. the u. s. financial stability oversight council ( fsoc ) is currently developing a work plan to analyze potential risks associated with asset management products and activities ( minutes of the october 6, 2014, meeting ( pdf ) ). for a detailed discussion of many of the issues i mention here, see mark carlson, burcu duygan - bump, and william r. nelson ( forthcoming ), “ why do we need both liquidity regulations and a lender of last resort? a perspective from federal reserve lending during the 2007 – 09 u. s. financial crisis, ” finance and economics discussion papers ( washington : board of governors of the federal reserve system ). bis central bankers ’ speeches consider first a regime in which there is no lolr and, thus, financial intermediaries are left to self - insure against liquidity risk. absent regulation, in normal times firms might choose to “ underhoard ” liquidity, to use jean tirole ’ s term. 4 as tirole explains, firms may be incentivized to sacrifice some insurance in order to buy more illiquid ( and presumably higheryielding ) investments. this choice raises the prospect of huge negative externalities, since each firm may hold a smaller buffer than is socially optimal. were a liquidity stress to arise, particularly one following an asset price shock that broadly affected financial intermediaries, the result could be the kind of freezing up of financial system gears that took place a few years ago, with consequences for the broader economy that went well beyond the effects on specific markets or institutions. assume, then, that regulation is put in place to force intermediaries to internalize all the liquidity costs of even the most severe, low - probability systemic events. firms would have to demonstrate that they either maintained more or less matched durations of their assets and liabilities in the steady state or, what in some circumstances could amount to much the same thing, have liquidity buffers sufficient to meet all liquidity demands even during a systemic event following a major shock to asset values. such an approach would entail two major costs. first, such a requirement would significantly constrain the level of liquidity and maturity transformation in normal times, surely resulting in significant constraints on credit extension, with consequent negative effects on economic growth. a primary economic function of banks and other financial intermediaries is facilitating liquidity management throughout the economy. demand deposits and other short - term

’ s total assets declined about $ 310 billion since the middle of last year and currently stand at close to $ 4. 0 trillion. relative to their peak level in 2014, banks ’ reserve balances with the federal reserve have declined by around $ 1. 2 trillion, a drop of more than 40 percent. in light of the substantial progress we have made in reducing reserves, and after extensive deliberations, the committee decided at our january meeting to continue over the longer run to implement policy with our current operating procedure. that is, we will continue to use our administered rates to control the policy rate, with an ample supply of reserves so that active management of reserves is not required. having made this decision, the committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff. i would note that we are prepared to adjust any of the details for completing balance sheet normalization in light of economic and financial developments. in the longer run, the size of the balance sheet will be determined by the demand for federal reserve liabilities such as currency and bank reserves. the february monetary policy report describes these liabilities and reviews the factors that influence their size over the longer run. i will conclude by mentioning some further progress we have made in improving transparency. late last year we launched two new publications : the first, financial stability report, shares our assessment of the resilience of the u. s. financial system, and the second, supervision and regulation report, provides information about our activities as a bank supervisor and regulator. last month we began conducting press conferences after every fomc meeting instead of every other one. the change will allow me to more fully and more frequently explain the committee ’ s thinking. last november we announced a plan to conduct a comprehensive review of the strategies, tools, and communications practices we use to pursue our congressionally assigned goals for monetary policy. this review will include outreach to a broad range of stakeholders across the country. the february monetary policy report provides further discussion of these initiatives. thank you. i am happy to respond to questions. 3 / 3 bis central bankers'speeches