President Daly at Community Bankers of Washington Northwest Conference
Tuesday, May 11, 2021
10 a.m. PT
SF Fed President Mary C. Daly and SF Fed Supervision + Credit Group Vice President Mongkha Pavlick join Community Bankers of Washington for their Northwest Conference Spring 2021.
American policy, American monetary policy that promotes a healthy and stable economy, since taking office in October 2018 Dr. Daly has committed to making a more community space that is transparent and responsive to the people it serves.
She works to connect economic principles to real world concerns, and is a sought after speaker on monetary policy, labor economics and increasing diversity within the economics field. Dr Daly began her career with the San Francisco Fed in 1996 as an economist, specializing in labor market dynamics, and economic inequality.
She went on to become the bank’s executive vice president and director of research. She currently serves on advisory board for the Center for first-generation student’s success, and the Maxwell schools citizenship and public affairs at Syracuse University. She’s also served on the advisory board of the Congressional Budget Office, and Social Security Administration, the Office of Rehabilitation Research and Training, the Institute of Medicine and the Library of Congress.
Dr. Daly earned a bachelor’s degree from the University of Missouri-Kansas City, a master’s degree from the University of Illinois Urbana-Champaign, and a PhD from Syracuse University. She’s also completed a National Institute of Aging postdoctoral fellowship at Northwestern University, a native of Ballwin Missouri Dr Daly now lives in Oakland, California with her wife Shelly. Please welcome Mary Daly and Mongkha Pavlick.
Thank you Denise that was a very comprehensive and very kind introduction. So I often get intimidated after you do the long balance introduction for Mary, but I think your warm smile makes it much easier for us to dive in, so thank you very much.
Before we get started, I first want to thank John and the Association for inviting us at the SF Fed to join this event. I was able to join, very early this morning when the program started, and it was really interesting to listen to the first segment where Bob Fisher and John and others spoke to what’s top of mind for the association today, and I guess more excited that what we have in store for the next half an hour to hour.
Our topics I think are very much in line with what seems to be top of mind for all the members of the association. And personally, I think that today’s events particularly exciting for me because as a 20-year supervisor now with SF Fed it’s often I go to these outreach events and I’m on the hot seat. I get grilled with very tough questions from a very intelligent group of bankers, and today I’m not.
Mary, you’re on the hot seat but it alleviates some of the stress I have because I get to pose the same questions and get to hear some of your deeper thoughts on how you’re thinking about some of the top of mind issues for our community bankers.
So I’m not going to waste any more time and jump right into our conversation. So Mary, let’s begin. And I’ll begin with our usual suspects because there hasn’t been an event that I’ve been to where our bankers don’t want to hear about you talk about the overall state of the economy. But I think things are different now that we all read the news, and things are changing, but we hear the media talking about runaway inflation, the next week is a week jobs report. How should we really be thinking about the state of the economy right now.
Well, thanks Mongkha, and thank you for the kind introduction and comprehensive. I feel exhausted after I listened to Mongkha’s introduction as well, so and thank you for having me. It really is a pleasure to be here and to be speaking with you as, I’ll just say that, you know, one of my commitments is to be a community engaged bank, and what that means is engaging with all of our constituents. That would be our communities, and our community banks, of course, our businesses, and so I just welcomed the opportunity to do that.
Okay so to the economy, and Mongkha you’re completely right: if you read the news you have the volatility of one minute people being very worried that we’ll have runaway inflation, the next minute they’re worried that the job market means things aren’t as good as we thought.
The stock market today is getting agitated about the high market valuations of tech stocks and engaging in a sell-off, and so these are just volatile times. I want to back up from the volatile times and I want to say that, here is what I see in the Outlook going forward.
My modal out is quite positive. I’m bullish about where the economy will be at the end of this year, my reasons are really two-fold. One, the vaccination rates have been higher than we expected at this point in the year, and also the momentum on vaccinations just continues to say solid.
We’ve had some waning, of course, as all the early vaccinators went out, and then some of the vaccine-hesitant or more cautious, are coming in at a slower pace. But I’m still confident that we are just going to chip away get more and more of our people vaccinated.
Should that occur as I expect, then what we find is that and this is the second piece as soon as people are vaccinated and ready, they’re just ready to get out and spend. The weather’s getting warmer in most parts of the country, and people are getting vaccinated, it’s safer to go out, with those things in mind.
The latest retail spending numbers highlight why I’m confident. People stopped shopping just at home, and they went out and bought clothing and other things we thought they’d never buy again, other than yoga pants, and they bought them in stores that sell clothing not off of Amazon or the Banana Republic website, so I’m very excited to see those types of trends. They’ve gone to restaurants etc.
So that makes me more bullish. And businesses are meeting this dem and by trying to ramp up production, and that would be true of restaurants, all the way to fabricators of metal parts that that make cars and other things we need.
This is naturally causing a considerable number of bottlenecks, we see bottlenecks in you’ve heard it in shipping and other places where the spot price for a container ship is two times, three times what it is if you made a long term contract.
So those bottlenecks are true in big things like shipping, but I went to a restaurant the other day a Mexican restaurant they ran out of lettuce. I asked how did you grab the lettuce, and they said well we’re completely bad at estimating how many people are going to come to our restaurant each night, and the inventory of the lettuce providers is also behind because they’ve got so much lettuce going to online shopping and not enough coming to restaurant sales because restaurants were not buying much of it.
