Speech:Financial Stability a Decade after the Onset of the Crisis
August 29, 2017 / Source: FRB
August 25, 2017
Financial Stability a Decade after the Onset of the Crisis
Chair Janet L. Yellen
At “Fostering a Dynamic Global Recovery,” a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming
A decade has passed since the beginnings of a global financial crisis that resulted in the most severe financial panic and largest contraction in economic activity in the United States since the Great Depression. Already, for some, memories of this experience may be fading—memories of just how costly the financial crisis was and of why certain steps were taken in response. Today I will look back at the crisis and discuss the reforms policymakers in the United States and around the world have made to improve financial regulation to limit both the probability and the adverse consequences of future financial crises.
A resilient financial system is critical to a dynamic global economy—the subject of this conference. A well-functioning financial system facilitates productive investment and new business formation and helps new and existing businesses weather the ups and downs of the business cycle. Prudent borrowing enables households to improve their standard of living by purchasing a home, investing in education, or starting a business. Because of the reforms that strengthened our financial system, and with support from monetary and other policies, credit is available on good terms, and lending has advanced broadly in line with economic activity in recent years, contributing to today's strong economy.1
At the same time, reforms have boosted the resilience of the financial system. Banks are safer. The risk of runs owing to maturity transformation is reduced. Efforts to enhance the resolvability of systemic firms have promoted market discipline and reduced the problem of too-big-to-fail. And a system is in place to more effectively monitor and address risks that arise outside the regulatory perimeter.
Nonetheless, the scope and complexity of financial regulatory reforms demand that policymakers and researchers remain alert to both areas for improvement and unexpected side effects. The Federal Reserve is committed to continuing to evaluate the effects of regulation on financial stability and on the broader economy and to making appropriate adjustments.
I will start by reviewing where we were 10 years ago. I will then walk through some key reforms our country has put in place to diminish the chances of another severe crisis and limit damage during times of financial instability. After reviewing these steps, I will summarize indicators and research that show the improved resilience of the U.S. financial system—resilience that is due importantly to regulatory reform as well as actions taken by the private sector. I will then turn to the evidence regarding how financial regulatory reform has affected economic growth, credit availability, and market liquidity.
1. Over the 12 quarters ending in the first quarter of this year, borrowing by the nonfinancial business sector increased at an annual rate just above 6 percent, on average, and borrowing by households and nonprofit institutions rose at an annual rate of 3-1/4 percent, on average; the corresponding average pace of increase in nominal gross domestic product was 3-3/4 percent. Over the same period, lending by private depository institutions advanced at an annual rate of nearly 6-1/2 percent. Return to text