reducing the federal funds rate. this means that we will need to allow our restrictive policy some further time to continue to do its work. i think we are in a good position to hold steady and closely watch how conditions evolve. i remain vigilant to the risks to achieving both components of our mandate. i believe that the current approach is a prudent way to manage those risks. evaluating risks is also fundamental to my other role as vice chair for supervision. in the same way that the public depends on monetary policy to support a healthy economy, the public also depends on a strong and stable financial system, so i would like a spend the remainder of my time discussing the prudential regulatory framework the fed uses to oversee banks and promote financial stability. conceptual framework underpinning our regulatory structure the prudential regulatory framework for the banking system is crucial to supporting an economy that works for everyone. as i have spoken about many times before, banks play a critical role in the economy in taking deposits and providing credit to households and businesses, but distress in the banking system can impose widespread costs on society. the government and taxpayers support the banking system through deposit insurance and other forms of government support. the system relies on banks having the capacity to remain resilient and continue lending to households and businesses through times of stress. - 3i will focus on three key components that underlie the resilience of the banking system : capital, liquidity, and resolution resources. each component plays a distinct role in fostering a safe and stable banking system by promoting the resilience of banks and limiting the impact of their distress or failure on the broader economy. the three elements work together : capital absorbs the impact of unanticipated losses ; liquidity enables a bank to meet funding withdrawals and provides time to right itself from a bout of stress ; and resolution resources facilitate an orderly wind down of a failing bank, which promotes financial stability and limits damage to the economy. capital is a core source of resilience, and common equity is the core of capital. common equity provides the greatest degree of loss absorbency, and it is the first line of defense against the risk of bank runs. sufficient capital makes a bank resilient both to cyclical economic downturns and unexpected shocks like we saw in march 2023. capital can absorb losses no matter the source, so it is an effective defense against a wide range of risks that banks face. we use different models to set capital

and the regulatory adjustments we are considering would ensure that all large banks maintain better liquidity risk management practices going forward. 9 they would also complement the capital requirements by improving banks ’ ability to respond to funding shocks. first, we are exploring a requirement that banks over a certain size maintain a minimum amount of readily available liquidity with a pool of reserves and pre - positioned collateral at the discount window, based on a fraction of their uninsured deposits. i have discussed the importance of prudent liquidity risk management in a number of previous speeches. see, for example, michael s. barr, “ the importance of effective liquidity risk management ” ( speech at the ecb forum on banking supervision, frankfurt, germany, december 1, 2023 ), https : / / www. federalreserve. gov / newsevents / speech / barr20231201a. htm. see also michael s. barr, “ the intersection of monetary policy, market functioning, and liquidity risk management ” ( speech at the 40th annual national association for business economics ( nabe ) economic policy conference, washington, dc, february 14, 2024 ), https : / / www. federalreserve. gov / newsevents / speech / barr20240214a. htm. the steps banks have taken include updating their contingency funding plans, reducing their reliance on htm assets for liquidity purposes, adjusting the composition of their high - quality liquid asset portfolios, and enhancing their ability to tap different sources of liquidity. - 9uninsured deposits often represent cash needed to meet near - term needs — like paying bills or making payroll — and we have seen depositors act quickly to withdraw these funds if their availability is in doubt. it is vital that uninsured depositors have confidence that their funds will be readily available, if needed, and this confidence would be enhanced by a requirement that large banks have readily available liquidity to meet requests for these deposits. incorporating the discount window into a readiness requirement would also reemphasize that supervisors and examiners view use of the discount window as appropriate and unexceptional under both normal and stressed market conditions. given the important role of the discount window, we ’ re also actively working to improve its functionality. as part of these efforts, we are seeking feedback from banks, and this feedback will help us to further prioritize operational improvements. second, we are considering a restriction