So, all of these things are transition dynamics of a normal economy, and that’s why you see both the inflation. That’s one of the things that explains both the inflation fears people have, because we are seeing a pickup in in prices that are, in our minds, transitory.
As a policymaker, I’m looking through those there’s these base effects we call them because of the 12-month math of price level was low, during the depth of COVID, and just returning to normal means inflation goes up, but also these bottlenecks.
There are bottlenecks everywhere, and these bottlenecks are causing temporary price spikes that will unravel and unwind once the bottlenecks are resolved. It’s also causing labor shortages. It’s all over the news, that labor shortages are everywhere, that we have many jobs that can’t be filled, and I will say this is also likely transitory.
The reason is that there are many people who are still afraid. They still don’t feel like they should go out because of health concerns, not everybody’s vaccinated, not all workplaces feel as safe as other workplaces. I think another thing that we’ve failed to recognize a lot of times is that schools aren’t in session. And so if you’re a parent, you’re trying to figure out how do I get childcare, how do I get to my job, do I really want a job right now or should I just hang on until the fall when I’ll have childcare provided again in the school system? All of these things matter.
And the other thing I’ll say and I’ll share this again: I was at the same restaurant, they have the Help Wanted sign, and the owner was complaining that can’t find workers, and I said well, you know, tell me about your guarantee on employment.
He said we guarantee hours, and being open one week in advance, or two weeks in advance tops. So that’s all they do, and then after two weeks, they don’t know how many hours you’re going to get or how many days a week you’ll be working.
So if you’re an individual who’s trying to decide on, well, do I prefer arranging transportation, get childcare, do all these other things when the job might not have that permanence or might not have that degree of income support that they need.
You just don’t do it, so all of those things are true, and of course, workers are also have higher savings rates than normal so they can fund themselves, despite the fact that they are not working. So all those things add up to have a very positive outlook for the economy.
That’s the inflation employment thing I think is completely transitory and quite anticipated, and I’m very, very hopeful that by next year we’re going to feel like we’re really starting to move ourselves out of the deep hole that COVID has caused.
I know that was a long answer and probably rapidly said, but I wanted to make sure I squeezed in all of that so we can get on to the other questions.
Thank you for those insights Mary, I peeked at the agenda, and I know there’s an economic full update later this afternoon. It’s really interesting because I looked at the slides that were provided. And I know you can probably spend the rest of our conversation talking about many of those topics, but we certainly don’t want to spend our time doing that because, as I said in the beginning, I think this is really an opportunity for us to shed some light on how you think about some of the topics.
So we have supervision at the San Francisco Fed really work with our community bankers, so with that I’m going to move us to our next segment. But for the benefit of the audience I wanted to share the approach I took to thinking about these questions because I always find it very interesting to talk to Mary about different supervisory topics.
And what would usually happen is: one of our teams would go and brief Mary on a hot topics, something that’s top of mind for our banks, and we think we prepared every single answer to every question she can come up with, and inevitably at the end, she would stump us, she would stump us with a view, a perspective or a question that’s very relevant, but we haven’t really thought about. And so my goal today is that, yes, we’lfl be talking about some topics that are top of mind, from our perspective, based on our engagement points with our banking community, but I also want Mary for you to share the perspective that you use to stump us every time we speak with you.
So with that, I’m going to pick on the first hot topic which I think this morning. Bob, I don’t think I could have said it any more passionately or comprehensively in terms of how he characterized the community bank’s role in the PPP program.
I think for where we sit at the Fed, with a discount window under my oversight, I had some first-hand view into how critical the community bankers and the community banks played in ensuring that PPP loans were reaching the customers that really needed the funds. And Mary as we converse with you throughout the year, I think it’s always interesting to hear a perspective that we don’t often maybe think about as a banking community, which is: What is your role as a policymaker in implementing these emergency lending programs?
So let me just back up and say thanks for that Mongkha. Let me just back up a little bit and say that when we get to the COVID crisis, we take our typical monetary policy actions which I would offer were bold, the fiscal actions were also bold. So we said this is a pandemic, and we need to lower the interest rate, and immediately, as you remember the markets were very dislocated, even the Treasury market.
The bedrock of our financial system was dislocated, so take the actions to get the markets back to smooth functioning so that our policy actions could intermediate through the economy, basically.
So we’ve got the interest rate, you can pass this along in car loan rates, and the mortgage brokers can pass it along in mortgage rates and small business lending, but that was obviously not sufficient, given the size of the economic shocks.
So we partnered with the Treasury, that’s the only way we can really work after the PPP loan program was put forth that. And we didn’t have the capacity really to take on all the PPP loans then we were able to open the PPP LF, with the Treasury as the backstop, because I know you notice but it’s worth repeating.
We have lending powers, not spending power so all we can do is intermediate we can’t really take credit risk, especially credit risk that’s unsupported by that Treasury backstop or funding that’s already there and available to us.
So with that in mind, what do we do? Well, we go into action, along with all of you. And here is something that I told the CDIAC group so I met with them, we did a lot of community banking outreach at the time.
My team you probably talked to a member of my team: we all went out and did things. I met with CEOs of community banks, etc. And here is my perspective, I don’t know if it’s stumping but it’s certainly my perspective.
So I’ve been sitting for three, four years, through in meetings where community banks were worrying and rightly so that the entity community banking, the value proposition of community banking, was getting overshadowed by the easy access that large bank providers can provide.
