financial system. i will walk through how potential near - term risks could interact with current conditions in the united states, based in part on the regular outreach survey the federal reserve bank of new york conducts to inform the discussion in the fsr. 6 in recent outreach, as summarized in this figure from the fsr, contacts were particularly focused on the persistent inflationary pressures leading to further monetary tightening, see the box “ survey of salient risks to financial stability ” in board of governors of the federal reserve system ( 2023 ), financial stability report ( washington : board of governors, october ), pp. 47 – 48, https : / / www. federalreserve. gov / publications / files / financial - stability - report - 20231020. pdf. - 8the potential for significant losses on cre and residential real estate, the reemergence of banking - sector stress, and market liquidity strains and volatility. market participants and others remain attentive to the possible effects of higher interest rates on the financial sector. an unexpected sharp increase in rates could lead to heightened volatility in financial markets, stresses to market liquidity, and downward pressures for asset prices. losses among financial intermediaries could lead to strains and a consequent reduction in credit supply. as i said earlier, the banking sector has stabilized since the period of acute stress earlier this year, and the system as a whole has ample capital and liquidity to withstand shocks. i continue to monitor the system for signs of renewed stresses. at the same time, vulnerabilities at certain nbfis could play a key role in amplifying stress associated with tightening financial conditions and slowing economic activity. i am closely monitoring nbfis with pronounced liquidity mismatches, such as certain money market funds and open - end funds, as well as those with significant leverage, such as hedge funds. for example, several indicators suggest that treasury cash - futures basis trades — trades that involve the sale of a treasury future and the purchase of a treasury security deliverable into the futures contract — likely gained in popularity recently. because the basis trade is often highly leveraged, a funding shock or heightened volatility in treasury markets could force hedge funds to abruptly unwind their positions at potentially distressed prices. i will keep an eye on how these leveraged trades might interact with treasury market liquidity. - 9last but not least, transparency is vital for financial stability risk monitoring. i

want to underscore some encouraging progress in improving data collection to enhance visibility into hedge fund activities. 7 in addition to their ongoing work on emerging risks, the financial stability oversight council ( fsoc ), the office of financial research ( ofr ), and individual fsoc agencies should continue to work together to ensure regulators have appropriate information to assess the financial stability risks posed by nonbank activities and their interconnectedness with banks. in conclusion, the financial system is substantially more resilient than it was in the mid - 2000s. however, vulnerabilities have risen somewhat in recent years, as highlighted by fragilities at nbfis, in the treasury market, and — most notably this year — at some banks. our framework and assessment of financial stability vulnerabilities help us understand these issues, but i am cognizant of the limitations. we cannot — and do not expect to — foresee all potential risks. the financial system is too complex and evolves too rapidly for that to be possible. what we can do is remain vigilant to emerging vulnerabilities and build resilience to a variety of potential shocks. i think it is particularly important to enhance resilience at large banks, and i support seeking public comment on federal banking agencies ’ basel iii endgame proposal on bank capital requirements. i will also focus on monitoring vulnerabilities at nbfis and the functioning of treasury markets. i strongly support continued efforts across the regulatory agencies to share more information and to boost resilience of the entire financial system. for example, the sec ’ s improved form pf reporting and the ofr ’ s bilateral repo data collection. - 10 looking forward, an area that i think deserves more attention is the financial stability implications of artificial intelligence ( ai ), especially its applications in financial services. i can imagine many of you, especially graduate students, are using or exploring the use of machine learning and other forms of ai in your research in economics. on the one hand, ai innovations could expand credit access for consumers and small businesses and bring greater efficiency to broader financial markets. on the other hand, the potential widespread adoption of powerful new ai, especially generative - ai applications, inevitably raises questions about potential benefits and risks to the stability of the financial system as a whole. academics, regulators, and financial market participants are all looking carefully at ai, and more research is welcome as we move ahead in exploring the policy and regulatory