William C Dudley: Panel remarks at the International Symposium of the Bank of France Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the International Symposium of the Bank of France “Central Banking: The Way Forward?” Paris, 7 November 2014. *  *  *  If all goes according to our forecast and the U.S. economy continues to make progress towards the Fed’s dual mandate goals of maximum sustainable employment and 2 percent inflation, the Federal Reserve will likely begin to raise its federal funds rate target off the zero lower bound sometime next year. For the United States, the start of the normalization of U.S. monetary policy will be a very welcome development. It will indicate that the U.S. economy has made great strides in healing itself from the damage caused by the U.S. housing boom and bust, and the financial crisis. However, this shift in policy will undoubtedly be accompanied by some degree of market turbulence. Moreover, it could create significant challenges for those emerging market economies (EMEs) that have been the beneficiaries of large capital inflows in recent years. What can the Federal Reserve do to minimize these risks? These are some of the very important issues raised by Helene Rey’s work. Let me begin by highlighting some of the key points I will be making.
A second issue I would like to touch upon is the need for an in-depth analysis of the framework for smaller retail institutions, particularly those typically funded by deposits. By now, there is a common understanding that we need to rethink the way to treat those in crisis. I am sure we are all aware of initiatives to develop special administrative liquidation procedures, and of alternative proposals on the need to extend the scope of resolution by reassessing the concept of public interest. My personal feeling right now is that both ways could be workable, and the argument I would like to present is that we should first try to agree on an optimal way to absorb losses and facilitate eventual restructuring costs. In non-systemic crises, bailing-in depositors or bailing-out institutions are socially costly options. At the same time, high MREL levels could be very expensive to achieve for many of these institutions. Therefore, I would suggest striking the right balance between, on the one hand, the internalisation of losses above capital requirements and, on the other, collective industry funding to facilitate the transfer tools. Connected to the previous topic is the issue of the level playing field. Failing banks that do not satisfy the public interest test are subject to insolvency procedures in accordance with national regulations that vary substantially across jurisdictions. At the end of the day, this results in an unlevelled playing field as some have upgraded their insolvency proceedings to quasi-resolution frameworks.