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How We Promote Financial Stability
What Is Financial Stability?
A financial system is considered stable when financial institutions and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy.
A healthy and stable financial system links, at the lowest possible cost, savers and investors seeking to grow their money with borrowers and businesses in need of funds. If this crucial role of intermediation between savers and borrowers is disrupted in times of stress, the adverse impact will be felt across the economy.
Financial stability in its most basic form could be thought of as a condition where financial institutions and markets are able to support consumers, communities, and businesses even in an otherwise stressed economic environment.
To support financial stability, it is critical that financial institutions and market structures are resilient, so that they are able to bend but not break under extreme economic pressures.
Financial stability depends on firms and critical financial market structures having the financial strength and operational skills to manage through volatility and continue to provide their essential products and services to consumers, communities, and other businesses.
Monitoring Risk across the Financial System
Congress established the Federal Reserve in 1913 to safeguard the economy by preventing financial panics and promoting financial stability. Accordingly, the Federal Reserve has long supervised individual banks and financial institutions, but monitoring the broader financial system and markets in which they operate has grown increasingly important.
Reforms enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)—the landmark legislative response to the 2007–09 financial crisis—assigned the Federal Reserve new responsibilities in the effort to promote financial system stability and keep pace with changing dynamics and innovation in the broader economy. A central element of the Dodd-Frank Act is the requirement that the Federal Reserve and other bank regulators look across the entire financial system for risks, adopting a “macroprudential” approach to supervision and regulation.
“Financial stability policymaking has evolved from managing individual crises as they arise to establishing a policy framework that emphasizes prevention.” —Chair Jerome H. Powell
The Fed regularly and systematically assesses a standard set of vulnerabilities as part of its macroprudential financial stability review:
- asset valuations and risk appetite
- leverage in the financial system
- funding risk
- borrowing by businesses and households
The Federal Reserve presents its current assessment of the resilience of the U.S. financial system in the semiannual Financial Stability Report.
Macroprudential Supervision and Regulation of Large, Complex Financial Institutions
Actions taken by the Federal Reserve to promote financial system resilience in the wake of the 2007–09 financial crisis include requirements for more and higher-quality capital, an innovative stress-testing regime, and new liquidity regulations applied to the largest banks in the United States. In addition, the Fed's assessment of financial vulnerabilities informs decisions regarding the countercyclical capital buffer (CCyB). The CCyB is designed to increase the resilience of large banking organizations when there is an elevated risk of above-normal losses and to promote a more sustainable supply of credit over the economic cycle.
The macroprudential approach informs Fed supervision of systemically important financial institutions (SIFIs)—including large bank holding companies, the U.S. operations of certain foreign banking organizations, and financial market utilities as well as nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be supervised by the Federal Reserve and subject to prudential standards.
The Federal Reserve actively monitors indicators of the riskiness of SIFIs, both individually as well as through interlinkages in the broader network of financial institutions, to help identify vulnerabilities. It then analyzes and assesses whether vulnerabilities pose risks to the financial system and evaluates whether mitigation is needed.
SIFIs are also subject to additional capital and liquidity regulations imposed by the Federal Reserve in order to help mitigate some of the additional risks they pose to the financial system as a whole, given their size and interconnectedness.
Promotion of financial stability strongly complements the primary goals of monetary policy—maximum employment and price stability.
Domestic and International Cooperation and Coordination
The Fed also engages with other central banks and supervisory authorities, to foster a financial system that promotes the sustainability and stability of the U.S. economy first, and the interdependent global economy more generally.
The FSOC is an important forum for cooperation with other domestic agencies. And the Federal Reserve participates in international bodies to address issues associated with the interconnected global financial system and the global activities of large U.S. financial institutions.
What Is Financial Stability?
A financial system is considered stable when financial institutions and financial markets are able to provide households, communities, and businesses with the resources, services, and products they need to invest, grow, and participate in a well-functioning economy.
A healthy and stable financial system links, at the lowest possible cost, savers and investors seeking to grow their money with borrowers and businesses in need of funds. If this crucial role of intermediation between savers and borrowers is disrupted in times of stress, the adverse impact will be felt across the economy.
Financial stability in its most basic form could be thought of as a condition where financial institutions and markets are able to support consumers, communities, and businesses even in an otherwise stressed economic environment.
To support financial stability, it is critical that financial institutions and market structures are resilient, so that they are able to bend but not break under extreme economic pressures.
Financial stability depends on firms and critical financial market structures having the financial strength and operational skills to manage through volatility and continue to provide their essential products and services to consumers, communities, and other businesses.
Monitoring Risk across the Financial System
Congress established the Federal Reserve in 1913 to safeguard the economy by preventing financial panics and promoting financial stability. Accordingly, the Federal Reserve has long supervised individual banks and financial institutions, but monitoring the broader financial system and markets in which they operate has grown increasingly important.
Reforms enacted under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)—the landmark legislative response to the 2007–09 financial crisis—assigned the Federal Reserve new responsibilities in the effort to promote financial system stability and keep pace with changing dynamics and innovation in the broader economy. A central element of the Dodd-Frank Act is the requirement that the Federal Reserve and other bank regulators look across the entire financial system for risks, adopting a “macroprudential” approach to supervision and regulation.
“Financial stability policymaking has evolved from managing individual crises as they arise to establishing a policy framework that emphasizes prevention.” —Chair Jerome H. Powell
The Fed regularly and systematically assesses a standard set of vulnerabilities as part of its macroprudential financial stability review:
- asset valuations and risk appetite
- leverage in the financial system
- funding risk
- borrowing by businesses and households
The Federal Reserve presents its current assessment of the resilience of the U.S. financial system in the semiannual Financial Stability Report.
Macroprudential Supervision and Regulation of Large, Complex Financial Institutions
Actions taken by the Federal Reserve to promote financial system resilience in the wake of the 2007–09 financial crisis include requirements for more and higher-quality capital, an innovative stress-testing regime, and new liquidity regulations applied to the largest banks in the United States. In addition, the Fed's assessment of financial vulnerabilities informs decisions regarding the countercyclical capital buffer (CCyB). The CCyB is designed to increase the resilience of large banking organizations when there is an elevated risk of above-normal losses and to promote a more sustainable supply of credit over the economic cycle.
The macroprudential approach informs Fed supervision of systemically important financial institutions (SIFIs)—including large bank holding companies, the U.S. operations of certain foreign banking organizations, and financial market utilities as well as nonbank financial companies that the Financial Stability Oversight Council (FSOC) has determined should be supervised by the Federal Reserve and subject to prudential standards.
The Federal Reserve actively monitors indicators of the riskiness of SIFIs, both individually as well as through interlinkages in the broader network of financial institutions, to help identify vulnerabilities. It then analyzes and assesses whether vulnerabilities pose risks to the financial system and evaluates whether mitigation is needed.
SIFIs are also subject to additional capital and liquidity regulations imposed by the Federal Reserve in order to help mitigate some of the additional risks they pose to the financial system as a whole, given their size and interconnectedness.
Promotion of financial stability strongly complements the primary goals of monetary policy—maximum employment and price stability.
Domestic and International Cooperation and Coordination
The Fed also engages with other central banks and supervisory authorities, to foster a financial system that promotes the sustainability and stability of the U.S. economy first, and the interdependent global economy more generally.
The FSOC is an important forum for cooperation with other domestic agencies. And the Federal Reserve participates in international bodies, such as the Basel Committee on Banking Supervision and the Financial Stability Board, to address issues associated with the interconnected global financial system and the global activities of large U.S. financial institutions.