And maybe that wasn’t being seen in Washington or among policymakers, the important role that community bankers play and community banks play in our communities. Well I think a silver lining of this tragic pandemic has been that community banks are now seen clearly by so many policymakers as the bedrock of how we facilitated the PPP loans, because ultimately these are about relationships.
These PPP loans were brought to scale and done in the way they were able to be done, because people had relationships with these groups. If we look back into the data, and it says something we can talk about a little later.
If you didn’t have any previous an existing relationship with some sort of financial entity, you were much less likely to actually secure a PPP loan, even know how to go about it.
So these relationships deeply held in the community were really something I wanted to highlight. I think the future of community banking now to me looks far stronger than it did in the past because the value proposition is so clearly laid out for people in a way that’s really tangible.
It’s tangible that all of you provided so much support. Over 50% of all PPP loans given by community banks, and that’s just an amazing number. And by and large, when I redo outreach to the community banking systems, I’m interested if you have different views.
People think of this as a big success. They’re able to facilitate it. And we’ve put it all together pretty fast, it’s exhausting. I think for many community bankers, at least the ones I speak to, they’re kind of in a state of, ‘okay, that was a lot of effort but you know, now we have some of our contacts.’
And I’d be interested if you have the same views. You’ve also got new relationships where people might have banked with a big bank but they were clogged up and unavailable, and so they initiated a new relationship with a community bank, and I think that gives value proposition for how to go forward.
It’s always helpful, people have good memories when it comes to who helps them in a crisis. So, from a policymaker perspective, what I’m focused on now, and I had a committee for the Federal Reserve System of President, the regional banks.
I had the Committee on credit and risk management for the system. We have subcommittees, I chair it. And one of our goals this year is to look at what we were doing in the PPP LF and other loan programs mainstream, etc., look at it and bring forward a playbook.
And that playbook is where did it succeed. What can we do better, how do we make sure that we maintain the infrastructure that allows us to go forward. We actually rely on these kinds of things more regularly if we need to not to say that we will be fine, but we have a playbook that allows us to choose among portfolios when treasury and Congress deem it as a reasonable thing to do, to offer support. But from my vantage point, a huge success, probably one of the most successful programs that we’ve run in my memory, and I just feel really strongly that community banks are the heroes in this in this piece of our COVID support as a nation.
Thank you for sharing your thoughts on this Mary, and I can guarantee you this morning in the opening segment, the group had a lot of energy, even though most of us were on mute or off video when this topic came up.
So certainly I think a topic that’s front-and-center for our community bankers. It’s hard for me to imagine. I’m sitting in a banker outreach event, and the top topic that I’m bringing up is not credit or liquidity or SSI. It’s about the emergency lending program.
It really amplifies how much the world has changed for all of us this past year. And on a note of change, I think naturally it leads me to our second topic that I’ve thought about, which is FinTech.
I think it’s no secret that at the San Francisco Reserve Bank, many areas within our reserve bank, especially in our supervision team, we have focused on FinTech more and more as the recent years have gone by, and now it’s really become a very integrated part of how we think about supervision, partly because we’ve identified as an emerging risk several years ago.
But probably equally important is that it’s really a critical part of the engagement because the risks are very present and very real now. So if you notice in my last three sentences I used risk, risk, risk. That comes up very frequently as a supervisor, but I also want our group here today to hear that it’s really not just about the risks that we think about. And what I really want to pick your brain on a little bit Mary is how you think about FinTech and perhaps the opportunities that FinTechs presented in the banking industry or the industry in general, when it relates to boosting financial inclusion.
Sure. So Mongkha was being polite, it’s that I have maybe a different perspective on a lot of these things because I come from the economics training background–about making markets–and not from the standard banking background.
But let me tell you openly how I feel about community bank FinTech. So I see community banks as being very relationship-oriented banks who are essential for their communities. Whether it was organized that way, or and I think increasingly, it is, financially inclusive.
Recognizing that the relationships help you know that a person might be a good credit risk, despite the fact that if you just did through a standard large bank model, you ran through a regression framework, you might not come up with okay that person is getting that loan.
So I think that’s important also–understanding that sometimes you coach people out of these loans, because they’re not really a good prospect for them, and so I think that’s useful. It’s more individualized, in terms of its treatment, and its product line. So FinTechs want to offer that same service, and they say, ‘Okay, we have the technology that allows us to tailor products to be very accessible and individually specific so that we can make squares, for example. There’s many, many of these, but square’s an example of their whole advertising platform. It’s sized for you, that you can take a little thing or a big thing, and your fee for injury is small. But then you can purchase services that are conditioned on the scale of your activity, so that feels very individual, and it seems more tailored to what people need.
So if you think about FinTechs and community banks having the same overall business goals or visions, then the marriage of some of these prospects just allow community banks to scale and reach more people and more people more effectively.
So that I think the value proposition, and without talking about any of the risks, that’s what I see as possible. And what I see going forward.
So then I started digging into this, and of course, I learned that that community base depends tremendously on core providers. And core providers have been, I’ll try to be gentle, sluggish, to respond to all the concerns of particular community banks in terms of modernizing some of their platforms.
And so then you think, well maybe these FinTechs can provide the service to ensure that we can get to these people of interest. So I think that the value proposition for Financial Inclusion is truly there, and it gives some other opportunities to make partnerships that are important.
