Congressional Testimony

S. HRG. 115–366 FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2018 HEARING BEFORETHE COMMITTEE ON BANKING, HOUSING, ANDURBANAFFAIRS UNITED STATES SENATE ONE HUNDRED FIFTEENTH CONGRESS SECOND SESSION ON OVERSIGHT ON THE MONETARY POLICY REPORT TO CONGRESS PURSU- ANTTOTHEFULLEMPLOYMENTANDBALANCEDGROWTHACTOF1978 JULY 17, 2018 Printed for the use of the Committee on Banking, Housing, and Urban Affairs ( Available at: http://www.fdsys.gov/ U.S. GOVERNMENT PUBLISHING OFFICE 32–517 PDF WASHINGTON : 2018 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00001 Fmt 5011 Sfmt 5011 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS MIKE CRAPO, Idaho, Chairman RICHARD C. SHELBY, Alabama SHERROD BROWN, Ohio BOB CORKER, Tennessee JACK REED, Rhode Island PATRICK J. TOOMEY, Pennsylvania ROBERT MENENDEZ, New Jersey DEAN HELLER, Nevada JON TESTER, Montana TIM SCOTT, South Carolina MARK R. WARNER, Virginia BEN SASSE, Nebraska ELIZABETH WARREN, Massachusetts TOM COTTON, Arkansas HEIDI HEITKAMP, North Dakota MIKE ROUNDS, South Dakota JOE DONNELLY, Indiana DAVID PERDUE, Georgia BRIAN SCHATZ, Hawaii THOM TILLIS, North Carolina CHRIS VAN HOLLEN, Maryland JOHN KENNEDY, Louisiana CATHERINE CORTEZ MASTO, Nevada JERRY MORAN, Kansas DOUG JONES, Alabama GREGG RICHARD, Staff Director MARK POWDEN, Democratic Staff Director JOE CARAPIET, Chief Counsel KRISTINE JOHNSON, Professional Staff Member ELISHA TUKU, Democratic Chief Counsel LAURA SWANSON, Democratic Deputy Staff Director PHIL RUDD, Democratic Legislative Assistan DAWN RATLIFF, Chief Clerk CAMERON RICKER, Deputy Clerk JAMES GUILIANO, Hearing Clerk SHELVIN SIMMONS, IT Director JIM CROWELL, Editor (II) VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00002 Fmt 0486 Sfmt 0486 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON C O N T E N T S TUESDAY, JULY 17, 2018 Page Opening statement of Chairman Crapo ................................................................. 1 Prepared statement .......................................................................................... 37 Opening statements, comments, or prepared statements of: Senator Brown .................................................................................................. 2 Prepared statement .......................................................................................... 37 WITNESS Jerome H. Powell, Chair, Board of Governors of the Federal Reserve System 4 Prepared statement .......................................................................................... 39 Responses to written questions of: Senator Brown ........................................................................................... 41 Senator Corker .......................................................................................... 58 Senator Cotton ........................................................................................... 59 Senator Rounds ......................................................................................... 62 Senator Scott ............................................................................................. 64 Senator Tillis ............................................................................................. 66 Senator Reed .............................................................................................. 69 Senator Menendez ..................................................................................... 70 Senator Warner ......................................................................................... 122 Senator Cortez Masto ................................................................................ 125 Senator Jones ............................................................................................ 141 ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD Monetary Policy Report to the Congress dated July 13, 2018 ............................. 146 Article submitted by Senator Brown ...................................................................... 212 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00003 Fmt 5904 Sfmt 5904 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00004 Fmt 5904 Sfmt 5904 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON FEDERAL RESERVE’S SECOND MONETARY POLICY REPORT FOR 2018 TUESDAY, JULY 17, 2018 U.S. SENATE, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC. The Committee met at 10:01 a.m., in room SH–216, Hart Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, presiding. OPENING STATEMENT OF CHAIRMAN MIKE CRAPO Chairman CRAPO. This hearing will now come to order. Today we welcome Chairman Powell back to the Committee for the Federal Reserve’s Semiannual Monetary Policy Report to Con- gress. This hearing provides the Committee an opportunity to explore the current state of the U.S. economy and the Fed’s implementa- tion of monetary policy and supervision and regulatory activities. Since our last Humphrey–Hawkins hearing in March, Congress passed, with significant bipartisan support, and the President signed into law S. 2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act. The primary purpose of this bill is to make targeted changes to simplify and improve the regulatory regime for community banks, credit unions, midsize banks, and regional banks to promote eco- nomic growth. A key provision of the bill provides immediate relief from en- hanced prudential standards to banks with $100 billion in total as- sets or less. The bill also authorizes the Fed to provide immediate relief from unnecessary enhanced prudential standards to banks with between $100 billion and $250 billion in assets. It is my hope that the Fed promptly provides relief to those within these thresholds. By rightsizing regulation, the bill will improve access to capital for consumers and small businesses that help drive our economy. And the banking regulators are already considering this bill in some of their statements and rulemakings. Earlier this month, the Fed, FDIC, and OCC issued a joint state- ment outlining rules and reporting requirements immediately im- pacted by the bill, including a separate letter issued by the Fed that was particularly focused on those impacting smaller, less com- plex banks. But there is still much work to do on the bill’s imple- mentation. (1) VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 2 As the Fed and other agencies revisit past rules and develop new rules in conjunction with the bill, it is my expectation that such rules will be developed consistent with the purpose of the bill and the intent of the Members of Congress who voted for the bill. With respect to monetary policy, the Fed continues to monitor and respond to market developments and economic conditions. In recent comments at a European Central Bank Forum on Cen- tral Banking, Chairman Powell described the state of the U.S. economy, saying, ‘‘Today most Americans who want jobs can find them. High demand for workers should support wage growth and labor force participation . . . Looking ahead, the job market is like- ly to strengthen further. Real gross domestic product in the United States is now reported to have risen 2.75 percent over the past four quarters, well above most estimates of its long-run trend . . . Many forecasters expect the unemployment rate to fall into the mid-3s and to remain there for an extended period.’’ According to the FOMC’s June meeting minutes, the FOMC meeting participants agreed that the labor market has continued to strengthen and economic activity has been rising at a solid rate. Additionally, job gains have been strong and inflation has moved closer to the 2-percent target. The Fed also noted that the recently passed tax reform legisla- tion has contributed to these favorable economic factors. I am en- couraged by these recent economic developments and look forward to seeing our bill’s meaningful contribution to the prosperity of con- sumers and households. As economic conditions improve, the Fed faces critical decisions with respect to the level and trajectory of short-term interest rates and the size of its balance sheet. I look forward to hearing more from Chairman Powell about the Fed’s monetary policy outlook and the ongoing effort to review, im- prove, and tailor regulations consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act. Senator Brown. OPENING STATEMENT OF SENATOR SHERROD BROWN Senator BROWN. Thank you, Mr. Chairman. Welcome, Mr. Chair. It is nice to see you again. This week the President of the United States went overseas and sided with President of Russia while denigrating critical American institutions, including the press, the intelligence community, and the rule of law. Our colleague Senator McCain expressed clearly what every pa- triotic American thought: ‘‘No prior President has ever abased him- self more abjectly before a tyrant. Not only did President Trump fail to speak the truth about an adversary; but speaking for Amer- ica to the world, our President failed to defend all that makes us who we are—a republic of free people dedicated to the cause of lib- erty at home and abroad. American Presidents must be the cham- pions of that cause if it is to succeed.’’ The words of the 2008 Re- publican Presidential nominee. With our democratic institutions under threat, we cannot ignore what happened in Helsinki yesterday. But we must not lose sight of the other special interest policies of this Administration, includ- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 3 ing the rollback of the rules put in place to prevent the next eco- nomic crisis. Just last week, a Federal Reserve official said, ‘‘There are defi- nitely downside risks, but the strength of the economy is really pretty important at the moment. The fundamentals for the U.S. economy are very strong.’’ That may be true for Wall Street, but for most of America work- ers have not seen a real raise in years, young Americans are drowning in student loan debt, families are trying to buy their first home. For most of America, the strength of the economy is an open question. Last month former Fed Chair Ben Bernanke was very clear about the long-term impact of the tax cut and the recent bump in Federal spending when he said, ‘‘in 2020 Wile E. Coyote is going to go off the cliff.’’ Last week the San Francisco Fed released a study finding that the rosy forecasts of the tax bill are likely ‘‘overly optimistic.’’ It found that the bill’s boost to growth is likely to be well below pro- jections—or even as small as zero. It suggested that these policies could make it difficult to respond to future economic downturns and manage growing Federal debt. And it is not just the tax bill. The economic recovery has not been evenly felt across the country. Not even close. Mr. Chairman, I would like to enter into the record an article from the New York Times this weekend which talks about those families still strug- gling from the lack of meaningful raises and other job opportuni- ties. Chairman CRAPO. Without objection. Senator BROWN. Thank you, Mr. Chairman. While hours have increased a bit over the past year for workers as a whole, real hourly earnings have not. For production and non- supervisory workers, hours are flat; pay has actually dropped slightly, according to the Bureau of Labor Statistics. The number of jobs created in 2017 was smaller than in each of the previous 4 years. Not what we hear in the mainstream media, perhaps. Some of the very companies that announced billions in buybacks and dividends are now announcing layoffs, shutting down factories, and offshoring more jobs. Some of the biggest buybacks, as we know in this Committee, are in the banking industry, assisted in part by the Federal Reserve’s increasingly lax approach to financial oversight. Earlier this month, as part of the annual stress tests, the Fed allowed the seven largest banks to redirect $96 billion to dividends and buybacks. This money might have been used, as the President and members of the majority party liked to promise during the tax bill, this money might have been used to pay workers, to reduce fees for consumers, to protect taxpayers from bailouts, or be de- ployed to help American businesses. Three banks—Goldman, Morgan Stanley, and State Street—all had capital below the amount required to pass the stress tests, but the Fed gave them passing grades anyway. The Fed wants to make the tests easier next year. Vice Chair Quarles has suggested he wants to give bankers more leeway to VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 4 comment on the tests before they are administered. I guess it is OK in Washington to let students help write the exam. The Fed is considering dropping the qualitative portion of the stress tests altogether—even though banks like Deutsche Bank and Santander and Citigroup and HSBC and RBS have failed on quali- tative grounds before. That does not even include the changes the Fed is working on after Congress passed S. 2155 to weaken Dodd–Frank, making company-run stress tests for the largest banks ‘‘periodic’’ instead of annual and exempting more banks from stress tests altogether. And, oh, yeah, Vice Chair Quarles has also made it clear that massive foreign banks can expect goodies, too. And on and on and on it goes. The regulators loosen rules around big bank capital, dismantle the CFPB, ignore the role of the FSOC, undermine the Volcker Rule, and weaken the Community Reinvest- ment Act. When banks make record profits, we should be preparing the fi- nancial system for the next crisis. We should buildup capital, we should invest in workers, we should combat asset bubbles. And we should be turning our attention to bigger issues that do not get enough attention, like how the value that we place on work has declined in this country, how our economy increasingly meas- ures success only in quarterly earning reports. Much of that is up to Congress to address. Over the last 6 months, tragically, I have seen the Fed moving in the direction of making it easier for financial institutions to cut corners, and I have only become more worried about our preparedness for the next cri- sis. I look forward to the testimony, Mr. Chairman. And welcome, Mr. Chairman. Chairman CRAPO. Thank you, Senator Brown. And, again, Chair- man Powell, welcome. We appreciate you testifying today, and we look forward to your opening statement. You may proceed. STATEMENT OF JEROME H. POWELL, CHAIR, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM Mr. POWELL. Thank you and good morning. Good morning Chair- man Crapo, Ranking Member Brown, and other Members of the Committee. I am happy to present the Federal Reserve’s semi- annual Monetary Policy Report to the Congress today. Let me start by saying that my colleagues and I strongly support the goals that Congress has set for monetary policy: maximum em- ployment and price stability. We also support clear and open com- munication about the policies we undertake to achieve these goals. We owe you, and the public in general, clear explanations of what we are doing and why we are doing it. Monetary policy affects ev- eryone and should be a mystery to no one. For the past 3 years, we have been gradually returning interest rates and the Fed’s securities holdings to more normal levels as the economy has strengthened. We believe that this is the best way we can help set conditions in which Americans who want a job can find one and in which inflation remains low and stable. I will review the current economic situation and outlook, and then I will turn to monetary policy. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00008 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 5 Since I last testified here in February, the job market has contin- ued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Fed- eral Open Market Committee thinks will best achieve our price sta- bility and employment objectives over the longer term. The latest figure was boosted by a significant increase in gasoline and other energy prices. An average of 215,000 net new jobs per month were created each month in the first half of this year. That number is somewhat high- er than the monthly average of 2017. It is also a good deal higher than the average number of people who enter the workforce each month on net. The unemployment rate edged down 0.1 percent over the first half of the year to 4.0 percent in June, near the lowest level of the past two decades. In addition, the share of the popu- lation that either has a job or has looked for one in the past month—what we call the ‘‘labor force participation rate’’—has not changed much since late 2013, and this development is another sign of labor market strength. Part of what has kept the participa- tion rate stable is that more working-age people have started look- ing for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force. Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for African Americans and Hispanics have fallen sharply over the past few years and are now near their low- est levels since the Bureau of Labor Statistics began reporting these data in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites responded in a recent Fed survey that they were doing at least OK financially, only two-thirds of Af- rican Americans and Hispanics responded that way. Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy—or GDP—rose at a moderate annual rate of 2 percent in the first quarter after ad- justing for inflation. However, the latest data suggest that eco- nomic growth in the second quarter has been considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax income, and optimism among households have lifted consumer spending in re- cent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing con- struction has not increased this year, it is up noticeably from where it stood a few years ago. Turning to inflation, after several years in which inflation ran below our 2-percent objective, the recent data are more encour- aging. The price index for personal consumption expenditures, or PCE inflation—an overall measure of prices paid by consumers— increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall or headline in- flation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by consumers. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 6 Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core infla- tion was 2.0 percent for the 12 months ending in May, compared to 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent. Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, interest rates, and financial conditions more broadly, remain favorable to growth. Second, our financial system is much stronger than before the cri- sis and is in a good position to meet the credit needs of households and businesses. Third, Federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for eco- nomic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, economic outcomes that we experience often turn out to be a good deal stronger or weaker than our best forecast. For example, it is dif- ficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently antici- pate. Over the first half of 2018, the FOMC has continued to gradually reduce monetary policy accommodation. In other words, we have continued to dial back the extra boost that was needed to help the economy recover from the financial crisis and the Great Recession. Specifically, we raised the target range for the Federal funds rate by a quarter percentage point at both our March and June meet- ings, bringing the target to its current range of 13⁄ 4 to 2 percent. In addition, last October we started gradually reducing the Fed’s holdings of Treasury and mortgage-backed securities, and that process has been running smoothly. Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues. The payment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out these policies, as the current Monetary Policy Report explains. Payment of interest on these balances is our prin- cipal tool for keeping the Federal funds rate in the FOMC’s target range. This tool has made it possible for us to gradually return in- terest rates to a more normal level without disrupting financial markets and the economy. As I mentioned, after many years of running below our longer- run objective of 2 percent, inflation has recently moved close to that level. Our challenge will be to keep it there. Many factors af- fect inflation—some temporary and others longer lasting. So infla- tion will at times be above 2 percent and at times below. We say that the 2-percent objective is ‘‘symmetric’’ because the FOMC would be concerned if inflation were running persistently above or below our 2-percent objective. