Michelle W Bowman: The evolving nature of banking, bank culture, and bank runs

Remarks by Ms Michelle W Bowman, Member of the Board of Governors of the Federal Reserve System, at the 21st Annual Symposium on "Building the Financial System of the 21st Century - an agenda for Europe and the United States", sponsored by Harvard Law School, Program on International Financial Systems, Frankfurt am Main, 12 May 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

It is a pleasure to be with you here today. This symposium, focused on building the financial system of the twenty-first century, is very timely. Given the recent banking system stress many are welcoming a fresh look at whether the Dodd-Frank era changes to the financial system and the approach to supervision and regulation have kept pace with the evolving nature of banking, the evolving culture of banking, and how the risks of bank runs today have evolved to be meaningfully different from what we've seen in the past. While my remarks will largely focus on the United States, the lens through which regulators and policymakers should view these issues has some broader applicability and is worthy of an ongoing discussion.

I will begin by offering a few thoughts on U.S. monetary policy. At our most recent meeting last week, in light of the ongoing unacceptably high inflation, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by 25 basis points. With this increase, the FOMC has raised the federal funds rate by 5 percentage points since March of last year. These increases, combined with the runoff of our balance sheet, are having the desired effect of tightening financial conditions. In my view, our policy stance is now restrictive, but whether it is sufficiently restrictive to bring inflation down remains uncertain. Some signs of slowing in aggregate demand, lower numbers of job openings and more modest gross domestic product (GDP) growth indicate that we have moved into restrictive territory. But inflation remains much too high, and measures of core inflation have remained persistently elevated, with declining unemployment and ongoing wage growth. And, as senior loan officers signaled beginning last summer, credit has continued to tighten. I expect this trend will continue given increased bank funding costs and reduced levels of liquidity.

While the U.S. banking and financial system remains sound and resilient, the recent failures of three U.S. banks with unique risk profiles have added to the uncertainty surrounding the economic outlook. This uncertainty is further complicated by stock price movements among regional banks.