So let me talk about where I think the challenges lie, and what has to be really focused on in order to do. We can’t let technology drive the outcome. Technologists are always about efficiency of the technology, but if that’s the case, you some lose some of the, for lack of a better word, the personalized service, and the personalized product lines that actually help with the financial inclusion.
I worry a lot about letting the technology drive the result as opposed to the views of community bankers and what they would like if they were writing the code themselves, let that determine what the technology looks like.
That means you have to have a voice, and I’ve offered to my CDIAC counsel that, you know maybe putting the voice together in terms of, here’s what we really need, here are the five things that could really do our work more effectively, come as a group.
It actually takes some of the risk away, but it also maybe is more influential. So these associations like the one you’re a part of are really a nice way to think about that. The other thing I worry about on the risk side is that it’s sold as third-party risk.
That’s a pretty onerous task; they have to review with the due diligence on a third party provider, where you don’t have the expertise. So then it’s expensive too. So then what are the guidelines for this, and how do you think about: how should I hire this firm, and if I hire this firm, it’s my reputation if they have a breach, it’s our reputation because the customer doesn’t know this is a third-party provider. They’re not going to blame that provider; they complain to us.
And so how do you do the due diligence, how do you feel comfortable that this is right, how do you meet the supervisory procedures that we put in place so that you’re not taking on too much risk? And here again I see an opportunity for collective action.
I think this is worth talking about, how we can be supportive, but I think it’s really the associations like yourself. What if there’s some review process that’s collective? So not every bank has to do it themselves, it’s a collective action. We get a star of approval or something like that.
And there’s a collective action that can be taken where things are reviewed at least given certifications, if I can get a certification for a plumber. I’m pretty sure we should be able to get a certification for a third party provider if we’re thoughtful about it.
So again, this is not my job so to create these things so I may be speaking in a way that seems very visionary, but not very practical. And I apologize if that’s the case, but I really want us to think this way as a group, and can we allow community banks to de-risk some of these enterprises, and at the same time, recognizing and being able to realize the value proposition of them.
So I feel very optimistic about this. I’m an optimist by nature, but I feel like there’s an opportunity here. And I guess the only thing I’ll nudge all of you on is to work together as one voice, because I think that has more ability to shape the outlook for us.
If you work independently because you can work independently, then any FinTech group is going to be bigger than any one community bank. So maybe you’re already doing that, and that’d be fantastic. And of course we’re anxious to hear anything you have to say about that, or where we might be helpful as an entity or a research system.
Thank you, Mary, I think it’s very important that our group hears about what you always tell our teams to think big. And I think our struggle as a regulator is, and I don’t know people will chuckle when I say this is, when you ask a regulator to be think big and be creative, it creates a mental struggle for us because we start going to what are the regs, what are the roadblocks, though your encouragement of our team to think big and think differently and think for the future.
And I think more importantly is this whole relationship concept. I think our supervisory teams very much value our relationships with our banks because that’s where the conversations happen to help us get context.
And think about some of these topics where we can use the very practical components to help us think bigger. So I think it’s very fascinating to hear. I think your leadership of us will help push us to a place where as regulators, we may be a little uncomfortable.
But it’s very necessary for us to be effective, so I appreciate those thoughts. And I think I chuckle a little bit when I think about this FinTech topic because several years ago, in my prior role as the head of our community bank supervision group, I would go out and visit with our executive level management and board of directors that are a member of banks, every year at least once or twice a year.
I love sitting in a boardroom, speaking with the management team and a board. And I will try to tee up questions to get some forward-thinking thoughts, and I distinctly remember at the time I tried to build in some questions about, so how is the board and the bank thinking about FinTech. It was a very broad question.
And the range of responses I got, and this was maybe three or four years ago, were either blank stares, like ‘We haven’t thought about it much, it doesn’t apply to us, we just monitor them because they may be a threat.’
I think that was the range of a majority of the response that I got. And now fast-forward several years later, I don’t think there is a conversation that our team has with our banks about strategy and risk that FinTech doesn’t come up.
So I’m really glad that we’re able to articulate to the group today, that it’s something that we’re thinking about, not just from the risk perspective but really more holistically and how we as supervisors should really be thinking about all these things, so that we can be balanced in how we approach these discussions with the banking community.
And so with that, maybe I’ll move us back to something a bit more traditional, because it’s hard for me to be in a virtual room with a group of bankers and not think about CRA. Last year I think 2020 was a quite a year for us at the Fed in terms of CRA modernization and lots of activities we had the ANPR out in the fall and great response I think public comments were reached I think 600 plus. And so clearly it was a topic of interest for the industry. So maybe I’ll spend a couple of minutes asking you about your thoughts on CRA modernization, and particularly on any views on what’s next.
Sure, so as Mongkha said it’s been a big year for us, with the OCC proposal we put out. We got some comments, then we put out some additional work and look for public comments there been a lot of public comments.
And so we’re in the process of taking in those comments and thinking about, ‘Okay, how does it affect the modernization program that we will propose?’ Eventually, I want to back up from that, though, for a second and ask why would we do this?
And I want to put something in our minds just generally, and I think other members of the Federal Reserve System are thinking about it: regulations, laws, etc. They’re not like made and then they survive forever in the state that they were made in, because the economy evolves, the financial system evolves in this case.
The communities that you’re serving evolve in not modernizing, it is actually amiss, and sometimes when people say I don’t like regulation or it’s not right or it’s burdensome, it’s often because it’s not evolved along with the situations that we face.