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 7 The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago. That said, they still are not rising as fast as in the years before the crisis. One explanation could be that productivity growth has been low in recent years. On a brighter note, moderate wage growth also tells us that the job market is not causing high infla- tion. With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that—for now—the best way forward is to keep gradually raising the Federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market ex- cesses. On the other hand, if we raise rates too rapidly, the econ- omy could weaken and inflation could run persistently below our objective. The Committee will continue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic outlook, which may and will change as we receive new data. For guideposts on appropriate policy, the FOMC routinely looks at a range of monetary policy rules that recommend a level for the Federal funds rate based on the current rates of inflation and un- employment. The July Monetary Policy Report gives an update on monetary policy rules and their role in our policy discussions. I con- tinue to find these rules helpful, although using them requires careful judgment. Thank you, and I will now be happy to take your questions. Chairman CRAPO. Thank you for your statement, Chairman Pow- ell. The first question I have will relate to CCAR. As you know, the Fed recently released the results of the 2018 Comprehensive Cap- ital Analysis and Review, the CCAR, stress test. This year the Fed issued conditional nonobjections to certain banks, which, as you are aware, some have criticized. What details can you share about the Fed’s decision to issue the conditional nonobjections while allowing those firms to maintain capital distributions at recent levels? Mr. POWELL. Thank you, Mr. Chairman. So the CCAR super- visory test is and will remain an important part of our supervisory framework, particularly for the largest and most systemically im- portant firms. And I guess I would start by saying that this year’s test was by a good margin the most stringent test yet. Hypothetical losses for 2018 were $85 billion higher than during the 2017 stress test, and the hypothetical decline in the capital ratio was 110 basis points higher this year than last year; so a very significantly severe test, and it will result in a material increase in the effect of aggre- gate capital requirement of the firms subject to the test. So, you know, we carefully evaluated the results. We voted on them on June 20th, and the next day the firms received a call from our staff, which informed them of the results and their options. This is the standard operating procedure that we follow every year. There is no negotiation, there is no haggling. The decision has been made the day before by the Board, and they are just informed of their options, and they deal with them as they are. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00011 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 8 Almost all the firms finished above the required poststress mini- mums, which is a sign of how well capitalized the industry is. Two firms that did not were required to restrict their distributions to past years’ levels. That has always been the penalty for failing to meet the poststress minimums, and that will require the firms to build capital this year, these two firms. The third firm was re- quired to take certain steps regarding the management and anal- ysis of its counterparty exposures under stress. So the same exact penalty was paid. We labeled these as conditional nonobjects rather than objecting straight out to the plan, and we have done that over a period of years many times, and we thought that it was appro- priate here. When we fail a firm, when we actually fail them and send—what we do is we send the plan back and say that your capital planning process is deficient, please take this plan back, please fix it and bring it back to us, and we will look at it again. So that sends a signal that we believe that the capital planning processes of the firms are deficient in some serious way. As I mentioned, in a number of cases we have gone with sort of an intermediate sanction, and we felt that that was appropriate here. One reason for that is the timing of the tax bill, as we men- tioned, and firms plan, of course, well in advance so that they will have enough capital to pass the test. This particular bill passed, was signed into law on December 22nd. We used fourth quarter capital levels for the test, so the TCJA resulted in a significant de- crease in the level of capital these firms have. But, of course, they do not benefit from what in the longer term will be a lower tax ef- fect on their earnings. So I think whereas any analyst would look at that law and say that it is positive for banks and for their ability to earn money, it was strictly a negative in this test. So we looked at that, and among other factors we decided to use the conditional nonobject. I will stop there, Mr. Chairman. Chairman CRAPO. All right. I appreciate that explanation, and essentially what I am hearing you say is that the same—in fact, even a stricter test was applied, and the same standards of review were used in your analysis and in the consequences that were ap- plied. Mr. POWELL. That is right, and I just would reiterate our com- mitment to this particular supervisory stress test. It is a very im- portant thing for us, and we will make sure to keep it stringent. Chairman CRAPO. All right. Thank you. Chairman Powell, moving to regulation, the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act received significant bipartisan support, as you know. In addition to several provisions providing regulatory relief to community and midsize banks, a key provision of the bill raises the threshold for the application of the enhanced prudential standards from $50 bil- lion to $250 billion. What is the Fed’s process for quickly implementing S. 2155, in- cluding its process for ensuring that the financial companies with total assets between $100 billion and $250 billion promptly receive similar relief to the relief provided for the financial institutions with less than $100 billion in total assets? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 9 Mr. POWELL. So our intention and our practice is going to be to implement the bill as quickly as we possibly can. As you probably know, I am sure you know, we released a statement the Friday of July 4th week laying out our plans to move ahead with some things. And, again, we will do them as quickly as possible, and we indicated that we will try to move that along very quickly. Chairman CRAPO. All right. Thank you. Senator Brown. Senator BROWN. Thank you, Mr. Chairman. Mr. Chairman, I have a number of questions. I hope your an- swers can be brief. Thank you for our phone call the other day. I know you know this: In real terms wages have not budged recently. Last week BLS reported that hours for production and non- supervisory workers are flat and pay has actually dropped over the past year. Of course, we should focus on real wages rather than nominal wages. By that measure, is the typical worker really better off this year than he or she was a year ago? Mr. POWELL. Yes. Yes, I would say that the labor market has strengthened. The labor report will show that wages went up 2.7 percent. That is significantly higher than trend inflation. There is a bit of a bump from gas prices going up and consumers do pay that, but I would say that overall workers are better off be- cause—— Senator BROWN. I would partially contradict that and say that nonsupervisory workers, four out of five workers have seen nominal wages go up but real wages have not by those same BLS statistics. Let me move to another. You have called stress testing ‘‘the most successful regulatory innovation of the postcrisis era’’—you said that some time ago—but the actions the Fed has taken during your tenure undercut that effect when the Fed gave Goldman, Morgan, and State Street passing grades this year even though they failed to meet capital requirements in CCAR, the first time that has ever happened in CCAR history. The Fed proposes to weaken the lever- age constraint, and CCAR reportedly may drop the qualitative por- tion of the test, wants to give bankers more leeway to influence the Fed’s models, and may soon adjust Dodd–Frank stress tests to make them less stressful and less frequent, hence the ‘‘periodic.’’ Stress test tests were adopted in 2009 to provide confidence to the public that the banks could weather economic shocks. How is the public supposed to trust the stress test when the Fed proposes all of those ways to weaken them? Mr. POWELL. So we are strongly committed to using stress tests. We really developed the supervisory stress test at the Fed, and as you know, we think it is a very important tool. It was one of the main ways that we used to raise capital, particularly among the largest firms, and we are committed to continuing stress testing as one of the three or four most important innovations, along with higher capital, higher liquidity, and resolution. It is one of the big four pillars for us. The program has to continue to evolve. We want to strengthen it. We want to make it more transparent. We want to improve it over time. And all of our actions are designed to do that, and I think if you look at the state of the banking system and the fact that this test will require higher capital, then I think you will see VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 10 that is consistent with—that our words are consistent with our ac- tions. Senator BROWN. Well, I think the message coming out emanating from the business press—and those are not, you know, Democratic, liberal newspapers; they are the Wall Street Journal, the Financial Times, the New York Times business section—speaks to the fact that these stress tests are getting weaker. Let me ask another question. Vice Chair Quarles has given two speeches outlining how the Fed wants to recalibrate the rules for large foreign banks. You gave an answer, a carefully worded an- swer, I thought, to obscure the fact that large foreign banks may receive less oversight as a result of S. 2155. The public is getting mixed messages from the Fed. For the record, can foreign banks with more than $50 billion in U.S. assets—Deutsche, Santander, Credit Suisse, the others—can foreign banks with more than $50 billion in U.S. assets expect to get regulatory relief during your tenure? Mr. POWELL. You know, I think I can say that S. 2155, it is not clear to me how it provides regulatory relief to those firms. I mean, all of the banks that have $50 billion in U.S. assets have more than $250 billion in global assets. So I do not think there really will be much effect. I will not say that we will never do anything to pro- vide regulatory relief to a group during my tenure, but—— Senator BROWN. So your position seems to be that if they are be- tween—if they are over 50 in the U.S., under 250 as those are, but much, much, much bigger with all the—— Mr. POWELL. Globally. Senator BROWN. Globally, that you do not expect any regulatory relief for them? Mr. POWELL. Well, the main thing is the $50 billion threshold for internal holding companies will remain the same. We are not look- ing at that. And I think they will not see much difference. Senator BROWN. Physical commodities. The Fed proposed a phys- ical commodities rule for 2016. You are moving presumably to fi- nalize it. The Fed responded to questions for the record saying that the Board continues to consider this proposal. When can we expect action on it, Mr. Chairman? Mr. POWELL. I do not have a date for you on that. I know that we received extensive comments on it, and we are considering them. Senator BROWN. Do you feel some urgency on it? Mr. POWELL. I will have to go back and look and see where that is in the line. Senator BROWN. If you would please respond in writing to that. And a last question, Mr. Chairman. The Administration and some in Congress pushed through tax cuts and bank deregulation under the guise that it would trickle down to American families in the form of more loans. Loan growth has slowed in the last quarter. It was less than half the growth rate than during the last year of the Obama administration. The four largest banks, as you know, redirected record levels of profits into dividends and stock buybacks. The four big banks’ CEOs got an average raise of 26 per- cent. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 11 My question is simple: When, if ever, do you expect to be able to come before this Committee and demonstrate to us in this Com- mittee, as Chair of the Fed, demonstrate to us how tax cuts and deregulation have actually benefited the real economy in the forms of more lending? Mr. POWELL. I guess I see my role as reporting about the overall economy rather than the effect of any particular law, although I will be happy to take questions on that. Senator BROWN. OK. Thank you, Mr. Chairman. Chairman CRAPO. Senator Scott. Senator SCOTT. Thank you, Mr. Chairman. And good morning, Chairman Powell. Thank you for being with us today. Mr. POWELL. Good morning, Senator. Senator SCOTT. It certainly is difficult to find negative news as it relates to our economic reality. The truth of the matter is that we are in the third largest economic expansion since 1854—not 1954—1854. An 18-year low in our unemployment rates. African American unemployment for the first time in recorded history below 6 percent at 5.9 percent. Hispanic unemployment at 4.6 per- cent, lowest recorded as well. Wage growth 2.7 percent, the highest level since 2009. And the Atlanta Federal Reserve suggests that we could have a 5-percent GDP growth in the second quarter. And the good news just keeps on coming. Small businesses said they have not been this optimistic in 45 years. That has got to be a record. Beyond a doubt, tax reform com- bined with responsible regulations have resulted in more Ameri- cans have more money in their pockets. And another great example of the economic reality that we face today is that the core prime- age labor force participation rate has stabilized since 2013 and is starting to climb in the right direction. My question for you, Chair Powell, is: What has been the overall impact of the economic growth for the long-term unemployed? And can we read into the prime-age labor force participation rate’s in- crease really positive news for those long-term unemployed? Mr. POWELL. Yes, so prime-age labor force participation, Senator, as you pointed out, has been climbing here in the last couple of years. That is a very healthy sign because prime-age labor force participation is really—you know, it has been weak, and it has been weak in the United States compared to other countries. So it is very troubling, and the fact that that is coming back up is a very positive thing. We really hope it is sustained, and we hope that these gains in participation can be sustained. We have a long box in our Monetary Policy Report that talks about that. The other thing, you mentioned the long-term unemployed. Senator SCOTT. Yes. Mr. POWELL. So the number of long-term unemployed has come down dramatically since, I do not know, maybe 2010. I want to say the numbers were between 6 and 7 million, and unless I get this wrong, I think the current number of longer-term unemployed is around 1.5 million. So the people who are on the very edges of the labor force like those people, those are the ones who have benefited the most. Senator SCOTT. Thank you. With all that economic heat coming our way in a positive way, the prices seem to be going up, so the VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 12 CPI rose 2.9 percent, the fastest pace since 2012. Those rising prices could negate some of the wage growth that I just talked about if left unchecked. In the past we have discussed, you and I, the Fed role according to the congressional mandate seeking stable prices being one of those specific mandates. We have also talked about the downsides of low interest rates for extended periods of time. What do you see in the prices for energy, housing, health care, and transportation? And how is that going to impact your thinking moving forward? Mr. POWELL. Inflation has been below our 2-percent objective since I joined the Board of Governors in May of 2012 just until last month. For the first time, we have 12 months of core inflation being at 2 percent. So that is a very positive thing. We want to see overall inflation continue to come up so that it is sort of symmetri- cally around 2 percent. I would say we are just shy of achieving that. But we want inflation to remain right around 2 percent and be as likely to be a little above as a little below. I would say we are on the—and I think our monetary policy is really designed to help us continue to achieve that. So we are gradually moving up rates, and that we think is the policy that will help us get inflation to 2 percent sustainably. Senator SCOTT. Thank you. Just two more areas for you. South Carolina, my home State’s economy is built on trade. You name it, we make it. We grow it and we ship it. Cars, cotton, tires, jets, peaches, soybeans, turbines, solar panels, and the list goes on and on. What has generally happened in the past to economic growth when we have raised tariffs? Mr. POWELL. I have to start by saying that, you know, I am real- ly firmly committed to staying in our lane and, you know, our lane is the economy. Trade is really the business of Congress, and Con- gress has delegated some of that to the executive branch. But, nonetheless, it has significant effects on the economy, and I think when there are long-run effects, we should talk about it and talk in principle. And I would say in general countries that have re- mained open to trade, that have not erected barriers, including tar- iffs, have grown faster. They have had higher incomes, high pro- ductivity. And countries that have, you know, gone in a more pro- tectionist direction have done worse. I think that is the empirical result. Senator SCOTT. I only have about 5 seconds left, so let me use my time wisely. As you know, I have a background in the insur- ance industry, and I am seriously a fan of a State-based system of insurance regulations. I think it is the best in the world. As the Fed participates in developing the ICS with the IAIS, I strongly urge you to shape a final product that protects the U.S. system of insurance regulation, and I would appreciate you and I having a conversation in the near future. Mr. POWELL. Thank you, Senator. Senator SCOTT. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Senator Reed. Senator REED. Thank you very much, Mr. Chairman. Welcome, Chairman Powell. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 13 The issue of wages has been discussed by several of my col- leagues and yourself. In 2000, the last time we were at this situa- tion where we were touching 4 percent unemployment, the share of national income by corporations was about 8.3 percent, and the share of wages was 66 percent. Today we are once again reaching that point of about 4 percent unemployment, yet corporate profits account for about 13.2 percent of national income. They have gone up significantly. Wages as a share of national income have gone down from 66 percent to 62 percent. If those trends continue, we are in a situation where working men and women are not going to get their fair share of growth. What are you trying to do at the Fed to ensure that they get their fair share of growth? Mr. POWELL. The decline in labor share of profits—labor share of profits was generally, you know, oscillating fairly constant for a number of decades and right around the turn of the century began to drop precipitously and continued to do so for more than a dec- ade. It is very troubling. We want an economy that works for ev- eryone. And that happened, by the way, in essentially all advanced economies, and probably a range of factors are responsible for that. In the last 5 years or so, labor share of profits has been side- ways. This is very much akin to the flattening out of median in- comes over the last few decades. So it has got to do with a number of global factors. The thing that we can do is to take seriously your congressional order that we seek maximum employment, so in tight labor mar- kets, workers are more likely going to be paid well and paid their share. I would say most of the factors that have driven down labor share of profits are really not under the control of the Fed. And so those are issues that we do not have control over. Senator REED. But would you say that the tax bill did not affect those downward trends in wages positively, that, in fact, it has done nothing to reverse what you have seen as a decade or more of decreases? Mr. POWELL. I think wages are set in the marketplace between workers and companies, and they are affected by a range of factors. I think it would be early to be looking for a bill that was signed into law less than a year ago to be able to visibly be affecting much of anything at this point, really. These things, big changes in fiscal policy, take quite a while to affect wages. Senator REED. So none of this good news we are talking about today is a result of this tax bill, it is too early? Mr. POWELL. It is very hard to isolate the—I mean, I would say wages have moved up meaningful over the last 5 years. It has been quite gradual. And, you know, we certainly think it would be fine for them to move up more. Senator REED. Do you think the European Union is a foe of the United States? Mr. POWELL. No, I do not. Senator REED. Thank you. As we look ahead to some of the potential obstacles—and having, both of us, lived through 2008 and 2009, it looked good and then it looked real bad. In retrospect, we saw some signs of the danger. What are the signs of danger that you are sort of focusing on? There are huge deficits, both Government deficits, private deficits VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 14 worldwide. You have got a trade battle brewing. And you have got things like Brexit that could complicate our life dramatically. So what are the two or three things that you think could throw us off this track? Mr. POWELL. There is a difference between the longer term and the short term. So in the near term, things look good. You know, we look very carefully at a range of financial conditions and finan- cial stability vulnerabilities, we feel that those are