ’ s conference on fiscal sustainability and the global economy fits squarely within that tradition. my remarks will focus on the challenges faced by u. s. policymakers as they confront the need to put fiscal policy on a sustainable track in the long term while providing support to the economy in the near term. i will also offer some thoughts on the recent actions undertaken by the federal reserve and on the implications of our nation ’ s fiscal and monetary policy choices for the global economy. 1 the challenge of achieving fiscal sustainability in the united states charting a sensible course for the federal budget is an essential but formidable task for u. s. policymakers. since the onset of the recent recession and financial crisis, the federal budget deficit has soared as the weak economy has depressed revenues and pushed up expenditures and as necessary policy actions have been taken to help ease the recession and shore up the financial system. at 9 percent of gross domestic product ( gdp ), the budget deficit in fiscal year 2010 was a little lower than it had been a year earlier, but it was still considerably above the average of 2 percent of gdp during the pre - crisis period from fiscal 2005 to 2007. as a result of the recent deficits, federal debt held by the public has increased to around 60 percent of gdp – a level not seen in 60 years. for now, the budget deficit seems to have topped out. so long as the economy and financial markets continue to recover, the deficit should narrow relative to gdp over the next few years as a growing economy boosts revenues and reduces safety - net expenditures and as the policies put in place to provide economic stimulus and promote financial stability wind down. that said, the budget situation over the longer run presents some very difficult challenges, in part because the aging of the u. s. population implies a sizable and sustained increase in the share of the population receiving benefits from social security, medicare, and medicaid. currently, there are about five individuals between the ages of 20 and 64 for each person aged 65

. amazonaws. com / wpcontent / uploads / 2010 / 07 / icb - final - report. pdf. see www. sif. admin. ch / dokumentation / 00514 / 00519 / 00592 / index. html? lang = en. see www. federalreserve. gov / boarddocs / srletters / 2001 / sr0101. htm. bis central bankers ’ speeches banks with both bank and nonbank operations in the united states depends on the foreign bank ’ s own organizational choices. a rebalanced approach to foreign bank regulation as has been the case in the past, we need to adjust the regulatory requirements for foreign banks in response to changes in the nature of their activities in the united states, the risks attendant to those changes, and instructions from congress in new statutory provisions. the modified regime should counteract the risks posed to u. s. financial stability by the activities of foreign banking organizations, as manifested in the years leading up to, and through, the financial crisis. special attention must be paid to the risk of runs associated with significant reliance on short - term funding. in addition, the regime should reduce the difficulties in resolution of cross - border firms. finally, it should take steps to diminish the potential need for ex - post ring - fencing when losses mount or runs develop during a crisis, since such actions may well be unhelpfully procyclical. at the same time, in modifying our regulatory regime for foreign banking organizations, we must remain mindful of the benefits that foreign banks can bring to our economy and of the important policies of national treatment and comparable competitive opportunity. thus, we should chart a middle course, not moving to a fully territorial model of foreign bank regulation, but instead making targeted adjustments to address the risks i have identified. in basic terms, three such adjustments are desirable. first, a more uniform structure should be required for the largest u. s. operations of foreign banks – specifically, that these firms establish a top - tier u. s. intermediate holding company ( ihc ) over all u. s. bank and nonbank subsidiaries. an ihc would make application of enhanced prudential supervision more consistent across foreign banks and reduce the ability of foreign banks to avoid u. s. consolidated - capital regulations. because u. s. branches and agencies are part of the foreign parent bank, they would not be included