stanley fischer : monetary policy - by rule, by committee, or by both? speech by mr stanley fischer, vice chair of the board of governors of the federal reserve system, at the 2017 us monetary policy forum, sponsored by the initiative on global markets at the university of chicago booth school of business, new york city, 3 march 2017. * * * in recent years, reforms in the monetary policy decisionmaking process in central banks have been in the direction of an increasing number of monetary policy committees and fewer single decisionmakers – the lone governor model. 1 we are only a few months away from the 20th anniversary of the introduction of the bank of england ’ s monetary policy committee, just a few years after the 300th birthday of the venerable old lady of threadneedle street. the bank of israel moved from a single policymaker to a monetary policy committee in 2010, while i was governor there ; more recently, central banks in india and new zealand have handed over monetary policy to committees. the federal reserve is not part of this recent shift, however. the federal open market committee ( fomc ) has been responsible for monetary policy decisions in the united states since it was established by the banking act of 1935, two decades after the founding of the fed itself. 2 the movement toward committees reflects the advantages of committees in aggregating a wide range of information, perspectives, and models. despite the prevalence and importance of committees in modern central banking, the role of committees in the formulation of policy has not attracted nearly as much academic attention as has the research on monetary policy rules. 3 the literature on monetary policy rules stretches back to at least adam smith and includes important contributions from david ricardo, knut wicksell, and milton friedman. more recently, john taylor has moved the research agenda forward with his eponymous rule, and a large number of academic papers have been written examining the effectiveness and robustness of policy rules. 4 in contrast, as noted, study of the role of committees in making monetary policy has been fairly light, notwithstanding the insightful work of alan blinder and others. 5 committees and rules may appear to be in opposition as approaches to policymaking. one might even argue that if a central bank ever converged on a single monetary rule, there would be no need for a monetary policy committee. in practice, the fed operates through a committee structure and considers the recommendations of a variety of monetary rules as we make monetary policy decisions. our decision is typically whether to raise or reduce the

the so - called risk - based capital standards, or the basle accord. the basle accord capital standards were adopted in 1988 by most of the world ’ s industrialized nations in an effort to encourage stronger capital at riskier banks, to include off - balance sheet exposures in the assessment of capital adequacy, and to establish more consistent capital standards across nations. the accord was a major advance in 1988, and has proved to be very useful since then. but in recent years calls for reform have begun to grow. i will outline briefly one of the key problems we are currently facing with the basle accord. the basle accord capital standards divide bank on - and off - balance - sheet assets into four risk buckets, and then apply a different capital weight to each bucket. these weights increase roughly with the riskiness of the assets in a given bucket. however, the relationship is rough. perhaps most troublesome, the same risk weight is applied to all loans. thus, for example, a loan to a very risky “ junk bond ” company gets the same weight as a loan to a “ triple a ” rated firm. this aspect of the accord clearly gives banks an incentive to find ways to avoid the regulatory capital standard for loans that their internal models say need less capital than is required by the basle accord. conversely, banks should want to keep loans which their models say require more capital than does the basle standard. and, guess what, banks have been doing just that. this so - called “ regulatory arbitrage ” may not be all bad, but it surely causes some serious problems as well. for one thing, it makes reported capital ratios - - a key measure of bank soundness used by supervisors and investors - - less meaningful for government supervisors and private analysts. finding ways around this problem is a high priority at the federal reserve. the arbitraging of regulatory capital requirements is but one of a host of similar conflicts between banks and bank supervisory rules and regulations. indeed, one can view much of the long history of bank supervision and regulation as something of a contest between supervisors who want to deter excessive risk taking and banks who seek ways around sometimes inefficient, or just plain uneconomic, regulations. this long history leads me to seek supervisory strategies that are, in the economist ’ s jargon, incentive compatible. by incentive compatible, i mean supervisory policies and procedures that give banks strong internal incentives to manage their risks prudently