And heightened uncertainty can add to market volatility, resulting in diminished market liquidity. But these debates about trade-offs expose a basic problem. Everyone is familiar with the idea of a "jack of all trades." Using monetary policy to mitigate financial stability vulnerabilities can lead to unfavorable outcomes for the economy. Monetary policy should not try to be a jack of all trades and a master of none. There must be a better way. Fortunately, there is. Instead of looking at this as a problem of choosing the point on an unfavorable trade-off curve, we must look for ways to shift the curve by enhancing the resilience of the financial system. The value of this approach to building resilience was demonstrated by the global efforts to strengthen the banking system following the global financial crisis. Despite the economic disruptions caused by COVID-19 and Russia's war on Ukraine, the banking system has functioned well, serving as a source of strength for the economy, not a weak link. Alternative Solutions, Prudent Results As monetary policymakers, we need to count on well-functioning markets that promote financial stability as we pursue our price stability and maximum employment goals. So, what can be done to enhance financial stability? At the Federal Reserve, we have instituted changes over the past few years that support market functioning in times of stress.
This should, in time, ultimately lead to a situation where it is simple and cost effective for any eligible participant to become a direct participant in CHAPS. Improved governance In bringing CHAPS in-house it has been important to develop a strong and robust governance framework and retain the strong ‘user voice’ that CHAPS Co facilitated. At the heart of this was the establishment of the RTGS/CHAPS Board (the Board) chaired by the Bank’s Deputy Governor for Markets & Banking and comprising four non-executive members selected for their experience and expertise, together with a number of the executive, myself included.9 The Board provides a strategic focus with particular attention to the Bank’s role as a systemic risk manager to the CHAPS system, broader financial stability remit and other public interests. The Bank’s operation of CHAPS is subject to the Bank’s full ‘three lines of defence’ risk management model and close engagement and oversight on relevant matters from the Governors, the Bank’s Court of Directors and the Financial Policy Committee. In its capacity as Payment System Operator, the Bank’s delivery of CHAPS is supervised by the Bank’s Financial Market Infrastructure Directorate10 to the same standards as other systemically important payment systems. It is also essential to understand the views of industry, and we have established forums to facilitate an open dialogue with a variety of key stakeholders. This includes the CHAPS Strategic Advisory Forum (SAF) and the RTGS Renewal Programme’s External Advisory Body (EAB).