I think CRA is an example. Their original idea is there, and it has been productive, but it hasn’t reshaped itself as things have changed in a way that makes the highest use of its practical application. It isn’t living up to the spirit of its core features.
And so what this is modernization is really about is, let’s bring it in line with the financial infrastructure of the system that we see. That can get very weedy about how this is done or that’s counted etc.
But let me give you a few things that are that are higher level than that. An example that I hear about regularly is, if we want investments to look like X, why don’t we give banks credit for investments that look like X.
So if we think like that if we have if we want sustainable communities if we want communities that are that are growing as a group as an entity, then why can’t banks get credit if they support that type of structure? Why is it so narrow? What if the outcome we want is different than that?
And I think that’s a really good point. Another really good point is that not all entities organize themselves in the geographic modalities that the original CRA is made in, so why are we not thinking about this geography?
There’s both sides to this if you let a large entity be anywhere, they might not be in the places that you want them to be. And if you make them go to a locality that’s over served, they might actually over invest in that locality, not invest in others.
So there’s a lot of things there that I think we just have to think hard about as regulators, but we can’t do it alone. I think that’s why I’ve been very pleased with the outreach we’ve done I think we’ve met with. National outreach got lots of comments, it comes up in every conversation, and we’ve had several events ourselves.
And what is really important here, and I will double-underline this, we can’t do this by introspection. We simply can’t look at what we’re doing and then write up a law. We have not just public comment but public ideas, what are the ideas you have, where are the pain points, how could it be better. How could it be more effective?
And we’ve done that with community groups with banking groups, and I think we’re going to end up with something that is superior. It won’t be the end, and I think that’s the thing I want everybody to know as well.
So when we get the proposal and put that forward and it ends up being the new modernized program, that’s not the end of it, and we won’t modernize again I hope for 20 years. That’s the modernized program that we have for now, and then it will need to evolve as the economy and the financial system continue to evolve.
I’ll pivot to monetary policy for just a moment, but we put out a framework, and new monetary policy framework in August of last year, and we’re utilizing that framework now. But we said it will be evaluated from time to time and really think about like a five-year frequency. It doesn’t have to be five years on the dot, but having that regularity of review.
And updating regulation and policy and reaction functions, which is our monetary policy framework, keeps them fresh and keeps them targeted on things that we want to do, and ensures that the vision we have for something, and the execution of that thing are aligned.
Thanks for that Mary. I’m listening to you talk about this concept of refresh, and I’m sure all of our bankers on the line today will recall conversations where, when our supervisors, you know as advisory teams, go into the banks, the expectations are very similar.
They’re refreshing, whether it’s a strategy, a plan or policy and procedures. So I think that concept very much resonates at all levels, and in particularly for something that’s so important and critical for the industry. So I’m really glad to know that the system.
Our system with our sister regulatory agencies are all thinking about that aspect, and our team locally I know is very excited to really see the next steps. Our team in San Francisco have had several of our subject matter experts be deeply involved with the process of reviewing the comments.
And so it’s been very fascinating, and then we are very much eager to see the next phase of where we will progress from here on out. I’m looking at the clock a little bit, that’s why I look distracted. Now I want to make sure I don’t shortchange your time because there’s one last topic I’d like to again pick your brain on, and it’s something that you’ve been in the news about quite a bit lately, relatively speaking, and it’s also no secret that in our district in our region, that there’s been an increase in severity and frequency of severe weather events.
And now that sometimes it’s not enough of a link as to why is it that interested in climate risk. So, and it seems mysterious, there are times I’m in conversations with even our internal team members, and it takes a bit of a conversation to really fully get us collectively as a supervisory team to see why are we interested. So today I think our last main question I’d love to hear some of your thoughts on and sharing with our group here today: why are we interested in climate risk?
Sure, absolutely. So let me start with something that I think is just level-setting. It makes sure that we’re all fixed on the same ideas. So we’re not studying climate change, we’re not climate scientists, we’re not studying mitigation strategies for climate change. That’s just not our role and it’s not our expertise.
What we study at the Federal Reserve System, and this is broadly study across many banks, but as Mongkha said San Francisco pays considerable attention to this. We define as the risk of severe weather patterns which have increased over the last decade in the frequency and in their magnitude.
And that’s something that’s just a fact, and then, but its impact on the economy, of course, grows as they grow in frequency and magnitude. So we’re thinking about, how does that affect the economy, how does it affect the payment system, and how does it affect the financial system?
Those are our three core responsibilities monetary policy, the economy, the payment system, making sure it’s sound and stable, particularly the distribution of cash inventory, because if you don’t get cash inventory, you know your customers wouldn’t be very happy.
But people unfortunately can’t get access to the critical payments method they need in a time of crisis. In crisis times the demand for cash shoots up, it becomes a much more familiar medium of exchange for people. We always use it, but it just skyrockets in its use when there’s an event, a severe weather event or any kind of natural disruption natural disaster or disruption.
So we have to make sure those inventories are in place and we’re doing risk management for those inventories for resiliency, and then of course the financial system, and here I’ll just share an anecdote.
A quick one.
Last year when they were the terrible fires in Oregon, I was phoning our colleagues our community bankers in Oregon and I said where are you worried about your portfolios and things of that sort. And apart from that, in addition to the people and the communities, and what they said, one gentleman said, “It’s 1% of my assets under bones that are affected, and it’s 100% of my thoughts and attention.”
So these are risk issues for banks and for the financial system or generally in the non-banking sector. And it can be risk from asset revaluation because now they’re in riskier places people are having trouble in many areas or some areas where this is going on, getting insurance.
So if you can’t get insurance on your property, then the banks holding an asset that as a collateral that isn’t insured that’s not going to go very well. So there’s all these issues about in for the economy, about communities they get devastated, they can get rebuilt, and of course for the payment system where we put the cash, and how we manage the payment system more generally in the electronic one with the resiliency plan.
So, these are all reasons why we must study these things not just about what’s happening this year and today, but also what’s going to happen going forward because ultimately, our net, our agreement in the economy is given to us by Congress. And it’s narrow, it’s monetary policy full-employment price stability. It’s a safe and sound financial system with other regulators. It’s the payment system of the safe and sound payment system, but if we didn’t take this seriously and think of it as a risk, then we would be remiss, so I, my monitor on this is our remit is narrow, but we would be remiss if we didn’t fully work on the topics so that we can ensure that we’re doing our best for the American people, not just today but also into the future.
Thanks, thanks for that line of thought Mary I want to record it so I can capture it into our internal training points to make sure all of us actually really see it so clearly as how you’ve articulated,
You can make a bobble head of me.
I think that’d be quite effective I think to get our team’s attention, but I think on that as I was listening to you speak to how we’re thinking about why we’re interested in climate risk and why it’s so critical that we study it, it does remind me of how our team was thinking about FinTech several years ago.
And I think initially there were questions as to, are we out there supervising, how are banks engaged with FinTech, like do we have these hidden work programs that we’re out trying to execute against and, and I think we’ve worked really hard to convey a very similar message which is, I think we wouldn’t be doing our jobs if we don’t identify the risk landscape. And really study and understand how it impacts our financial institutions and the communities we serve.
And then we won’t take any type of a change in our regulatory approach until it really becomes something that’s necessary. It’s part of the need and also, you know, discussed among our regulatory agencies more broadly. And so I think the points you made were just resonated with me so much as I think about how we approach the FinTech topic. And in so just you know, thank you, again, Mary for that.
If I may, I think that’s worth highlighting, you know some people have asked me, Well, why did you suddenly get involved in this? It’s the things we get involved in have changed over time. So we work on issues, but anything in the risk landscape for many points in my career has been trade policy.
What does trade policy mean for the risk landscape if that will be on the macroeconomic side? It’s the FinTech what does it mean for the right risk landscape for the financial system. What does now climate risk mean for the risk landscape of all the core functions that were part of so we are regularly?
This is where the Federal Reserve, where its mandate squarely lies: We need to assess, not just the economy that we’re working with today, but what the risk landscape for the future economy is as well, and that includes all of our functions. So, this is just an ongoing area of interest for us and climate is the current risk that we obviously have to focus on.
Mary I think you bring up a great point I’d like to invite our audience here today, you know in your free moments the rare free moments that you do have to peruse our Federal Reserve Bank’s public website.
,I think as a proud employee of SFFed it’s not just a shameless plug, I think as I look on our website. You will find a lot of the messaging and Mary Sharecare on how we’re thinking about the different topics beyond the typical just how the economy is doing.
It’s our thoughts on the future of work, our thoughts on financial inclusion as you dig a little bit deeper are the FinTech team which is part of my group in supervision. We just launched a hope podcast series Financial Inclusion and Beyond.
Mary actually graciously kicked off the series for us and really dove deeper into why does this matter to us and why is it an issue that we as, you know for the mission that we’re trying to just serve and achieve, that we need to pay attention to.
So, you know, I think it’s a simple website, check it out there are some very interesting things, I think, even as a San Francisco Fed employee, I’m often surprised by what material we have out there. And I think at a recent event that I engaged in with the California Bankers group.
When I sent the link out of some of the attendees wrote back to me and said they had no idea that we have so much information out there on our chain of framework for a change or a diversity of DEI topic that’s also front and center for us.
So there’s my marketing plug Mary, I think I’m personally a huge fan of our revised website so I’d like to share that with the group here as well. And so John, I know we have a lot of them planned for Q&A during this session.
So I want to be respectful that we do save enough time for that. But before I turn it over to you, I see Roberta on the screen and I don’t want to put you on the spot Roberta, but I do want to thank you, because a secret preparation step I took was I did reach out to our supervisory team has a strong relationship with the state of Washington.
And we always appreciate that Roberta and her team are very kind and sharing with us on an ongoing basis. Things that are top of mind for our baking community up in Washington. And so Roberta, thank you for you. I think validating to some of the topics that I really wanted to tee up today would resonate and you know just hope you know, I’m sure I’ll circle back with you to get some feedback to make sure in the future.
No, we do get invited back for another event that the topics we bring are ones that are relevant to the group here. So with that, John, are there any questions in the chat box that you’d like for Mary to answer?
I don’t see any at this point in time, as you mentioned, Roberta, I would like to put a plug in for Roberta is very good to us, she’s a great regulator. She answers her telephone all the time, all hours, I call her late at night and she has a new phone and is always willing to work with us. And it’s been good, it’s a great relationship with a regulator. So thanks for bringing that. Mongkha has to give me an opportunity to thank Roberta.
I’ve got a question real quick if I could. Hi, Mary, John, we’re one of the two Fed banks in the state of Washington. I was curious when I was listening to the bio, Mary, that you had done some work on economic inequality, early, early on, and is there a role that the Fed plays with that?
I mean we’ve got low interest rates causing increases in stock market and housing prices and we hear about the rich are getting richer. At what point do we need higher interest rates for our homes? I mean what’s the role for the Fed?
That’s a fantastic question. I appreciate you raising it, so I think this is such an important question that last year in November of 2020. I wrote a speech, and we can share it with you if you’re interested, and gave it at UC Irvine.
It was called is the Fed Contributing to Income Inequality, or to inequality, and I took it on. I said, okay let’s ask about this. And the first thing that I’d like to offer is that inequality is one word that describes many types of variables that we might look at.
So let me tell you what range. So there’s one of the things I look at as I look at employment equality or inequality, the access to, you know, the unemployment rate inequalities, wage inequality, income inequality, and then ultimately wealth inequality consumption inequality as well.
So if you follow those variables, what you’ll see in literally every expansion is that or anytime interest rates are low, You know this happens in any cycle, is that employment wage income and consumption inequality, fall, because the wages and employment opportunities, the wage rates, the income gains, and the consumption gains of the lowest part of our income distribution are the lowest part of the distributions, they rise faster as the economy gains strength than does the average.
They’re the last to come in but they grow faster at a strong economy is disproportionately affecting those groups and so those gaps narrow. But wealth inequality rises. So now if you’re the Fed you’ve got a trade-off.
Do I want to compress wealth, so that I have less wealth inequality which would show up in any kind of asset valuation, like housing, or the stock market because when the economy expands, even in the past, when interest rates haven’t been quite as low.
But they were lower than their natural rate as the economy continues to expand, asset valuations rise including houses and stock market and any other asset you hold. And so, wealth inequality goes up, while all these other inequalities go down.
So then what do we do. Well, when you look at why is wealth inequality so dramatic, in why does it increase so much, it’s because the asset allocation is very disproportionately held by a few people.
So, homeownership is an example that and then the value of your home rises as you get more wealthy so that it goes up more quickly that valuation goes up, access to the stock market is very limited for people from the middle and below unless you’re in some sort of retirement program to invest for you.
You’re just raw participation in the stock markets, not very common for the bulk of the population. So that means that these valuations are rising, but only a few relative to the total population are getting the benefits.
When we have interest rates lower, though, and the economy continues to grow, that affects all people, and it affects those at the who are more marginalized, more disadvantaged. And historically, it affects them in a bigger way than affects the average.
So when I got to the end of the speech I said so it’s a trade off. And what do I, what do I think I would do I?
I cannot trade millions of American workers getting employment for keeping wealth inequality lower, so that has to be the fiscal side of the house, other places have to figure out how do we get a better asset allocation across our population, because ultimately, the only way you can buy a stock or buy a house, is if you have a job, and you have some income, and you have some sense that you can continue to have that job and income.
And that’s what the accommodative stance, the policy that we have now is doing, it’s ensuring that all the individuals, the over 8 million people who had a job before the pandemic and don’t have one now, have the opportunity to come back in, get a job, get income, and then have the potential to buy an asset.
But without that, they have no potential to buy an asset. So for me the trade-off is clearly standing on the side of achieving our dual mandate goals for employment and price stability. We have a lot of resources on our website about this topic.
There’s other Federal Reserve System banks that that specialize in this too, and the Minneapolis Fed–you know all of the banks really try to find something where they can be a resource for people for the system, and the Minneapolis Fed has the–I always forget the name of it and I’m sorry about this—but it’s really just called the opportunity and inclusive growth center.
But they have a huge amount of resources on these types of topics, and then of course we have a lot of resources on the 12th district and our own our own work. I’ve done a lot of work on inequality which I publish regularly on our website as well so I think of us as a good resource, but we can’t solve the inequality problems on our own.
We set the conditions for things, we don’t actually change the pattern inequality in the country. And these patterns have been long standing, going back for four decades actually. So more work to be done. I think it’s a critical issue that our nation as a nation we have to think about because you know it’s it’s just too challenging for the economy—when people at the lower end don’t have sufficient resources to participate.
Thank you, I feel like maybe I need a PhD to understand the answer there.
Oh, I’m sorry.
No, no, no, it’s great. No, it’s great, it’s not, there’s no, there’s no right or wrong answer, right?
There isn’t a right or wrong answer. I don’t mean to plug my own work, I kind of feel embarrassed about that, but the speech that I prepared was meant to look like lay out this for someone who doesn’t have a PhD in economics. So if you have an opportunity to take a look at it, because I think your question is very important, and I tried to lay out the reasoning behind these things. But if you if you had found yourself saying, ‘Well I don’t know I still don’t get it,’ just give me a call. I also answer my phone.
And John, I think one of our team members put the link in the chat for that speech, and I can attest that I probably don’t follow what Mary was saying, either, but I was privy to that speech, so it really helped me understand a bit of that topic more. So that is of interest to you please do check out the link that’s in the chat right now.
There was one question in the chat regarding the CRA and community banks versus credit unions. And I just want to find out what your comments are about community banks, providing all that information and doing the job I think we do, and credit unions claim to do the same job, but there is no regulation that says that they do that. So, just your thoughts on that.
I’ll answer that this way, which is to say that the credit union community discussions are always a topic at the CDIAC meeting I go to and we have credit unions and community banks in the same room talking on the same issues.
So I’ve heard all the different debates back and forth about both groups have different views on things. So here’s how I think of it. I’m not gonna be popular, I already know it, I’m gonna say something unpopular. But I think that the time is now for credit unions and community banks to recognize that they’re actually competing.
I get that in this space, but there’s so much more that can be done by smaller entities, and that if you work together more collectively, then I think you’ll actually be able to achieve more for our communities than if we continue to have the same discussions about credit unions have special treatment they’re not regulated community banks carry a burden.
I get it, it’s a different regulatory environment. And that’s true. The CRA things, you know I can’t front run how this will be treated. And this is always what makes me unpopular is: in CDIAC, I think that these discussions are, ‘Okay, I’m trying to think about how far I go here, but I think that it’s trying to decide compete in a narrow pie as the narrow slice of the pie.’
And I think with the PPP and the PPP LF showed me, and with the emergence of FinTech partnerships with community banks. Tell me, is that the pie slice can be far bigger than what has been looking like what’s going to happen because the community banks, these relationships have an opportunity that the people now see from the PPP loan program–that they have just an opportunity to change the landscape for community banks.
And that’s where I would focus on it, and that’s where I hope CRA will focus on that, so I hope it becomes actually instead of this burden, it becomes sort of a virtuous cycle that community banks given value from a modernized CRA, as opposed to feeling like yes, that’s another regulatory burden that makes our landscape feel unfair. Again I recognize that I could be unpopular.
That’s fine. Well, there’s a big difference that credit unions are different than community banks. And we do very similar lending, and then taxation is an issue, but I’ll get off that soapbox because you’ve heard it before, and we talked to our congressman all the time about it.
And hopefully, as a result of PPP, Congress will recognize a little bit more that there is a difference between community banks and credit unions, and maybe take a look at those tax exemptions in the future.
So okay I’m stepping off my soapbox. One question before we close, and one question I like to ask and it’s kind of off from your website that I’ve been looking at, as we’ve been talking as we went through the 2008 crash.
On Friday nights I would cringe when my phone would ring at six o’clock saying, ‘Okay, John, we just had to close another bank in your state,’ and I just I hated that. So we’ve gotten through that, but gotten stronger now we got through a pandemic. We’ve done a great job with PPP loans. And we’re looking at doing a better job of lending in our own space again. But in your opinion, how is banking safer now, after these two incidents of 2008 and the pandemic? Or is it safer?
I think banking is safer than it was prior to the financial crisis for sure. I think that all of the things that happened after the financial crisis to shore up capital. I mean, think of where banks came in the cycle for the pandemic.
Let’s strip away the increase in deposits and other things that occurred because of the pandemic support programs, just very well capitalized banks coming into the crisis that put us in a far better position than we would have been in, if we had been not attending to that.
So one of the big successes of the decade between the financial crisis and the pandemic was the shoring up of the financial system on the banking part of it. So all my attention is now turned to, what about the non-bank financial system?
And thinking about, Where are the risks percolating in that set system that we also have to think about that’s not our regulatory purview? But I do have a voice in these issues about how important those things are to financial stability. So that’s where my focus has turned, not taking the eye off the ball in the banking system at all, but recognizing that we came in really well capitalized.
And that has been a service to the economy. It allows banks to continue to facilitate lending, when we needed the most which is during a during a crisis. So I see that as a positive thing.
And when you think about the larger banks and not community banks, I think there’s additional work to be done on whether or not we should be using a counter cyclical capital buffer and other things that allow you to be better prepared going into a crisis.
But those are things for the future discussions of course. As we come through the crisis, it’s time to turn our attention to that. But my look back from the financial crisis which I worked at the Fed during both of these things as a staff economist before was that the financial crisis, which was a financial crisis affecting this financial system directly.
This was a pandemic, which is different, but it was just a difference in situation. It makes me feel good about the efforts that you’ve all put in over the last decade to get prepared for this.
And I think what the pandemic has done, is that it’s just reminded us all about the importance of the community banking part of the banking system. A big portion of the public focus after the financial crisis was large banks and systemic risk, and what the pandemic has really highlighted is the incredible on the ground importance of our community banks.
And so I think it’s an opportunity to market the heck out of that if I, if I may say so, and really capitalize on some of that to ensure that there’s a better, a brighter future than you might have forecast for community banking prior to the pandemic, when it wasn’t clear you were saying it but it wasn’t as clear to people tangibly the important role you play.
Well, thank you very much. I don’t see any questions out there in the chat room so I will call this to call it a close. Mongkha and Mary, I really appreciate your being on our program today, and I will mention to you that we are doing a FinTech showcase tomorrow afternoon, or tomorrow morning, late morning. And so if you’re interested in coming back and visiting with that listening to that you’re more than welcome to do that so there’ll be a shark tank experience so…
Thank you, John, I caught that caught my attention on the agenda so I may take you up on that offer.
More than welcome.
I see we have a polling question out there so if you want to answer the polling question we can do that, and then give me about two minutes and we’ll start our next program. So thank you very much.
Thank you everyone.
Mary C. Daly is president and CEO of the Federal Reserve Bank of San Francisco and helps set American monetary policy as a Federal Open Market Committee participant. Since taking office in 2018, she has committed to making the SF Fed a more community-engaged bank that is transparent and responsive to the people it serves.
Mongkha Pavlick is a group vice president in the SF Fed’s Supervision + Credit Group. She is responsible for overseeing the SF Fed’s consumer compliance supervision, credit risk management, applications, and fintech teams.