at sort of nor- mal, moderate levels right now, although there are some areas that are elevated, some assets prices are high, and there is an elevated level of debt in the nonfinancial corporate sector. More broadly, banks are well capitalized. Households are in much better shape. So financial stability I do not worry about too much at this point, although we keep our eye on that very carefully after our recent experience. You mentioned trade. It is hard to say what the outcome will be. Really, there is no precedent for this kind of broad trade discus- sions. In my adult life, I have not seen where essentially all of our major trading partners—hard to know how that comes out. If it re- sults in lower tariffs for everyone, that would be a good thing for the economy. If it results in, you know, higher tariffs across a broad range of traded goods and services that remain that way for a longer period of time, that will be bad for our economy and for other economies, too. Senator REED. Thank you very much, Mr. Chairman. Chairman CRAPO. Thank you. Senator Rounds. Senator ROUNDS. Thank you, Mr. Chairman. Chairman Powell, first of all, I want to thank you for being here today. Before I get into the questions, I would just like to take note of the two rules that were announced this spring: the new stress capital buffer and the proposed changes to tailor the enhanced sup- plementary leverage ratio. I do appreciate the Federal Reserve’s ef- forts, and I hope we can continue an open dialogue on these changes as you move forward. I am just curious. You indicated with regard to Senator Reed’s question, based on the tax bill, clearly there is an improvement in GDP growth over the last couple of years. Was it anticipation of the tax bill being passed? I would like to flesh that out just a little bit, because most certainly I think a lot of truly believe that that tax bill is a key component in the development of an improvement in our GDP. Your thoughts? Mr. POWELL. I was really answering about whether you could see it in wages right now. That is hard to do. So growth averaged around 2 percent for 8 years, and then in 2017, I think the current estimate is 2.6 percent. And you saw significant improvements in household and business confidence levels. Overall confidence about the economy, you saw that coming on in 2017. Some of that was probably in anticipation of the passage of what finally passed. So probably that was already in the growth rate. I think it is hard to say, but I suspect that some anticipation of tax cuts and tax reform was already in the growth in 2017. Going forward—and we have said this—we expect—there are a range of estimates on this, but we would expect that the tax bill VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 15 and the spending bill would provide meaningful support to demand for at least the next 2 or 3 years, maybe 3 years, and also might have, you know, effects on the supply side as well. To the extent you are encouraging more investment, you are going to get higher productivity. So it is very—these estimates are subject to tremen- dous uncertainty both as to amount and as to timing. But I think we look at the range of estimates, and that is certainly where we broadly come out. Senator ROUNDS. I just want to be clear. That tax bill had a posi- tive impact, even if it is the anticipation of the tax bill. It has a positive impact on our GDP growth, correct? Mr. POWELL. Yes, I think, so this year, maybe last year, too. Senator ROUNDS. OK. Let me ask you this: With regard to trade, you make notes specifically in your comments on trade and the fact that there are some things up in the air right now. There is per- haps some instability or some questions on the part of not only our businesses but businesses around the world. Are businesses looking for stability with regard to trade compacts? Or are they looking for opportunity and instability? Mr. POWELL. Well, they would clearly be looking for stability. Senator ROUNDS. OK. And then I would look to associate my- self—and I support what Senator Scott indicated earlier with re- gard to the insurance issues and the fact that our State-based reg- ulatory system for insurance I think is critical. I think it is a posi- tive thing for consumers when it is as close to that State regulatory process as possible. When you came here before the Committee earlier this year, you discussed capital requirements in the options market and men- tioned that the Federal Reserve was working on a rule to transition from the risk-insensitive Current Exposure Method, or CEM, to the internationally agreed upon Standardized Approach for Counterparty Credit Risk, SA–CCR. I am supportive of these ef- forts, but I remain concerned about the timeline for implementa- tion. I noted with concern in a letter to Vice Chair Quarles last year, in response to my request that the Federal Reserve used its reservation of authority to grant interim relief, Vice Chair Quarles asserted that the Fed lacks such authority in this context. I origi- nally raised this issue when Vice Chair Quarles was testifying at his confirmation hearing last July. Unfortunately, it has been a year since that time, and the Fed has yet to take meaningful ac- tion. I remain concerned about this because the longer we wait for American regulators to implement SA–CCR, the more market mak- ers will exit the options market entirely, making our financial sys- tem more vulnerable to economic shocks and less competitive com- pared to our international peers. I noted in the Basel Committee’s last progress report from April of 2018 that 22 of the 27 Basel member countries have either im- plemented SA–CCR or made substantially more progress at imple- mentation compared to the United States. I am a particularly strong supporter of risk-based capital standards, particularly in this context in options markets. Can you provide an update on when the rulemaking from CEM to SA–CCR will be released? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 16 Mr. POWELL. I know that we are working on it now. I know that we think it is good policy. And I cannot give you an exact date, but I know we are actively directing a rule. By not being able to pro- vide interim relief, all we meant was we actually have to amend the rule. So we will be putting a rule out for proposal and get com- ments, and then it will go final. It is in train, but these things take time. We are working on it. Senator ROUNDS. OK. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Senator Menendez. Senator MENENDEZ. Thank you. Thank you, Chairman Powell, for being here. Lately we have heard a near constant refrain from the Adminis- tration, the President himself, corporate media outlets, and even from you that ‘‘the economy is doing very well’’ and ‘‘it has never been better.’’ Now, if we take a narrow view of the unemployment rate and corporate profits, then, sure, it is a real rosy picture. But take a wider lens to what working families are seeing, and the view is one of great contrast. Over the last year, despite falling unemployment, working fami- lies actually saw their real wages fall. By comparison, after-tax cor- porate profits increased by 8.7 percent just in the last quarter. There is something fundamentally wrong in our economy when workers are seeing their pay cut while corporations are benefiting from a $2 trillion tax giveaway. Working families not only cannot get ahead, but they are actually falling behind. I can tell you, families in New Jersey cannot keep up with the surge in costs, particularly for prescription drugs and health care. I just heard from a constituent in Glendora, New Jersey, who told me that even with his Medicare and secondary insurance, he can- not afford to pay for his insulin and diabetes equipment, and that is pretty unconscionable. So my question to you, Mr. Chairman, is: When will the benefits of this ‘‘booming economy’’ reach working families? Mr. POWELL. Thank you, Senator. I think we are aware and I am aware that while the aggregate numbers are good and unemploy- ment is low and surveys overall of households are very positive about the job market, not everybody is experiencing the recovery. Not every demographic group, not every place are experiencing this. So we call that out in every FOMC meeting and in all of our public communications, as I did in my testimony this morning. And, you know, we understand that we have to take maximum em- ployment seriously, and we do. We have been supporting a strong labor market for a long time. Despite many calls for us to raise in- terest rates much more quickly, I am glad that we stayed in longer than that, and I think gradually raising rates is the way for us to extend this expansion. Nothing hurts working families and people at the margin of the labor markets more than a recession. Senator MENENDEZ. Well, you are probably going to have a cou- ple more interest rates. What specific steps then are you taking to foster broad-based wage growth so that the average worker, not just managers and executives, are reaping the benefits? I cannot accept that wages are growing when the Bureau of Labor Statistics VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 17 points out that production and nonsupervisory workers saw their wages fall two-tenths of a percent, and that is despite increasing their average work week to make up for it. So they are getting squeezed. Mr. POWELL. So the latest Government report was that wages went up 2.7 percent for production, nonsupervisory workers, and supervisory workers over the last 12 months. And that is higher. That is moving up. It also happens that inflation has moved up and that sort of a bump in energy prices is passing through the head- line inflation number. So I think overall, though, you see inflation at about a 2-percent trend. You see wages at 2.7 percent. So I think those trends are healthy, and I think they are reflected in what are pretty positive surveys among workers generally. Senator MENENDEZ. Let me ask you this: These working families we are talking about are the first to feel the impact when banks, big banks, and corporations take risky bets with no accountability. When we passed Dodd–Frank, we included language to ban incen- tive-based compensation practices that reward senior executives for irresponsible risk taking. Regulators issued a proposal in 2016, but more than 2 years later, nothing has been finalized. In the mean- time, Wall Street bonuses jumped 17 percent last year to an aver- age of more than $184,000—the most since 2006, and that is bo- nuses alone. Now, you have made time to weaken Wall Street oversight by re- visiting capital rules, revisiting leverage rules, proposing changes to the Volcker Rule, all of which were finalized after years of delib- eration, public comments, and input from other regulators, and all of which protect our economy from another financial crisis. How is it, Mr. Chairman, that you have not made time to finish the incen- tive-based compensation rulemaking for the first time? And can you give me a commitment today as to a timeline for when this will be done? Mr. POWELL. We tried for many years—it is a multiagency rule, the incentive comp rule. We tried—we were not able to achieve con- sensus over a period of many years between the various regulatory agencies that need to sign off on that. But that did not stop us from acting, you should know. Particularly for the large institutions, we do expect that they will have in place compensation plans that do not provide incentives for excessive risk taking. And we expect that the Board of Directors will make sure that that is the case. And so it is not something that we have not done. We have, in fact, moved ahead through supervisory practice to make sure that these things are better than they were, and they are substantially better than they were. You see much better compensation practices here focusing mainly on the big firms where the problem really was. Senator MENENDEZ. Well, that does not have the power of a rule. I hope we can get to a rule-based purpose, because at the end of the day we seem to have revisited everything that was already completed, but yet we cannot get this one going. Thank you, Mr. Chairman. Chairman CRAPO. Senator Corker. Senator CORKER. Thank you, Mr. Chairman. And, Mr. Chairman, thank you for being here. I was remarking to our staff yesterday, as we talked a little bit about this meeting, that because of the way VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 18 that you are handling yourself, which I think is in a very positive way, following the Fed is getting really boring these days. But hopefully that will continue. I know that is your goal. We appre- ciate some of the transparency efforts that you have put forth. I think I heard you earlier talk about inflation, and obviously we are, you know, at full employment. Hopefully there will be addi- tional people participating in the workforce that have not in the past, and I am glad to see those numbers are rising. But if I under- stand correctly what you are saying, the predictive stat for people who are watching the Fed today will be core inflation. In other words, that will be the determinative factor as it relates to rate in- creases in the future. Mr. POWELL. So we, of course, look at headline inflation, too, and that is our legal mandate. We look at core inflation when we are thinking about the path of future inflation, though, because it is just a better predictor. Many of the things that affect headline in- flation do not actually send much of a signal about future inflation. Senator CORKER. But for people who are trying to see where things are going, now that the labor issue is where it is today, the predictive matter as it relates to future increases and the amount of those is really going to be inflation. Mr. POWELL. Inflation is going to be really important. You know, I think we are—for quite a while here, we have been in the range of achieving our maximum employment goal, and we are only just getting there with inflation. I would not declare victory on that yet, either. Senator CORKER. Yeah, it has really been difficult, I think, for many Western countries to get to a place that they are comfortable in inflation, which brings me to the wage issue. Look, like my colleagues, I am very concerned about wage stag- nation, and I am not in any way trying to offload that issue to you. We all have responsibilities to put in place policies that will hope- fully cause all Americans’ wages to increase. But what we are see- ing here and what we are seeing actually, let us face it, in Western countries around the world is people are not—the anticipation that people had relative to where they were going to be in life is not being achieved, which is creating some extremes as it relates to the political environment—actually, in some ways beginning to desta- bilize, because people are, rightly so, concerned about the fact that they are not really increasing the ability to raise their families as they wish. Let us talk a little bit about that. What is it from your perspec- tive that is causing us to be in this place where the economy is growing, but for the last 30 years, Americans really have not seen the wage gains that they would like to see? Could you just lay out—not in any way to take responsibility at the Fed solely your- self, but what is driving that? Mr. POWELL. You know, the stagnation of middle-class incomes, the relatively low mobility that we have, the disappointing level of wages over a long period of time, it is all of a piece, and it all does go to that. And I think the causes of these things are really deep. It is not something we can address really successfully over time with monetary policy, as you say. So, I mean, I think it is—— Senator CORKER. What are those deep causes? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 19 Mr. POWELL. So I think, you know, part of it is, in our case, in the case of the United States, stagnation of educational achieve- ment, the leveling out of educational attainment. When U.S. edu- cational attainment was rising, technology was coming in; it was asking for more skills on the part of people. They had those skills, and so you had productivity rising, you had incomes rising, you had inequality declining over a long period of time. U.S. educational attainment flattened out in the 1970s, and ev- erywhere else in the world it has been going up. We really had a lead. We were the first country to have gender-blind, you know, secondary education universally. So that is a big thing. Really the only way for incomes to go up over a long period of time is through higher productivity. Real incomes go up over a long period of time because of higher productivity. Higher productivity is a function of, in part, the educational and skills and aptitude of the workforce. It is also, you know, partly the evolution of technology and invest- ment. I think right now in particular we had a number of years of very weak investment after the crisis because there was no need to in- vest. That weak investment period is casting a shadow over pro- ductivity right now, which is one of the main factors that is holding down wages. These are deep, hard problems, but education is really at the bottom of the pile. Senator CORKER. And I am glad you alluded to that, and my time is up, I know. But we have had—we actually have had productivity growth without wage growth. Mr. POWELL. Over long periods of time, the only way wages can go up sustainably is with productivity growth. They do not nec- essarily match all the time. I mean, since the crisis ended, produc- tivity growth has been—output per hour has been very, very weak. Increases have been very, very weak. Senator CORKER. Thank you, Mr. Chairman. Chairman CRAPO. Senator Tester. Senator TESTER. Thank you, Chairman Crapo and Ranking Mem- ber Brown. And thank you for being here, Chairman Powell. I want to run over some stuff that has been run over already just real quick. You had answered in a previous question that the stress tests continue. Is that correct? Stress tests continue on the banks? Mr. POWELL. Absolutely. Every year. Senator TESTER. And you said you were going to try to improve them, make them more transparent, which, by the way, I applaud that. Would you also add to that list that you are trying to weaken the stress tests? Mr. POWELL. No, absolutely not. Senator TESTER. You are still making them do what they need to do to prove that their soundness is there? Mr. POWELL. The 2018 stress test was by a margin the most stringent stress test we have done yet. Senator TESTER. OK. Folks also continue to be concerned that S. 2155 allowed foreign megabanks like Deutsche Bank, UBS, Barclays to see their enhanced prudential standards weakened. You have agreed—and you have said it again today—that S. 2155 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 20 does not do that. Do you have any plans to weaken standards on the largest FBOs that I mentioned? Mr. POWELL. No. No, sir. Senator TESTER. OK. In your testimony you said, ‘‘Good economic performance in other countries has supported U.S. exports and manufacturing.’’ What other countries are you talking about? Would that include the EU? Would that include Canada and Mex- ico, the other countries, I am talking about, that have good eco- nomic performance? Would that include China? Those other coun- tries—— Mr. POWELL. It would include all those countries, yes. Senator TESTER. All those countries? And I know you said that the tariff situation and the trade situation is something that Con- gress deals with that you do not deal with, but it would appear to me—and I just want to get your opinion on this because I value it. It would appear to me that all this stuff about getting out of NAFTA and putting tariffs on folks and not being at the table when TPP was finally signed is a net negative on our economy. Would you agree with that long term—short term and long term? Mr. POWELL. I am going to try to walk that line that I mentioned earlier and not comment on any particular policy, but in principle, open trading is good. We do not want countries to have barriers to trade or, you know, tariffs being a barrier to trade. Senator TESTER. Both directions. Mr. POWELL. In both directions. We want to have an inter- national, you know, rules-based system in which countries can get together and any country that violates that can face the other countries, and that system has served us very well. Tariffs have come down steadily over the years. Until recently, they were at their all-time low level. But the thing is we do not know how this goes. This process we are in right now, the Administration says it is going for broadly lower tariffs. If that happens, that is good for the economy. That would be very good for the economy—our econ- omy and others’ too, by the way. On the other hand, if we wind up with higher tariffs, then not so good. Senator TESTER. That is correct. And in the meantime, just as a sidebar, if it cuts off foreign markets for grains, for example, there is going to be a lot of people in family farm agriculture that are put out of business. And that is my concern. You do not need to comment on that. I realize that you do not play a central role in our housing fi- nance system, but you do play a central role in our economy, and the Fed does have a sizable balance sheet with billions of dollars’ worth of mortgage-backed securities on the books. In March it was announced that Fannie Mae and Freddie—no, not Freddie, but Fannie Mae would need $4 billion from its line of credit at the Treasury Department. How concerning is this to you and the Fed given the size of mortgage-backed securities that are on your books? Mr. POWELL. The mortgage-backed securities that we have are guaranteed by the Federal Government. There is no credit risk there. I would say more generally, if this is responsive, I think that the housing finance system, the GSEs, remains one of the big un- finished pieces of business postfinancial crisis, and I think it would VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 21 be healthy for the economy and for the housing finance system to see that move forward. Senator TESTER. You answered my second question. So you think that Congress’ inability to address Fannie Mae and Freddie Mac in the end could harm our economy? Mr. POWELL. I think it is really important for the longer run that we get the housing finance system off the Federal Government’s balance sheet and using market forces and some of the things that are already in place and carry forward some kind of a reform. I think it is very important for the economy longer term. Senator TESTER. OK. Thank you, Chairman Powell, and I appre- ciate your being here. I have got a couple other questions for the record that I would love to have you answer. Thank you very much. Mr. POWELL. Thanks. Chairman CRAPO. Senator Toomey. Senator TOOMEY. Thanks, Mr. Chairman. Thank you, Chairman Powell, for joining us. I just had a quick follow-up on this wage discussion. I think the most recent numbers we had were the month of June. Comparison to the previous June, 2.7 percent I think was the nominal growth in the wage number, so obviously a positive number. I think we would all like to see a bigger real growth. I think there is no ques- tion we would like to see that. But I would suggest that there is something peculiar about just the arithmetic of this sometimes, and maybe you could just briefly comment on this. As our economic growth has coincided with a significant growth in entry-level jobs and people coming into the workforce at entry- level wages, since those wages are at the low end of the wage spec- trum, isn’t it the case that the nature of arithmetic is that the av- erage wage will reflect to some degree the fact that new entrants naturally come in at the low end of the spectrum and it would mask the growth in wages of people who have been continuously employed? Mr. POWELL. Yes, that is right. There can be compositional ef- fects, is what we call them, so younger people coming in, lower wages; older people, higher wages, retirement can be an effect. I am not sure it is right now, but I can check on that. Senator TOOMEY. I think that is likely to be the case as we have increasing workforce participation. I think that is a likely con- sequence. You made a very important point, I think, earlier that sustained wage growth absolutely requires sustained productivity growth. It is not possible to have the former without the latter. We all know that productivity growth is driven by several things, but one of the principal contributing factors is capital expenditure. It is new tools and equipment and technology in the hands of workers that make them more productive. The June FOMC minutes included a disturbing observation, and I will quote very briefly. It says, ‘‘Some districts indicated that plans for capital spending had been scaled back or postponed as a result of uncertainty over trade policy.’’ So the FOMC is saying that there is already adverse consequence in the form of scaled back investment as a result of uncertainty in trade policy. If there VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 22 is more uncertainty—and we have threats of additional tariffs hanging over the markets right now—doesn’t it follow that this is a threat to wage growth because the continuum includes a reduc- tion in capital expenditure, lower productivity growth than we would otherwise have in a corresponding relative weakness in wage growth? So, in other words, isn’t all this trade uncertainty a threat to wage growth? Mr. POWELL. It may well be. We do not see it in the numbers yet, but we have heard a rising chorus of concern which now begins to speak of actual cap ex plans being put on ice for the time being. Senator TOOMEY. Yeah, which is really disturbing. The Senator from Tennessee’s question about what causes stagnant wages, well, it corresponded to an extended period of very low productivity growth, which itself corresponded to very low capital expenditure growth. We broke that with the incentives in the tax reform that caused a big surge in cap ex. And it would be a tremendous pity to jeopardize that because of the trade policy. Let me move on to a somewhat technical matter regarding the Fed’s balance sheet. As you know, historically the Fed has manipu- lated just overnight rates, the discount rate and Fed funds rate, and let the markets decided all other interest rates. That all changed with quantitative easing when the Fed became the biggest market participant in the purchase of Treasurys. And it changed in an explicit way when the Fed decided that it would intentionally manipulate the shape of the yield curve with Operation Twist, which was very consciously and willfully designed to change the shape of the curve. My understanding is now, to the extent that you make purchases of Treasurys, which you do when payments come back to the Fed in excess of what you want to run off, you do so basically as a set proportion of what the Treasury is issuing without regard to where on the curve they are issuing. So while this is happening, the yield curve is flattening and in a pretty dramatic way, right? Twos, tens were like a hundred basis points a year ago. Today they are, I do not know, 25 basis points. Some people are concerned that a flattening curve or an inverted curve correlates with economic slowdown and recession. Here is my question: Does a dramatic change in the shape of the yield curve in any way influence the trajectory that you guys are on with respect to normalizing interest rates and the balance sheet? Mr. POWELL. Sorry. In other words, are we going to change our balance sheet policies due to the—is that what you are asking—due to the changing shape of the curve? Senator TOOMEY. Yeah, does the changing shape of the curve weigh into your considerations at all? Mr. POWELL. You know, I think what really matters is what the neutral rate of interest is, and I think population look at the shape of the curve because they think that there is a message in longer- run rates, which reflects many things, but that longer-run rates also tell us something, along with other things, about what the longer-run neutral rate is. That is really, I think, why the slope of the yield curve matters. So I look directly at that rather than—in VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00026 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 23 other words, if you raise short-term rates higher than long-term rates, you know, then maybe your policy is tighter than you think, or it is tight, anyway. So I think the shape of the curve is something we have talked about quite a lot. Different people think about it different ways. Some people think about it more than others. I think about it as really the question being what is that message from the longer-run rate about neutral rates. Senator TOOMEY. Yeah, I think that makes a lot of sense. I see my time has expired. Thank you, Mr. Chairman. Chairman CRAPO. Let me check. Senator WARNER. I got in under—— Chairman CRAPO. Senator Warner. Senator WARNER. Thank you, Mr. Chairman. Chairman Powell, it is great to see you again. Part of the challenge coming this late in the hearing is a lot of my questions have been answered. I want to follow up a comment at least on what Senator Toomey was ad- dressing. I was going to cite the minutes of the Fed June meeting as well in terms of you say you have not seen these effects in the economy yet, but there has been a slowing of cap ex because of con- cerns about what I think is the President’s kind of ill-thought- through trade war. I strongly believe we ought to take into consid- eration and have a fair and balanced trading system. I think China is the worst offender, particularly in the theft of intellectual prop- erty and other items. I was actually applauding the President when he moved strongly at first for a day or two on ZTE and before he folded at the first pushback from President Xi. And I would argue that we would be in a stronger position vis-a-vis citizenship if we had been about to actually rally other nations around the world, nations that are our allies. Instead, he is engaged in trade prac- tices with them. No need to comment on that. Senator Tester raised an issue I wanted to raise as well, indi- cating foreign banks that have relatively small U.S. subsidiaries but large overall international assets are still going to be subject to stress tests. As a matter of fact, wasn’t it correct that at least, since there are a variety of stress tests, the CCAR stress tests still applies to institutions that have assets at any level or relatively any level, and that there was recently a foreign bank with $900 bil- lion of total assets but only $86 billion in U.S. assets that the CCAR stress test still applied to? Is that not correct? Mr. POWELL. I believe that is correct. Senator WARNER. OK. I think you have addressed that, and there are some tensions here between—the Chairman is a good friend of mine and all. I think there may be appropriate regulatory relief for some regional banks, but I want to make sure—and I think you have addressed this with Senator Tester—that for those banks in that 100 to 250 range, you can have a thorough process and rulemaking process that stress tests are going to continue on a regular basis, and that these banks that fall into this category are going to be strictly reviewed before they might receive some of this regulatory relief to make sure that they—you know, size alone may not be the only indicator of significance to the overall market, and there may be some institutions that fall in that category but still need the enhanced SIFI diagnosis. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 24 Mr. POWELL. Right, so the bill gives us all the authority we need, frankly, to reach below 250 down to 100 and apply any prudential standard we want, either on the grounds of financial stability or just the safety and soundness of banking companies. We will pub- lished—we are thinking about it carefully now. We are going to publish for public comment the range of factors that we can con- sider. And, again, the bill is very generous in letting us consider all the factors that we think are relevant. Senator WARNER. But one of the reasons that I was supportive of the legislation was testimony that you had given prior to the passage that this was not going to be some blanket dismissal of these institutions, that you were going to go through a thorough rulemaking process and make an evaluation before those regula- tions were relaxed. Is that still your position? Mr. POWELL. We will, absolutely. In fact, there is one institution now that is designated as a SIFI that is less than 250. So we are not shy about finding financial stability risk when we find it. Senator WARNER. We think, again, the lines are always arbitrary here, but it is up to you and the Fed to make sure that institutions, particularly based upon their business practices that may be over- all economically significant, that they still will have that deter- mination, as you indicated, even if they fall below 250. Mr. POWELL. Yes, a wide range of factors it will be. Senator WARNER. Let me move to a different topic. I recently sent you a letter with a number of my Democratic colleagues on the Community Reinvestment Act, and I think the renewal of that act is very important. And I am concerned that the OCC has proposed a policy that will ‘‘only consider lowering component performance test ratings of a bank if evidence of discrimination or illegal credit practices directly relates to the institution’s CRA lending activi- ties.’’ The way I read that would mean that under the OCC’s proposal, which I think is inappropriate, you could end up with a bank still getting a good CRA rating, even though they had discriminatory practices, but simply those discriminatory practices fell outside of its CRA lending processes. So my hope would be for those banks that fall under the Fed’s review that we will not see a relaxing of those CRA standards. Mr. POWELL. You have correctly stated what our policy is, and I have every reason to think that it will continue to be that. We am not looking to change it. Senator WARNER. I would hope so, and I want to make sure we will follow up with additional letters and requests on that subject. Thank you, Mr. Chairman. Chairman CRAPO. Thank you. Senator Van Hollen. Senator VAN HOLLEN. Thank you, Mr. Chairman. Mr. Chairman, welcome. Good to have you here. A couple questions that relate to the tax bill, because much has been said about that. Senator Toomey mentioned that it has re- sulted in increased investment. What I have seen is a huge whop- ping increase in stock buybacks. In fact, as of today, the number is $600 billion in stock buybacks. Those are corporations that have decided not to invest the money back into their workers or their VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 25 plant or their equipment, but give it to stockholders, which in- cluded, I should say, one-third of the stock holdings in this country are foreign stockholders. So it is a great windfall for the accounts of foreign stockholders. Much has also been claimed about the economic impact. I am looking at the most recent projection that the Fed had for median long-term growth. As of your June 13th report, I see it is 1.8 per- cent, is that correct, for the current long-term growth median pro- jection? Mr. POWELL. Yes, it is. Senator VAN HOLLEN. Are you aware of what the projection was a year ago before the tax bill was passed? Mr. POWELL. I am going to say 1.8 percent. Senator VAN HOLLEN. It was 1.8 percent. I mean, the reality is, despite all the hype around here, it is not really going to have an impact on our long-term growth. Surprisingly, a lot of us did think there was going to be a sugar high. When you dump $2 trillion into the economy, you would think there would be some sugar high, and maybe there will be some sugar high. But I was interested in an analysis that came out of the San Francisco Fed. I do not know if you saw it. Two economists there actually said that the 2017 tax law is likely to give maybe not even a sugar high. Have you had a chance to review that analysis? Mr. POWELL. I have, and I would just say that, you know, there is a wide range of estimates of the effects of the recent fiscal changes, and, you know, they are talking about the possibility—I think their point was late in the cycle when you are near full em- ployment, the effects might be less. You know, they might or they might not be. I think there is a lot of uncertainty. One of the great things about the Fed is we get a range of views, which is a healthy thing. Senator VAN HOLLEN. But it does stand to reason, right, that you would have a smaller impact late in a cycle? I mean, that is why most fiscal policy in this country over the years has said that we want to provide stimulus during the really tough times when a lot of people are out of work, but you do not necessarily want to pro- vide stimulus sugar high when the economy is clicking on all cyl- inders. And I think that is the point these economists made, is we are actually in the ninth year of growth. So when you are talking about some increase in real wages, not nearly what we want—I mean, that is over the 9-year period. Is that right? Mr. POWELL. I am sorry. Your question? Senator VAN HOLLEN. When you talk about some small uptick in real wages, that is over the period of recovery, right? Mr. POWELL. I was really talking about nominal wages, and what I was talking about was if you look at 2012, 2013, 2014, all of our main wage things sort of were around 2 percent, measures around 2 percent. Now they are close to 3 percent. So it was not an over- night thing, overnight sensation. It was a gradual increase. But you have seen a meaningful increase. Senator VAN HOLLEN. Right. And isn’t a fact that real wage in- creases were higher during the last term of the Obama administra- tion than during the Trump administration? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00029 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 26 Mr. POWELL. I would really have to go back and look at that. Senator VAN HOLLEN. I have the advantage, Mr. Chairman, of having your detailed Fed analysis and the Bureau of Labor Statis- tics. And what it shows is that, in fact, real wage increases were higher during the last term of the Obama administration. The point here really is not play make-believe, as we sometimes hear around here, that this tax bill somehow miraculously helped a lot of people out. The reality is, as we heard, real wages are pretty flat. I understood your testimony about oil price increases. We do not know how long they will be with us. But we also know that real wage increases were higher during the 4 years of the Obama ad- ministration than so far in the Trump administration with the tax cut and everything else. So I hope that my colleagues will bring more of a discussion based—a reality-based discussion to this. The one thing we do know that tax bill did, the one thing we did know is it is going to add about $2 trillion to our national debt, a debt that will have to be paid off by everybody in this room and their kids and grandkids. And at the same time, the Fed projection shows no change in the long-term growth projections. So we just blew $2 trillion. A lot of it is already going to stock buybacks, and I just hope we will sort of end the happy talk about what this tax cut did. Thank you. Chairman CRAPO. Senator Heitkamp. Senator HEITKAMP. Thank you, Mr. Chairman. And thank you, Chairman Powell, for once again coming before the Committee and being willing to answer our questions. I want to just make a point about wages, and you do not need to comment on this. Almost 20 percent of the people in our country who are wage earners earn less than $12.50 an hour. I do not know how many of you think you can live on $12.50 an hour, but I think—given that you are working a 40-hour week. Thirty-two per- cent earn between $12.50 and $20 an hour. Twenty dollars an hour is just barely $40,000 a year. And the next 30 percent is $22 to $30, much of it heavily weighted on the light end. In fact, I have seen one survey that has told us that two-thirds of all wage earn- ers in this country earn less than $20 an hour, hourly wage earn- ers. If you do not think that that presents economic challenges if that does not change, we are wrong. I think that there is optimism. Op- timism is leading to taking on more consumer debt. I think we are seeing that. The response, and I think appropriate, that you have on interest rates is going to drive increased costs. We have targeted or linked the student loan rate to what you do, thereby exacer- bating those people who are attempting to take that next leap for- ward. So I just want to make the point that where your job is to look at macro, we visit with people every day in our States who are struggling, struggling to make ends meet. And I want to transition to the next place for me on North Da- kota struggles, and that is trade. You know, I have been asking questions about trade for 2 years now. So if you look at the min- utes of the Fed meeting, which I think Senator Toomey talked about, businesses across the country from steel and aluminum to farming have been telling Fed officials about plans to pull back VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 27 their investments in their business or offshore their business. We have now pork producers talking about moving their pork produc- tion offshore to basically avoid what has been happening in the pork industry. These industries I think have good reason to be concerned. Economists across the spectrum, including economists in the pri- vate sector, Morgan Stanley and Goldman Sachs, European Central Bank, the IMF, they are all raising alarms with trade tensions looming. So if the President’s trade policies continue to result in escalating tariffs by our trading partners, I think this is going to have serious damage to the economy and, in particular, to producers and con- sumers in my State. Now, just to give you a number, North Dakota is the ninth most dependent on imported steel. That surprises people, but you think about our base industry. What is one of the primary inputs in drill- ing and in moving oil? It is steel. What is one of the primary inputs in large equipment manufacturing? It is steel. And I have heard from my equipment manufacturers that what amount they got in tax savings has been gobbled up in the first 2 or 3 months of this fiscal year. Then we are not even talking about farmers with the double whammy of getting hit with steel tariffs—they are large steel users—and seeing their commodity prices being challenged. You offered a view last week that the President’s trade war re- sults in other countries actually lowering their trade barriers. Then that would be a positive outcome. I do not disagree. However, the historic and economic evidence suggests the opposite is likely to occur. In fact, if you look at efforts such as Smoot–Hawley—we can go all the way back there—we know and I believe history will tell you that it contributed significantly to the depth of the Great De- pression. I do not say it causes it, but it certainly did not assist in early recovery. So would you agree with former Chairman Ben Bernanke when he said in a 2007 speech on trade that restricting trade by impos- ing tariffs, quotas, or other barriers is exactly the wrong thing to do for the economy? Mr. POWELL. I would, assuming you are talking about them re- maining in place over a sustained period of time. Absolutely. Senator HEITKAMP. Well, you know, I get a little frustrated by this short-term pain for long-term gain. I think that we are going to have long-term consequences in agriculture because I think we are going to have emerging markets in the competitive space that we have not before. We already see the Chinese are subsidizing their farmers to grow soybeans. We see that Brazil and Argentina are amping up their soybeans and, arguably, could be, in fact, buy- ing American soybeans, marking them up and enjoying our market with the markup as we struggle. So in that same speech, then-Chair Bernanke cites studies which show that the effects of protectionist policies almost invariably lead to lower productivity in U.S. firms and lower living standards for U.S. consumers. Is there any reason to believe that these studies are no longer valid? Mr. POWELL. None that I know of. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00031 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 28 Senator HEITKAMP. OK. Chair Powell, I make the point on Bernanke’s comments and historic record because we cannot afford to put our head in the sand and ignore the facts about the impact of the Administration’s trade policies on our economy. I think it is clear—I have been probably one of the most outspoken critics of the President’s trade policy here, certainly on this side of the aisle. And if we want to improve trade, the right way to do it is to expand trade agreements, in my opinion, not impose reciprocal tariffs. And so I am deeply concerned—and I know that at this point you are taking a watchful eye. But I am deeply concerned about the long-term ramifications of this so-called short-term policy. And cer- tainly if we see the next tranche, the $200 billion, and then beyond that we see tariffs on automobiles, we will, in fact, be in a full-on, escalated, damaging trade war. And I do not know where that ends. And if this is a game of who blinks first, the best thing to do would be to get to the negotiating table. Now—oh, I am over my time. Chairman CRAPO. Yes. Senator HEITKAMP. I am sorry. But I want to make the point that I am going to stay on this. I am going to stay on the macro effects of this trade policy, because this is not good for our econ- omy, and we are going to look back at this time perhaps in a year and say that is the point at which we turned the corner and the economy started taking a downturn. Chairman CRAPO. Senator Warren. Senator WARREN. Thank you, Mr. Chairman. And good to see you again, Chairman Powell. Before the financial crisis, banks loaded up on risky loans while regulators just looked the other way. And when those loans went bad, taxpayers were left holding the bag because big banks did not have enough capital to stay afloat. Dodd–Frank included two major reforms to make sure that this never happens again: first, rules that make big banks meet higher capital standards so they are better equipped to handle losses; and, second, rules that make the banks take annual stress tests to en- sure that they are not taking on too much risk. But since you have taken over, Chairman Powell, the Fed has rolled back on both of these reforms, and I just want to explore what that means for our economy. In April the Fed proposed an amendment that lowers the en- hanced supplementary leverage ratio. That is the special capital re- quirement for the too-big-to-fail banks. The FDIC claims that this reform will allow the banks to maintain $121 billion less in capital, but the Fed disagrees with the FDIC’s assessment. Why is that? Mr. POWELL. We actually think that the effect of that proposed change which is under consideration—we are looking at the com- ments—would be pretty close to zero as it relates to the firm itself. And, also, we think—in other words, if you look at the entire enti- ty, it would be less than $1 billion. I will not say zero, but I think our estimate was $400 million. Senator WARREN. So you just think the FDIC’s $121 billion esti- mate is made up? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 29 Mr. POWELL. They are talking about the bank; whereas, we are talking about the whole firm. Within the whole firm, at the firm level—— Senator WARREN. But the banks we have to worry about are the banks that get bailed out here. Mr. POWELL. Yeah, and the enhanced supplemental leverage ratio, the problem with this is that we do not want a leverage ratio to be the binding capital requirement because it actually calls upon—if you are bound by that, you are actually called upon to take more risk. So we would rather not have the bank bound by that. Senator WARREN. So let us take a look at this in terms of trying to strengthen the banks so that we do not have to be in a position to bail them out. The second thing you have done is you have put a lot of stock in stress tests, and last week you called the stress tests ‘‘the most successful postcrisis innovation for bank regula- tion.’’ But under your leadership, the Fed has weakened the stress test regime. Here is one example. Results of this year’s exercise recently be- came public and reportedly three banks—Goldman Sachs, State Street, and Morgan Stanley—had capital levels that were too low to pass the test. I wrote to you about these banks a few weeks ago, and I appreciate your response on this. But just to be clear, after they flunked, did you give those too-big-to-fail banks a failing grade? Mr. POWELL. We gave them what we call a ‘‘conditional non- object,’’ which is something we have done—— Senator WARREN. OK, but that is not a failing grade, right? They did not flunk. Mr. POWELL. They suffered the same penalty, which was to have to limit their distributions to the prior years. Senator WARREN. Well, that is what I want to ask. If you did not flunk them, did you at least follow the Fed guidelines and make those banks submit new capital plans that would pass the test? Mr. POWELL. No. In fact, when we do the conditional nonobject, we do not require them to resubmit—— Senator WARREN. So you do not require them to actually meet the criteria. Mr. POWELL. In the many times we have used that tool over the years, we have not required that. Senator WARREN. In other words, the Fed looked the other way. You let these banks off with what you call a conditional nonobjec- tion, letting them distribute capital to their shareholders instead of keeping it on their books. In fact, because of your action, Morgan Stanley and Goldman Sachs investors took home about $5 billion more than they otherwise would have. That is nice gift to the bank, Mr. Chairman. On top of that, the Fed also proposed a rule in April that would make the stress tests less severe, effectively reducing capital re- quirements at the eight largest banks by a total of about $54 bil- lion, according to a Goldman Sachs analysis. So, Chairman Powell, by your own account, the economy is doing well. We all know that bank profits are gigantic. The banks just got huge tax breaks. Three Fed Presidents—President Rosengren, VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00033 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 30 President Mester, and President Evans—have suggested it is an ideal time to raise capital requirements to strengthen the banks in- stead of siphoning off cash to shareholders. So why is the Fed under your leadership persistently seeking to reduce capital re- quirements and weaken stress tests? Mr. POWELL. With respect, Senator, we are not doing either of those things. In fact, the stress test in 2018 was materially more stressful—the amount of the loss and the amount of required cap- ital to pass the test was the highest by far of any test. Senator WARREN. Look, I do not know what to say. The FDIC does not see it that way. Goldman Sachs does not see it that way. The data do not seem to back you up on this. The Fed’s capital re- quirements and the stress test are like a belt and suspenders. You can loosen the belt and rely on the suspenders, or you can take off the suspenders and rely on the belt. But if you do both, your pants will fall down. And, Chairman Powell, we learned in 2008 that when the big banks’ pants fall down, it is the American economy, American taxpayers, American workers who get stuck pulling them back up. So it looks like to me the Fed is headed in the wrong di- rection here. Thank you, Mr. Chairman. Chairman CRAPO. Senator Schatz. Senator SCHATZ. Thank you, Mr. Chairman. Chairman Powell, thank you for your service, and thank you for being willing to en- gage. I understand the need for you to stay in your lane, so I am going to ask a question, and I want to have as constructive of an exchange as possible, knowing that some of this ground has been covered, and I do not want to turn this into a partisan conversa- tion. Banks are doing well. They had record-breaking profits in the years 2016 and 2017, and it looks like 2018 is going to be another gangbuster year. Across the board, banks increased their dividends by 17 percent in 2017, 12 percent in 2018. Community banks’ earn- ings are also up. Household credit is up. In April, after your speech to the Economic Club of Chicago, you said, and I quote, ‘‘As you look around the world, U.S. banks are competing very, very successfully. They are very profitable. They are earning good returns on capital. Their stock prices are doing well. So I am looking for the case for some kind of evidence that regulation is holding them back, and I am not really seeing that case as made at this point.’’ The data backs up your statement. Banks are the most profitable that they have ever been. So what is the motivation for weakening Dodd–Frank rules like the Volcker Rule? Mr. POWELL. I think we want regulation to be as efficient as well as effective as it can possibly be. Regulation is not free. Regulation, good regulation, has very positive benefits—avoiding financial cri- ses, avoiding consumer harm, and things like that. But nobody ben- efits when regulation is inefficient. And so we have taken the job, particularly for the smaller institutions going back and looking at everything we have done over the last decade, to make sure that we are doing it in the most efficient way possible. That is what we are doing. We want the strongest, toughest regulation to apply to the biggest banks, particularly the eight SIFIs. And then we want VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00034 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 31 to make sure that we have tailored appropriately as we move down into regionals and subregionals and then large community banks and then smaller ones. Senator SCHATZ. OK. A fair answer. What would you say to someone back home who says, ‘‘Why would the Fed focus on this? Why would the Banking Committee focus on this? Why would the Federal legislative branch focus on making life easier for the banks given income inequality, given that these are literally the most profitable institutions in American history?’’ I get that it is always better to make things more efficient. It just seems like you have limited resources and we have limited political capital to spend on priorities for the Fed. What do I say to someone back home who says, ‘‘Why are you taking care of these guys who seem to be feed- ing at the trough pretty nicely?’’ Mr. POWELL. I think you have to distinguish between different kinds of institutions. You know, I do not think that the smaller community banks are maybe feeling quite as healthy as you are saying. I think they are healthy. But I think, you know, we want them to be devoting their efforts to making loans and investing in their communities, supporting economic activities in communities, not—— Senator SCHATZ. But lending is up, right? And profitability is at least somewhat of a proxy for the efficiency of the regulations. I will not belabor this. I take your answer in good faith. In a recent interview with Marketplace, you were asked what keeps you up at night. This is one of the things I enjoy about you, is you are frank in your responses while trying to stay in your lane. And you said, ‘‘We face some real longer-term challenges, again, as- sociate with how fast the economy can grow and also how much the benefits of that growth can be spread through the population. I look at things like mobility. If you judge the United States against other similar well-off countries, we have relatively low mobility. So if you are born in the lower end of the income spectrum, your chances of making it to the top or even to the middle are actually lower than they are in other countries.’’ Understanding that the Fed cannot address these issue squarely, can you talk a little bit about income inequality and what ought to be done? And then my final question around income inequality is whether, to the extent that you have expressed this view, a tax cut that provides about $33,000 for individuals in the top 1 percent of earners and about 40 bucks to the poorest of the poor, whether or not that helps or hurts in terms of income inequality. Mr. POWELL. There are a range of—the question I was answering in that interview and that you are really asking is really these are issues that the Fed does not have the tools or the mandate to fix, but they, nonetheless, involve significant longer-term economic challenges. So I just would—you know, I pointed out low mobility, which is the research of Raj Chetty, who is a professor back at Harvard now, and also just the stagnation of median incomes for a long time. And if you look at things like labor force participation among prime-age males, you have seen a decline over 60 years. These are unhealthy trends in the U.S. economy that we do not have the tools to fix. You do. These are things for the legislature to work on. And, you know, it comes down to things that are easy VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00035 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 32 to say and hard to do, like improve education, deal with the opioid crisis, things like that. And I also think, you know, balanced regu- lation plays a role in this and in enabling capital to be allocated freely and people to move from job to job. All those things go into it. But these are long-run important issues, particularly—another one is the potential growth rate of the country, which looks like it has slowed down because of aging, really, and demographics and things like that. So these are big issues. We cannot really affect them with mone- tary policy. Senator SCHATZ. Thank you. Chairman CRAPO. Senator Cortez Masto. Senator CORTEZ MASTO. Thank you. Chairman Powell, thank you for being here, and thank you for also answering our questions. I appreciated your comments earlier in the introduction, and noting what you admitted that the aggregate numbers do look good. But I also noted in your presentation that there is a quote that you say, and it is this: ‘‘And while three-fourths of whites re- sponded in a recent Federal Reserve survey that they were doing at least OK financially’’ in 2017—‘‘at least OK, only two-thirds of African Americans and Hispanics responded that way’’ when it comes to financially whether they were doing OK. And I think that is what this comes down to. It comes down to those individuals who are living out there who are struggling, how much money is in their pocket, how much it can pay for. I notice you talked about the wages are up 0.27 percent, price index increased 2.3 percent. So in response to Senator Menendez’s question about the steps that you were taking for broad-based wage growth, you answered several things. But let me ask you this: Is it your opinion that it is the Fed’s responsibility or role to do something about wage growth, broad-based wage growth to play a role there? Mr. POWELL. I think, you know, what you have assigned us is lit- erally maximum employment and stable prices, and also financial stability, we have an overall responsibility for that. Maximum em- ployment, the sense of that is it is not just one measure. It is a broad range of measures, and I think we have really—you know, we have worked hard to provide support for the labor markets. Senator CORTEZ MASTO. And that would include wage growth then? Mr. POWELL. It would. Wage growth comes into really both of those things. It comes into maximum employment. It also comes into inflation. Senator CORTEZ MASTO. Good. I am glad you said that because here is the other thing that you said that concerned me, and you said one way to address and increase wage growth was incomes need to go up, and they only go up with higher productivity. And that is what you said needs to occur. But let me ask you this, because I have looked at some of the economists and studied some of the reports in the last 30 years or so, and I know that was true probably from 1950 to the 1970s, that they were both going up together. But we also have studies that show from 1973 to 2016 it was just the opposite. They are diver- gent, that productivity went up by 73.7 percent, but the hourly pay VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00036 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 33 went up 12.5 percent, only 12.5 percent. That is 5.9 times more, more productivity than pay. So knowing that, how can you say that we need to focus on high- er productivity because that will also increase wages? Mr. POWELL. So what I said was that over a long period of time, wages cannot go up sustainably without productivity also increas- ing. It is a different thing to say that higher productivity guaran- tees higher wages. I did not say that, and I do not think that is true. I know very well the charts you are talking about. Senator CORTEZ MASTO. So then what tools—then what are you doing to address wage growth to ensure that we are increasing wages? Because here is what is happening—and you know this. If you are in your community—and I am hoping you are—and you are talking to people across America, you know that wages have been flat since 1973. That means that the people when I go home—and me and my family and Nevadans in general who are struggling, they do not have enough money to pay for housing costs, for health care, for education, for prescription drugs. And what do I tell them that you are doing to look out for their interests to help them and improve their lives with the tools that you have? Mr. POWELL. The tool that we have is monetary policy, and we can and we have—— Senator CORTEZ MASTO. No, I appreciate that. Let me ask you this: Can you just put it in terms if you are talking to a constituent in my State to explain to them what you are doing—now, remem- ber, Nevada was a place where we had the foreclosure crisis. Peo- ple lost their homes, and they lost their jobs. We had 15 percent unemployment at one point in time, underwater in their homes. What would you say to those individuals that you are doing to en- sure, one, it does not happen again and, two, improve the wage growth for them? Mr. POWELL. We are doing everything we can with our tools to make sure that if you want a job, you can have one, and we are also—— Senator CORTEZ MASTO. But having a job and having a livable wage are two different things. Mr. POWELL. Over the long term, we do not have those tools. You have those tools. Congress has the tools to assure stronger wage growth over time. We really do not have that with—we can move interest rates around to support activities, support hiring. We do not have the tools to support higher productivity, for example, which tends to lead to higher wages without guaranteeing them. Senator CORTEZ MASTO. As an economist, you can work with us and tell us the tools or the things that can be done, like increasing the minimum wage, that might improve livable wages for individ- uals, correct? Mr. POWELL. I would say principally over long periods of time in- vesting in education and in skills are the single—that is the single best thing we can do to have a productive workforce and share prosperity widely, which is what we all want. Senator CORTEZ MASTO. And I know my time is up, and I appre- ciate that. But I am concerned. Is that based on your own indi- vidual opinion, or is that research or data or information that you know that shows that? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 34 Mr. POWELL. It is a lot of research. Senator Cortez Masto. OK. Thank you. Chairman CRAPO. Senator Donnelly. Senator DONNELLY. Thank you, Mr. Chairman. And thank you, Mr. Chairman. Mr. Powell, I am worried about farmers in my State. I checked about an hour ago. Soybean prices are $8.40 a bushel, well below the cost of production right now. Corn is $3.48 a bushel, well below the cost of production. In the last couple of weeks, I have visited with a number of Hoosier farmers and groups like the Indiana Corn and Soybean Alliance and the Indiana Farm Bureau to hear their growing concerns with falling commodity prices and uncertain trade policies, which are already harming Hoosier farmers in rural communities. Let me tell you a conversation I had last Friday. It was with a businessman who is also a farmer, and he was telling me about he just bought 140 acres from another farmer. And he said, ‘‘Joe, I told the farmer, ‘I do not want to buy this from you right now be- cause I know you are struggling. And I know you do not want to sell this. And I do not want to take advantage of you.’’’ And the farmer who was selling it said, ‘‘If I do not sell this, I could start losing everything else, and so you are actually helping me out.’’ This is where our rural economy is going right now. I have also heard from local businesses dealing with canceled or- ders because of the tariffs. The price of soybeans, as I mentioned, it is a 10-year low—a 10-year low—due largely to the Chinese tar- iffs on U.S. exports. This current policy, what I worry about is that it has already damaged foreign export markets that took decades and decades to build. And so what I am asking you is: What would be the long-term impact of falling commodity prices and reduced agriculture exports on rural communities, which are struggling in so many ways already? Mr. POWELL. Well, I think we know it would be very bad, and we have seen periods in American history where that has hap- pened, and it can be extremely tough on farmers and rural commu- nities. Senator DONNELLY. And if they lose the markets that they have developed—I was over in China talking to some of their defense leaders a few years ago about North Korea, and I was walking through the airport, and there was a group just by coincidence— it was a flight back home, the flight to Chicago and then go back home to Indiana. It was a group of Indiana soybean farmers who were traveling the country, developing the market. What happens to rural communities if China just looks up and says, you know, ‘‘we found more reliable suppliers’’? Mr. POWELL. As we discussed, it can be very tough. Senator DONNELLY. So as Fed Chairman, what would you say to all those farmers who are really nervous, really concerned about what their future will be? They look to us for smart policies, for reasonable policies. Is there anything you can say about this trade war that is going on right now? Mr. POWELL. I should again start by saying that it is really not the Fed’s role. We do not do trade policy. That is Congress and the Administration. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00038 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 35 But, you know, I think if the current process of negotiation back and forth results in lower tariffs, that would be a good thing for the economy. If it results in higher tariffs, then I think—you know, I hardly need to tell you what higher tariffs would do for agricul- tural producers. Agriculture is an area where we lead the world in productivity and we are great exporters, and, you know, you would be very hard hit by these tariffs. Senator DONNELLY. If this goes on for a couple more years, what would be the impact on our rural communities? Mr. POWELL. I think certainly it would be very tough on the rural communities and, you know, I think we would feel that at the national level, too. Senator DONNELLY. Let me also ask you about opioids, which you have mentioned, and workforce participation. My State has been deeply impacted by the opioid crisis. Last summer, during one of her final appearances before Congress, I spoke with former Chair Janet Yellen about the opioid epidemic and its connection to not just health outcomes but also economic and employment outcomes, the impact of opioids on the labor participation rate, which has de- clined from 66 to 63 percent over the last decade. She agreed there was a connection and noted surveys suggest that many prime-age individuals who are not actively participating in the labor market are involved in prescription drug use. You know, I look at these people we have lost, the next doctors, the next electricians, the next nurses. What do you see is the im- pact of the opioid epidemic on our workforce participation and, in general, the economy? Mr. POWELL. You know, it is a terrible human tragedy for many communities, certainly for the individuals and their families in- volved. I think from an economic standpoint, some high percentage of the prime-age people who are not in the labor force, particularly prime-age males who are not in the labor force, are taking pain- killers of some kind. I think the number that Alan Krueger, who is a professor, came up with is 44 percent of them. So it is a big number. It is having a terrible human tool on our communities, and also it matters a lot for labor force participation and economic activity in our country. Senator DONNELLY. Thank you. Thank you, Mr. Chairman. Chairman CRAPO. Thank you, Senator Donnelly. That concludes the questioning, but Senator Brown wants—— Senator BROWN. Thirty seconds, Mr. Chairman. Thank you. A number of colleagues have talked about productivity and non- supervisory pay, that pay has gone up 27 percent and—I am sorry, 2.7 percent, but it is important—from June to June, I think, was what one of my colleagues said. But it is important to recognize that CPI has gone up 3 percent in that period. So we should really never talk about nominal pay. We should talk about real dollar pay. Thank you, Mr. Chairman. Chairman CRAPO. Understood. All right. Thank you. And thank you, Mr. Chairman, again for being here. We appreciate your work and also your taking the time to come here and respond to our questions. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00039 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 36 For Senators wishing to submit questions for the record, those questions are due in 1 week, on Tuesday, July 24th, and, Chairman Powell, we ask that you respond as promptly as you can to the questions that may come in. Again, we thank you for being here. This is very good timing. We have got a vote underway right now, so we appreciate you helping to steer this hearing to a good conclusion. With that, the hearing is adjourned. Mr. POWELL. Thank you. [Whereupon, at 11:53 a.m., the hearing was adjourned.] [Prepared statements, responses to written questions, and addi- tional material supplied for the record follow:] VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00040 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 37 PREPARED STATEMENT OF CHAIRMAN MIKE CRAPO Today, we welcome Chairman Powell back to the Committee for the Federal Re- serve’s Semiannual Monetary Policy Report to Congress. This hearing provides the Committee an opportunity to explore the current state of the U.S. economy, and the Fed’s implementation of monetary policy and super- vision and regulation activities. Since our last Humphrey–Hawkins hearing in March, Congress passed, with sig- nificant bipartisan support, and the President signed into law, S. 2155, the Eco- nomic Growth, Regulatory Relief, and Consumer Protection Act. The primary purpose of the bill is to make targeted changes to simplify and im- prove the regulatory regime for community banks, credit unions, midsize banks, and regional banks to promote economic growth. A key provision of the bill provides immediate relief from enhanced prudential standards to banks with $100 billion in total assets or less. The bill also authorizes the Fed to provide immediate relief from enhanced pru- dential standards to banks with between $100 billion and $250 billion in assets. It is my hope that the Fed promptly provides relief to those within those thresh- olds. By right-sizing regulation, the bill will improve access to capital for consumers and small businesses that help drive our economy. And, the banking regulators are already considering this bill in some of their statements and rulemakings. Earlier this month, the Fed, FDIC and OCC issued a joint statement outlining rules and reporting requirements immediately impacted by the bill, including a sep- arate letter issued by the Fed that was particularly focused on those impacting smaller, less complex banks. But, there is still much work to do on the bill’s implementation. As the Fed and other agencies revisit past rules and develop new rules in conjunc- tion with the bill, it is my expectation that such rules be developed consistent with the purpose of the bill and intent of the members of Congress who voted for the bill. With respect to monetary policy, the Fed continues to monitor and respond to market developments and economic conditions. In recent comments at a European Central Bank Forum on Central Banking, Chairman Powell described the state of the U.S. economy, saying, ‘‘Today, most Americans who want jobs can find them. High demand for workers should support wage growth and labor force participation . . . Looking ahead, the job market is likely to strengthen further. Real gross domestic product in the United States is now reported to have risen 2.75 percent over the past four quarters, well above most es- timates of its long-run trend . . . Many forecasters expect the unemployment rate to fall into the mid-3s and to remain there for an extended period.’’ According to the FOMC’s June meeting minutes, the FOMC meeting participants agreed that the labor market has continued to strengthen and economic activity has been rising at a solid rate. Additionally, job gains have been strong and inflation has moved closer to the 2 percent target. The Fed also noted that the recently passed tax reform legislation has contributed to these favorable economic factors. I am encouraged by these recent economic developments, and look forward to see- ing our bill’s meaningful contribution to the prosperity of consumers and house- holds. As economic conditions continue to improve, the Fed faces critical decisions with respect to the level and trajectory of short-term interest rates and the size of its balance sheet. I look forward to hearing more from Chairman Powell about the Fed’s monetary policy outlook and the ongoing effort to review, improve and tailor regulations con- sistent with the Economic Growth, Regulatory Relief and Consumer Protection Act. PREPARED STATEMENT OF SENATOR SHERROD BROWN Thank you, Mr. Chairman. This week, the President went overseas, and sided with President Putin while denigrating critical American institutions, including the press, the intelligence community, and the rule of law. Our colleague Senator John McCain expressed clearly what every patriotic Amer- ican thought, ‘‘No prior president has ever abased himself more abjectly before a ty- rant. Not only did President Trump fail to speak the truth about an adversary; but speaking for America to the world, our president failed to defend all that makes us VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00041 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 38 who we are—a republic of free people dedicated to the cause of liberty at home and abroad. American presidents must be the champions of that cause if it is to suc- ceed.’’ With our democratic institutions under threat, we cannot ignore what happened in Helsinki yesterday. But we must not lose sight of the other policies of this Ad- ministration—including the rollback of the rules put in place to prevent the next economic crisis. Mr. Powell, thank you for appearing before the Committee to discuss these poli- cies. Just last week, a Federal Reserve official said, ‘‘There are definitely downside risks, but the strength of the economy is really pretty important at the moment. The fundamentals for the U.S. economy are very strong.’’ That may be true for Wall Street, but for most of America workers haven’t seen a real raise in years, young Americans drowning in student loan debt, families try- ing to buy their first home—the strength of the economy is an open question at best. Last month, former Fed Chair Ben Bernanke was very clear about the long-term impact of the tax cut and the recent bump in Federal spending when he said, ‘‘in 2020 Wile E. Coyote is going to go off the cliff.’’ Last week, the San Francisco Fed released a study finding that the rosy forecasts of the tax bill are likely ‘‘overly optimistic.’’ It found that the bill’s boost to growth is likely to be well below projections—or as small as zero. It also suggested that these policies could make it difficult to respond to future economic downturns and manage growing Federal debt. And it’s not just the tax bill—the economic recovery hasn’t been evenly felt across the country, either. Mr. Chair, I’d like to enter into the record an article from the New York Times this weekend which talks about those families still struggling from the lack of meaningful raises and other job opportunities. While hours have increased a bit over the past year for workers as a whole, real hourly earnings have not.1 And for production and nonsupervisory workers, hours are flat and pay has actually dropped slightly, according to the Bureau of Labor Sta- tistics. The number of jobs created in 2017 was smaller than in each of the previous 4 years. Some of the very companies that announced billions in buybacks and divi- dends are now announcing layoffs, shutting down factories, and offshoring more jobs. Some of the biggest buybacks are in the banking industry, assisted in part by the Federal Reserve’s increasingly lax approach to financial oversight. Earlier this month, as part of the annual stress tests, the Fed allowed the seven largest banks to redirect $96 billion to dividends and buybacks. This money might have been used to pay workers, reduce fees for consumers, protect taxpayers from bailouts, or be deployed to help American businesses. Three banks—Goldman Sachs, Morgan Stanley, and State Street—all had capital below the amount required to pass the stress tests, but the Fed gave them passing grades anyway. The Fed wants to make the tests easier next year. And Vice Chair Quarles has suggested he wants to give bankers more leeway to comment on the tests before they’re administered—that’s like letting the students help write the exam. The Fed is considering dropping the qualitative portion of the stress tests all to- gether—even though banks like Deutsche Bank, Santander, Citigroup, HSBC, and RBS have failed on qualitative grounds before. That doesn’t even include the changes the Fed is working on after Congress passed S. 2155 to weaken Dodd–Frank, making company-run stress tests for the largest banks ‘‘periodic’’ instead of annual, and exempting more banks from stress tests altogether. Vice Chair Quarles has also made it clear that massive foreign banks can expect goodies, too. And on and on and on it goes. The regulators are loosening rules around big bank capital, dismantling the CFPB, ignoring the role of the FSOC, undermining the Volcker Rule, and weakening the Community Reinvestment Act. When banks are making record profits, we should be preparing the financial sys- tem for the next crisis, building up capital, investing in workers, and combating asset bubbles. And we should be turning our attention to bigger issues that don’t get enough at- tention, like how the value placed on work has declined in this country, and how our economy increasingly measures success only in quarterly earnings reports. 1https://www.bls.gov/news.release/realer.nr0.htm VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00042 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 39 Much of that is up to Congress to address, but over the last 6 months, I have only seen the Fed moving in the direction of making it easier for financial institu- tions to cut corners, and I have only become more worried about our preparedness for the next crisis. I look forward to your testimony. Thank you. PREPARED STATEMENT OF JEROME H. POWELL CHAIR, BOARDOFGOVERNORSOFTHEFEDERALRESERVESYSTEM JULY17, 2018 Good morning. Chairman Crapo, Ranking Member Brown, and other Members of the Committee, I am happy to present the Federal Reserve’s semiannual Monetary Policy Report to the Congress. Let me start by saying that my colleagues and I strongly support the goals the Congress has set for monetary policy—maximum employment and price stability. We also support clear and open communication about the policies we undertake to achieve these goals. We owe you, and the public in general, clear explanations of what we are doing and why we are doing it. Monetary policy affects everyone and should be a mystery to no one. For the past 3 years, we have been gradually return- ing interest rates and the Fed’s securities holdings to more normal levels as the economy strengthens. We believe this is the best way we can help set conditions in which Americans who want a job can find one, and that inflation remains low and stable. I will review the current economic situation and outlook and then turn to mone- tary policy. Current Economic Situation and Outlook Since I last testified here in February, the job market has continued to strengthen and inflation has moved up. In the most recent data, inflation was a little above 2 percent, the level that the Federal Open Market Committee, or FOMC, thinks will best achieve our price stability and employment objectives over the longer run. The latest figure was boosted by a significant increase in gasoline and other energy prices. An average of 215,000 net new jobs were created each month in the first half of this year. That number is somewhat higher than the monthly average for 2017. It is also a good deal higher than the average number of people who enter the work force each month on net. The unemployment rate edged down 0.1 percentage point over the first half of the year to 4.0 percent in June, near the lowest level of the past two decades. In addition, the share of the population that either has a job or has looked for one in the past month—the labor force participation rate—has not changed much since late 2013. This development is another sign of labor market strength. Part of what has kept the participation rate stable is that more working- age people have started looking for a job, which has helped make up for the large number of baby boomers who are retiring and leaving the labor force. Another piece of good news is that the robust conditions in the labor market are being felt by many different groups. For example, the unemployment rates for Afri- can Americans and Hispanics have fallen sharply over the past few years and are now near their lowest levels since the Bureau of Labor Statistics began reporting data for these groups in 1972. Groups with higher unemployment rates have tended to benefit the most as the job market has strengthened. But jobless rates for these groups are still higher than those for whites. And while three-fourths of whites re- sponded in a recent Federal Reserve survey that they were doing at least okay fi- nancially in 2017, only two-thirds of African Americans and Hispanics responded that way. Incoming data show that, alongside the strong job market, the U.S. economy has grown at a solid pace so far this year. The value of goods and services produced in the economy—or gross domestic product—rose at a moderate annual rate of 2 per- cent in the first quarter after adjusting for inflation. However, the latest data sug- gest that economic growth in the second quarter was considerably stronger than in the first. The solid pace of growth so far this year is based on several factors. Robust job gains, rising after-tax incomes, and optimism among households have lifted con- sumer spending in recent months. Investment by businesses has continued to grow at a healthy rate. Good economic performance in other countries has supported U.S. exports and manufacturing. And while housing construction has not increased this year, it is up noticeably from where it stood a few years ago. I will turn now to inflation. After several years in which inflation ran below our 2 percent objective, the recent data are encouraging. The price index for personal consumption expenditures, which is an overall measure of prices paid by consumers, VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00043 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 40 increased 2.3 percent over the 12 months ending in May. That number is up from 1.5 percent a year ago. Overall inflation increased partly because of higher oil prices, which caused a sharp rise in gasoline and other energy prices paid by con- sumers. Because energy prices move up and down a great deal, we also look at core inflation. Core inflation excludes energy and food prices and generally is a better indicator of future overall inflation. Core inflation was 2.0 percent for the 12 months ending in May, compared with 1.5 percent a year ago. We will continue to keep a close eye on inflation with the goal of keeping it near 2 percent. Looking ahead, my colleagues on the FOMC and I expect that, with appropriate monetary policy, the job market will remain strong and inflation will stay near 2 percent over the next several years. This judgment reflects several factors. First, in- terest rates, and financial conditions more broadly, remain favorable to growth. Sec- ond, our financial system is much stronger than before the crisis and is in a good position to meet the credit needs of households and businesses. Third, Federal tax and spending policies likely will continue to support the expansion. And, fourth, the outlook for economic growth abroad remains solid despite greater uncertainties in several parts of the world. What I have just described is what we see as the most likely path for the economy. Of course, the economic outcomes we experience often turn out to be a good deal stronger or weaker than our best forecast. For example, it is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy. Overall, we see the risk of the economy unexpectedly weakening as roughly balanced with the possibility of the economy growing faster than we currently an- ticipate. Monetary Policy Over the first half of 2018 the FOMC has continued to gradually reduce monetary policy accommodation. In other words, we have continued to dial back the extra boost that was needed to help the economy recover from the financial crisis and re- cession. Specifically, we raised the target range for the Federal funds rate by 1⁄4per- centage point at both our March and June meetings, bringing the target to its cur- rent range of 13⁄4to 2 percent. In addition, last October we started gradually reduc- ing the Federal Reserve’s holdings of Treasury and mortgage-backed securities. That process has been running smoothly. Our policies reflect the strong performance of the economy and are intended to help make sure that this trend continues. The pay- ment of interest on balances held by banks in their accounts at the Federal Reserve has played a key role in carrying out these policies, as the current Monetary Policy Report explains. Payment of interest on these balances is our principal tool for keep- ing the Federal funds rate in the FOMC’s target range. This tool has made it pos- sible for us to gradually return interest rates to a more normal level without dis- rupting financial markets and the economy. As I mentioned, after many years of running below our longer-run objective of 2 percent, inflation has recently moved close to that level. Our challenge will be to keep it there. Many factors affect inflation—some temporary and others longer last- ing. Inflation will at times be above 2 percent and at other times below. We say that the 2 percent objective is ‘‘symmetric’’ because the FOMC would be concerned if inflation were running persistently above or below our objective. The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago. That said, they still are not rising as fast as in the years before the crisis. One explanation could be that productivity growth has been low in recent years. On a brighter note, moderate wage growth also tells us that the job market is not causing high inflation. With a strong job market, inflation close to our objective, and the risks to the out- look roughly balanced, the FOMC believes that—for now—the best way forward is to keep gradually raising the Federal funds rate. We are aware that, on the one hand, raising interest rates too slowly may lead to high inflation or financial market excesses. On the other hand, if we raise rates too rapidly, the economy could weaken and inflation could run persistently below our objective. The Committee will con- tinue to weigh a wide range of relevant information when deciding what monetary policy will be appropriate. As always, our actions will depend on the economic out- look, which may change as we receive new data. For guideposts on appropriate policy, the FOMC routinely looks at monetary pol- icy rules that recommend a level for the Federal funds rate based on the current rates of inflation and unemployment. The July Monetary Policy Report gives an up- date on monetary policy rules and their role in our policy discussions. I continue to find these rules helpful, although using them requires careful judgment. Thank you. I will now be happy to take your questions. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00044 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 41 RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN FROM JEROME H. POWELL Q.1. In response to questions at your confirmation hearing on Fed- eral Reserve efforts to increase diversity in the System, you said, ‘‘I assure you that diversity will remain a high priority objective for the Federal Reserve. Reserve banks, working closely with the Board, have also been looking at ways to further develop a diverse pool of talent in a thoughtful, strategic fashion, readying them for leadership roles through the Federal Reserve System.’’ Since you have become chair, what specific steps have you taken to encourage more diversity in the Federal Reserve System? A.1. The Federal Reserve System (System) needs people with a va- riety of personal and professional backgrounds to be fully effective in discharging its responsibilities, and we have observed that bet- ter decisions are made when there are many different perspectives represented around the table. Since 2016, my colleagues and I on the Federal Reserve Board (Board) have implemented a framework to better understand and discuss a range of Board and System ef- forts that address diversity and inclusion as well as research on economic inclusion and economic disparities in the economy. Since becoming the Chairman in February, I have worked with Board staff to refresh the framework and prioritize our focus on diversity and economic inclusion initiatives both at the Board and elsewhere in the System and have ongoing discussions with staff, including the Board’s Office of Minority and Women Inclusion (OMWI) Direc- tor, on ways to support various efforts. I continue to stress to Federal Reserve leaders and staff the im- portance of having a diverse workforce and providing an inclusive work environment to our people. System leaders have fostered a range of diversity and inclusion initiatives, including the develop- ment of leadership pipelines and ongoing engagements with our own staff and with the financial services, economic, and academic communities more broadly. Of the various efforts, I would like to highlight the following: • The System launched a leadership development initiative to provide a structured way to share information about our talent pool and to find opportunities throughout the System to more rapidly grow our talent and prepare them to take on expanded roles. • Through the Financial Services Pipeline Initiative,1 the Fed- eral Reserve Bank of Chicago is working to increase the rep- resentation of people of color in the financial services industry in the Chicago region. Over the last several months, the Re- serve Bank of Chicago has hosted events designed to develop leadership skills for high-performing people of color. • Researchers throughout the System continue to produce cut- ting-edge research on how and why disparities exist for dif- ferent demographic groups in their experiences in employment, education, and health, and in the housing and credit markets. In addition, seminars and panels about diversity and inclusion 1For more information about the Financial Services Pipeline initiative, go to: https:// www.fspchicago.org/. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00045 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 42 topics are being fostered by local leadership and employee re- source networks and are shared across the System. • Through the Opportunity & Inclusive Growth Institute,2 the Reserve Bank of Minneapolis is conducting research on struc- tural barriers that limit full participation in economic oppor- tunity and advancement in the country. The Institute looks be- yond aggregate economic indicators in order to examine how national policies impact diverse communities of people within the U.S. economy. • The Board cosponsored a Gender and Career Progression3 con- ference with the European Central Bank and the Bank of Eng- land in May of this year. There were about 140 people in at- tendance, including participants from central banks, academia, think tanks, private industry, as well as a number of local stu- dents. The topics and papers from the conference focused on gender diversity in economics, finance, and central banking, in- cluding gender-based discrimination, the benefits of increased diversity, the role of culture, and the approaches that could be used to improve gender diversity. We continue to explore ways to leverage the knowledge gained from this event for the Board, the System, and the broader economic community. The Board subsequently held a panel discussion for its employees sharing key insights from the conference. • Throughout the System, we continue to increase our outreach to local universities, with a particular focus on outreach to under-represented groups. The Board will soon be hosting Ex- ploring Careers in Economics,4 an event for high school and college students, in October. Organized to broaden awareness of careers in economics and to further develop a diverse pool of talent interested in the field, Exploring Careers in Econom- ics will offer students a chance to learn about and discuss op- portunities in economics generally, and learn about mentoring opportunities, resources, and career opportunities within the System. The agenda includes a discussion of why inclusion and diversity matter for economics. In addition to welcoming stu- dents to the Board in Washington, students from around the country will participate in this event via webcast. • The Board’s OMWI Office, in collaboration with the OMWI Di- rectors from the Office of the Comptroller of the Currency (OCC), Federal Deposit Insurance Corporation (FDIC), Na- tional Credit Union Administration (NCUA), and Consumer Fi- nancial Protection Bureau (CFPB) (collectively, the Agencies), hosted a Diversity and Inclusion Summit (Summit) on Sep- tember 13 at the Federal Reserve Bank of New York for the institutions regulated by each regulatory agency. The primary purpose of the Summit was for the Agencies’ OMW is to pro- vide feedback on submissions received from regulated entities responding to the questionnaire developed through the Policy 2For more information about the Opportunity & Inclusive Growth Institute, go to: https:// www.minneapolisfed.org/institute. 3The conference program and discussion materials are available on the Bank of England’s website at: https://www.bankofengland.co.uk/events/2018/may/gender-and-career-progression. 4For more information about the Exploring Careers in Economics event, go to https:// www.federalreserve.gov/newsevents/pressreleases/other20180823a.htm. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 43 Standards for Assessing Diversity Policies and Practices pursu- ant to section 342 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act). Additionally, an important aspect of the Summit was the dialogue and insights between representatives from the regulated entities and the OMWI Directors on leading diversity practices. Q.2. In your role as the head of the Reserve Bank Affairs Com- mittee and now as Chair of the Board of Governors of the Federal Reserve System, did you ever ask the search committees in At- lanta, Richmond, or New York for a lists of candidates under con- sideration? At any point did you urge the search committees at any of the Banks to broaden their searches to include more women or minority candidates? A.2. As the Chair of the Reserve Bank Affairs Committee, I had worked closely with the search committees to ensure a strong and transparent process that identifies a broad and diverse slate of qualified candidates for president searches. Now as Chairman of the Board, I continue to work closely with my colleague Lael Brainard, Chair of the Reserve Bank Affairs Committee, to exercise the Board’s oversight responsibility and stress the importance of conducting a broad search throughout the search process. We also recognize that the appointment of a president is, as a legal matter, a responsibility of the Class Band Class C directors. During the recent Reserve Bank president searches, the search committees proactively sought out candidates from a variety of sources. The search committees have also carried out extensive out- reach programs intended to solicit input and candidate rec- ommendations from a range of constituencies across the districts. These engagement efforts were done with the goal of having as broad and diverse of candidate pools as possible for the searches. Throughout the search process, the chair of the search committee typically provides status updates, including information about the candidate pools, and discusses potential candidates with the Chair of the Reserve Bank Affairs Committee. Q.3. What is your role, directly and indirectly, in the San Francisco Federal Reserve Bank’s search to select its next President? A.3. The San Francisco Fed announced the appointment of Mary Daly as its new president on September 14. As Chairman of the Board, I stayed abreast of the search through the Chair of the Re- serve Bank Affairs Committee. When the search committee settled on the finalist, my colleagues and I at the Board interviewed Ms. Daly. Upon final approval by all Class B and Class C directors of the Federal Reserve Bank of San Francisco, my colleagues and I at the Board voted on the Bank board’s request for approval of the appointment of Ms. Daly as the new president for the Reserve Bank. Q.4. Recently proposed legislation would override the Securities and Exchange Commission’s (SEC) 2014 reforms to money market funds. Specifically, that legislation would permit sponsors of money market funds that satisfy certain conditions to utilize a stable net asset value, or NAV. In addition, the proposal would exempt those funds from the liquidity fee requirements in the SEC’s rules. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 44 As you know, the SEC’s 2014 reforms require institutional money market funds investing in corporate or municipal debt securities to use a floating NAV and provide nongovernment money market fund boards with new tools—liquidity fees and redemption gates— to prevent runs. Those mechanisms are intended to prevent runs on money market funds and the freezing of the short-term liquidity market that occurred during the financial crisis. Nellie Liang, who served for 11 years in senior roles at the Fed- eral Reserve in the Division of Financial Stability and the Division of Research and Statistics, recently wrote an article titled, ‘‘Why Congress shouldn’t roll back the SEC’s money market rules’’ (at- tached). Ms. Liang’s article explains the market dislocation that occurred during the crisis that led to the SEC’s implementation of the 2014 reforms. Ms. Liang highlights several important improvements to the structure of money funds, explaining that during the crisis ‘‘there was no doubt that the structure of prime MMF’s amplified losses and spread problems to many companies when their inves- tors ran.’’ She concludes that the ‘‘post crisis rules aim not only to prevent a repeat of the last crisis but to reduce the probability and costs of the next one,’’ and that, ‘‘reverting to precrisis rules would risk a return to high levels of private short-term liabilities and an- other destabilizing run on money market funds, and threaten sta- bility in the financial system and the economy as a whole’’. Do you agree with Ms. Liang’s concerns that reverting to precrisis rules could create vulnerabilities in the stability of the fi- nancial system? A.4. Susceptibility of money market funds (MMFs) to runs was a significant vulnerability and flashpoint in the U.S. financial system during the financial crisis and afterwards. The run on MMFs in September 2008 destabilized wholesale funding markets used by banks, dealers, nonfinancial firms, and municipalities for short- term financing. The Securities and Exchange Commission’s (SEC) reforms were designed to mitigate these risks. In part due to these regulatory changes, funding markets have undergone significant shifts; while markets have largely adjusted to these shifts, consid- ering additional changes at this moment would likely be unhelpful to the funding markets. Q.5. In your testimony, you noted that the banking industry is well-capitalized. Recent research from the Fed system suggests that large banks may hold less capital than is optimal in terms of balancing the cost of another financial crisis with any incremental increase in bank lending rates.5 5Former Fed Chair Yellen cited research noting that ‘‘research points to benefits from capital requirements in excess of those adopted.’’ See remarks by Chair Janet L. Yellen. ‘‘Financial Sta- bility a Decade After the Onset of the Crisis’’. Speech at the ‘‘Fostering a Dynamic Global Recov- ery’’ Symposium Sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo- ming, August 25, 2017. Available at: https://www.federalreserve.gov/newsevents/speech/ yellen20170825a.htm; Firestone, Simon, Amy Lorenc, and Ben Ranish, ‘‘An Empirical Economic Assessment of the Costs and Benefits of Bank Capital in the U.S.’’, Board of Governors of the Federal Reserve System, 2017. Available at: https://www.federalreserve.gov/econres/feds/files/ 2017034pap.pdf; Federal Reserve Bank of Minneapolis, ‘‘The Minneapolis Plan To End Too Big To Fail’’, December 2017. Available at: https://www.minneapolisfed.org/-/media/files/publica- tions/studies/endingtbtf/the-minneapolis-plan/the-minneapolis-plan-to-end-too-big-to-fail- final.pdf?la=en. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00048 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 45 What do you think of this research? Do G–SIBs need to hold ad- ditional capital? A.5. Maintaining the safety and soundness of the largest U.S. banks is critical to maintaining the stability of the U.S. financial system and the broader economy. These firms must be well-capital- ized in order to be considered safe and sound. Accordingly, the U.S. banking agencies have substantially strengthened regulatory cap- ital requirements for large banking firms, thereby improving the quality and increasing the amount of capital in the banking sys- tem. From before the crisis to today, large U.S. banking firms have roughly doubled their capital positions, making them significantly more resilient, as well as able to support lending and financial intermediation in times of financial stress. Firestone et al., the staff working paper that you cite, analyzes aggregate capital levels across the U.S. banking sector and does not address targeted capital requirements that apply to specific banks. A firm identified as a global systematically important bank (G– SIB) is currently subject to more stringent capital requirements than those required of other, less systemic firms. Under the Federal Reserve’s final G–SIB surcharge rule, a G– SIB is required to hold an additional amount of risk-based capital that is calibrated to its overall systemic risk as well as an addi- tional supplementary leverage ratio buffer of 2 percent above the 3 percent minimum in order to avoid restrictions on distributions and certain discretionary bonus payments. G–SIBs, together with certain other large banks, also are subject to annual examination of capital planning practices through the Federal Reserve’s Com- prehensive Capital Analysis and Review (CCAR) and to a super- visory stress test. Finally, G–SIBs are required to maintain min- imum levels of unsecured, long-term debt and total loss-absorbing capacity (TLAC), which is made up of both capital and long-term debt, in order to further help reduce the systemic impact of the fail- ure of a G–SIB. The purpose of these more stringent requirements is to increase a G–SIB’s resiliency in light of the greater threat it poses to U.S. financial stability. This capital regulatory framework is designed to ensure that G–SIBs, as well as the banking industry as a whole, maintain strong capital positions. Q.6. When asked at the July 17 hearing about your plans to imple- ment S. 2155, you said it is your intention ‘‘implement the bill as quickly as we possibly can.’’ Does that mean you are going to move to the rulemakings and implementation of S. 2155 before you finish the remaining unfinished rulemakings required by the Wall Street Reform and Consumer Protection Act enacted 8 years ago? A.6. Many of Economic Growth, Regulatory Relief, and Consumer Protection Act’s (EGRRCPA) changes require amendments to exist- ing rules. The Board is working expeditiously on these rulemakings and plans to solicit public comment on the proposed rule changes. EGRRCPA includes a number of statutory deadlines for imple- menting certain sections of the law. It is our intention to prioritize rulemakings with statutory deadlines in order to ensure that the Board’s rules are compliant with the law in the timeframe man- dated by Congress. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00049 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 46 The Board has implemented the majority of its assigned provi- sions from the Dodd–Frank Act. Sections of EGRRCPA, along with the remaining unimplemented sections of the Dodd–Frank Act, which do not have statutory deadlines, may take longer to com- plete. Q.7. Does the Fed view any provisions in S. 2155 as providing a statutory requirement to revisit or recalibrate the enhanced pru- dential standards applicable to bank holding companies with more than $250 billion in total consolidated assets? A.7. One of the fundamental lessons from the financial crisis was that the largest, most interconnected financial firms needed to maintain substantially more capital, take substantially less liquid- ity risk, and face an effective orderly resolution regime if they fail. Firms with assets of $250 billion or more can present a range of safety and soundness and financial stability concerns. Therefore, the Board has tailored, and will continue to tailor, as appropriate, our regulations to the risk profiles of the firms subject to those reg- ulations. In light of EGRRCPA’s amendments, and consistent with the Board’s ongoing refinement and evaluation of its supervisory pro- gram, the Board is evaluating whether any changes to the en- hanced prudential standards applicable to bank holding companies with more than $250 billion in total consolidated assets are appro- priate. In doing so, the Board will consider individual firms’ capital structure, riskiness, complexity, financial activities (including the financial activities of their subsidiaries), size, and any other risk- related factors that the Board deems appropriate, as provided in EGRRCPA. Q.8. Either pursuant to S. 2155 or pursuant to other authority con- ferred to the Fed, does the Board intend to alter the threshold at which foreign banking organizations must establish a U.S. Inter- mediate Holding Company? Does the Fed intend to provide any regulatory relief to foreign banking organizations that have more than $50 billion in domestic assets? If so, what regulatory relief is the Fed planning to propose? A.8. Pursuant to the Board’s regulations, foreign bank organiza- tions (FBOs) with global assets of at least $100 billion and U.S. nonbranch assets of at least $50 billion are required to establish or designate a U.S. intermediate holding company (IHC). In our su- pervisory experience, the requirement to establish an IHC has worked effectively, providing for appropriate application of capital, liquidity, and other prudential requirements across the U.S. non- branch operations of the FBO, as well as a single nexus for risk management of those U.S. nonbranch operations. The Board pres- ently sees no reason to modify this threshold. We continue to re- view our regulatory framework to improve the manner in which we deal with the particular risks of FBOs in light of the distinct char- acteristics of such institutions. Q.9. Does the Fed have any economic evidence suggesting that the recently enacted tax bill, S. 2155, or any deregulation finalized by regulators since 2017 has benefited the overall economy through in- creased lending? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00050 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 47 A.9. Economic conditions remain strong. Gross domestic product growth thus far this year is estimated to have averaged a little above 3 percent at an annual rate. Households and businesses have been able to obtain the financing needed to support this growth. Fi- nancial institutions are well-positioned to meet the needs of bor- rowers. However, it is too early to determine the economic effects of the tax bill or recently implemented changes in regulation. Gen- erally speaking, it is difficult to isolate the effects of such changes given the myriad factors influencing the economy. Q.10. Does the Fed intend to revisit the calculation of the G–SIB surcharge? If so, when and in what ways? A.10. The Board’s capital rules have been designed to reduce sig- nificantly the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organiza- tion and the consequences of such a failure, were it to occur. Cap- ital rules and other prudential requirements for large banking or- ganizations should be set at a level that protects financial stability and maximizes long-term, through-the-cycle, credit availability and economic growth. Consistent with these principles, the Board origi- nally calibrated the G–SIB surcharge so that—given the cir- cumstances of the financial system—each G–SIB would hold enough capital to lower its probability of failure so that the ex- pected impact of its failure on the financial system would be ap- proximately equal to that of a large non- G–SIB. The bulk of the postcrisis regulation is largely complete, with the exception of the U.S. implementation of the recently concluded Basel Committee agreement on bank capital standards. It is there- fore a natural and appropriate time to step back and assess those efforts. The Board is conducting a comprehensive review of the reg- ulations in the core areas of postcrisis reform, including capital, stress testing, liquidity, and resolution. The objective of this review is to consider the effect of those regulatory frameworks on the resil- iency of the financial system, including improvements in the resolv- ability of banking organizations, and on credit availability and eco- nomic growth. In general, I believe overall capital for our largest banking orga- nizations is at about the right level. Critical elements of our capital structure for these organizations include stress testing, the stress capital buffer, and the enhanced supplementary leverage ratio. Work is underway to finalize the calibration of these fundamental building blocks, all of which form part of the system in which the G–SIB surcharge has an effect. In this regard, I would note that the G–SIB surcharge rule does not take full effect until January 2019. Q.11. When does the Fed intend to finalize a 2016 proposed rule- making related to bank holding companies’ allowable activities in physical commodities markets? A.11. The Board undertook a review of the physical commodities activities of financial holding companies after a substantial in- crease in these activities during the financial crisis. In January 2014, the Board invited public comment on a range of issues re- lated to these activities through an advance notice of proposed rule- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 48 making. In response, the Board received a large number of com- ments from a variety of perspectives. The Board considered those comments in developing the proposed rulemaking that was issued in September 2016. The proposed rule- making would address the potential catastrophic, legal, and reputational risks of financial holding companies’ (FHC) physical commodities activities by applying additional risk-based capital re- quirements to some of these activities; tightening some of the exist- ing limitations on physical commodities trading by FHCs; and es- tablishing new reporting requirements for physical commodities holdings and activities of FHCs. Under the proposal, FHCs would be permitted to continue to engage in a number of physical com- modities trading activities with end users subject to new limits on physical commodities trading activities. After providing an extended comment period (150 days) to allow comm enters time to understand and address the important and complex issues raised by the proposal, the Board again received a large number of comments from a variety of perspectives, including Members of Congress, academics, users and producers of physical commodities, and banking organizations. The Board continues to consider the proposal in light of the many comments received. Q.12. At the July 17 hearing, when asked when the Fed will final- ize the rulemaking required under Dodd–Frank related to incen- tive-based compensation at large bank holding companies, you stat- ed that the interagency regulators have been unable to reach con- sensus and that the Fed has accomplished some of the goals of the rulemaking through the supervisory process. Please provide specific examples. A.12. Section 956 of the Dodd–Frank Act5 prohibits incentive- based compensation arrangements that encourage inappropriate risks. Federal Reserve staff have worked with firms in the imple- mentation of the 2010 Federal Banking Agency Guidance on Sound Incentive Compensation Policies,6 a core principle of which is that incentive compensation should appropriately balance risk and re- ward. In so doing, Federal Reserve staff have observed improve- ment in incentive compensation practices in the following areas: • Risk adjustment: Firms have increasingly begun adjusting compensation to more appropriately take into account the risk an employee’s activities may pose to the organization, includ- ing through use of deferral and forfeiture features in com- pensation arrangements. Firms also have increasingly focused on nonfinancial risk (e.g., compliance failures, misconduct, and operational challenges) in risk adjustment decisions. • Involvement of risk management and control personnel: Risk management and control personnel generally play a greater role in the design and operation of incentive compensation pro- grams than before the financial crisis. • Director oversight: Boards of directors are now increasingly fo- cused on the relationship between incentive compensation and risk. For example, at the board level, finance and audit com- 5Public Law 111-203, 124 Stat. 1376 (2010). 675 Federal Register 36395. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00052 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 49 mittees generally work together with compensation committees with the goal of promoting prudent risk-taking. • Policies and procedures: Firms have increasingly developed written policies and procedures to guide managers in making appropriate risk adjustments. Q.13. What is the your view on the Fed’s role as the consolidated Federal regulator for insurance companies that have a savings and loan holding company? A.13. The Federal Reserve is charged with consolidated supervision of savings and loan holding companies to promote the safety and soundness of the subsidiary insured depository institution (IDI) and the holding company. Our principal supervisory objectives for consolidated supervision of insurance savings and loan holding companies (ISLHCs) are to ensure that they operate in a safe-and- sound manner so that the subsidiary insured depository institution is protected from risks related to nonbanking activities, including insurance, as well as intercompany transactions between the par- ent and IDI, and to ensure that the IDI is not adversely affected. To avoid duplication, we rely on the State insurance departments to the greatest extent possible, including their supervision of the business of insurance. In applying our consolidated supervision, we work to ensure that regulations, supervisory guidance, and expec- tations are appropriately tailored to account for the unique com- plexities and characteristics of ISLHCs. We remain committed to tailoring our supervision of ISLHCs to the firms and their insur- ance operations, as well as conducting our consolidated supervision of these firms in coordination with State insurance regulators. Moreover, the Board continues to welcome feedback from ISLHCs and other interested parties on the potential impact of our super- vision and proposed rulemakings in the context of ISLHCs’ busi- ness and practices. Q.14. Vice Chair Quarles recently gave a speech suggesting that the Fed should ‘‘consider scaling back or removing entirely resolu- tion planning requirements for most of the firms’’ in the $100 bil- lion to $250 billion total consolidated asset range. Please describe further the Fed’s plans in this regard, along with any cost-benefit analysis suggesting that the economy would benefit from such a change. How does the Fed view the directive in S. 2155 that company- run and certain supervisory stress tests be made ‘‘periodic’’ rather than semi-annual or annual? Does the Fed anticipate changing the frequency of stress tests for banks with more than $250 billion in total consolidated assets? A.14. Consistent with the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA), the Board is considering the application of enhanced prudential standards, including resolution planning requirements, to firms in the $100 billion to $250 billion total consolidated assets range. Resolution planning is especially critical to ensure that the largest, most complex, and most inter- connected banking firms structure their operations in ways that make it more possible for them to be resolved upon failure without causing systemic risks for the broader economy. The Board there- fore anticipates focusing resolution planning requirements on these VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 50 firms. Firms with total assets between $100 billion and $250 bil- lion, especially those that are less complex and less interconnected, do not pose a high degree of resolvability risk. Therefore, we should consider no longer imposing the resolution planning requirement on at least a subset of the firms with total assets between $100 bil- lion $250 billion. The Board will solicit feedback, including feed- back on costs and benefits, on any proposed changes to the applica- bility of resolution planning requirements through the public notice and comment process. The provisions of EGRRCPA are generally consistent with the Board’s view that supervision and regulation should be appro- priately tailored to the risks posed by firms to the financial system. The Board also recognizes that the complexity of banks can vary significantly from bank to bank, even for institutions within the $100 billion to $250 billion group. Those banks, which provide a significant amount of credit to the economy, range from large re- gional banks to an institution that has been designated a system- ically important financial institution given its size and complexity. That suggests we may need to consider factors beyond size when we consider whether it is appropriate to reduce the frequency of the stress test. Pursuant to the provisions of EGRRCPA, the Board will assess the necessary and appropriate frequency of supervisory and com- pany-run stress tests to effectively ensure the safety, soundness, and resiliency of the financial system while concurrently mini- mizing regulatory burden. In general, firms that pose limited risk to financial stability would be expected to be subject to less fre- quent supervisory and company-run stress tests than those with a large systemic footprint. Of course, we would invite public comment on any proposal to change the frequency of the stress test. Q.15. Does the Fed intend to exempt any firms from the require- ment to calculate risk-weighted assets according to Advanced Ap- proaches? A.15. The Board is currently focused on ways to simplify the exist- ing capital rules and to reduce any unwarranted complexity of the applicable capital requirements overall, rather than on considering exemptions for particular firms. The Board believes there is room to simplify the capital framework, while preserving the stringency of the overall capital requirements. The Board is also actively re- viewing the requirements applicable to firms with more than $250 billion in total assets to make sure they are appropriately tailored to the firms to which they are applied. Q.16. How does the Fed’s planned rulemaking regarding ‘‘reach back’’ application of enhanced prudential standards anticipate ex- peditiously capturing quickly growing firms whose risk to the econ- omy may rapidly escalate? For example, Countrywide grew from $26 billion in total consolidated assets in 2000 to $211 billion in 2007, and posed systemic threat to the economy. A.16. EGRRCPA tailors supervisory requirements to the size and complexity of banking organizations. As is reflected in EGRRCPA, regulations should be the most stringent for the largest and most complex institutions. Rulemakings proposed by the Board to tailor existing requirements would be designed to maintain a safe, sound, VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00054 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 51 and stable banking system that supports economic growth without imposing unnecessary costs. Under this principle, if a bank grows in size and complexity, the Board’s regulatory framework would apply increasingly stringent requirements to that banking organi- zation commensurate with the organization’s size and complexity. Q.17. In what ways, if any, does the Fed intend to revamp the Community Reinvestment Act (CRA)? A.17. The Federal Reserve supports modernizing the Community Reinvestment Act (CRA) regulations so that they better reflect structural and technological changes in the banking industry and strengthen the rules to help address the credit needs of low- and moderate-income communities. We think an Advance Notice of Pro- posed Rulemaking (ANPR) is a good starting point to gather input on the impact of the significant advancements in technology and other changes in the financial services marketplace since the regu- lations were last revised. We value input from all stakeholders on the impact of the significant advancements in technology and other changes in the financial services marketplace since the regulations were last revised. We look forward to reviewing suggestions that result from the OCC’s ANPR on possible refinements to CRA regu- lations. While there are many positive aspects of the current regulations, we believe that there are opportunities to improve clarity and con- sistency through modernization efforts, which would benefit both banks and the communities they serve. The Board also believes that revised regulations should recognize that banks vary widely in size and business strategy and serve communities with different credit needs. An interagency modernization process is also an op- portunity to define ways to evaluate a bank’s CRA performance in light of its size, business strategy, capacity, and constraints, as well as its community’s demographics, economic conditions, and credit needs and opportunities. To this end, more metrics could provide clarity. It is important that the use of metrics is sufficiently re- sponsive to local credit needs and account for differences in per- formance expectations based on a bank’s size, business model, and strategy. The Board values the interagency process, and we look forward to working with the OCC and the FDIC on any regulatory revisions that would promote consistency in the implementation of CRA across the industry, as well as offer the greatest impact to benefit reinvestment in local communities, consistent with the spirit and intent of the law. Q.18. Assessment Areas under CRA are geographical areas where bank performance is evaluated on CRA exams. Currently, these areas include bank branches and deposit-taking ATMs. Many banks are making loans outside of branch networks, using alter- native delivery channels including the Internet. Has the Federal Reserve given thought to changing the definition of Assessment Areas to reflect the changing landscape of banking? A.18. Yes. The central focus of the law is on a bank’s affirmative obligation to meet the credit needs of the communities it serves, in- cluding low- and moderate-income communities, consistent with safe-and-sound lending. The Board believes it is time to modernize VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00055 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 52 the regulations, including making changes to the definition of a bank’s ‘‘assessment area,’’ in which its CRA performance is evalu- ated. The banking environment has changed significantly since CRA’s enactment and since the current CRA regulation was adopted. The regulation focuses on assessing performance where banks have branches, but many banks may now serve consumers in areas far from their physical branches. Therefore, the Board agrees that it is sensible for the agencies to consider expanding the assessment area definition to reflect the various ways a bank can serve local communities, while retaining the core focus on place. Q.19. Comptroller Otting, during Committee testimony in June, suggested reducing CRA performance measurement to a simple for- mula system comparing the sum of CRA activities to bank assets. Making this ratio the totality of a CRA exam would abandon cur- rent examination weights which judge certain activities as more important than others, based on local needs. Do you support this single ratio approach? A.19. We support updating the CRA regulations to make them more effective in making credit available in low- and moderate-in- come areas. In enforcing CRA, we have identified principles to guide our work. For example, the Board believes that revised regu- lations should be tailored recognizing that banks vary widely in size and business strategy and serve communities with widely varying needs. We believe this can be done while retaining the flexibility to evaluate a bank’s CRA performance in light of its size, business strategy, capacity, and constraints as well as its commu- nity’s demographics, economic conditions, and credit needs and op- portunities. We recognize the importance of considering the ways in which a bank’s business strategy, no matter its size, influences the types of activities it undertakes to meet its CRA obligations. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00056 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 53 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00057 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.10181717 Why Congress shouldn '1 roll back !he SEC's money marl<< I rules hlq>s:/lwww.brooking;.<dulbloglup-fionii2018/0I/121why-<Oilgress-shou. .. BROOKINGS Why Congress shouldn't roll back the SEC's money market rules Nellie Liang Friday, January 12, 2018 A t the height of the financial crisis in 2008, the Primary Reserve Fund ran into triggering a run on money market mutual funds. Investors pulled nearly $450 out of prime money market funds (MMFs) in just a few weeks, causing the fun stop lending to big banks and industrial giants General Electric and Ford and endangering their ability to promptly meet payrolls and other bills. The government responded, quickly and creatively, with both a guarantee for existing MMF investors to stop the run, as well as an emergency liquidity facility, the Commercial Paper Funding Facility, to provide financing to companies that lost their access to short-term funds amid the turmoil. In 2014, the Securities and Exchange Commission changed the rules for money market funds so this would never happen again. Those rules are working well. But some in the industry want Congress to undo them. That would be a mistake. Before the crisis, prime MMFs (those permitted to invest in short-term IOUs issued by borrowers other than governments) were allowed to promise investors $1 for their shares even when the value of their portfolios fell below $1 a share. If values fell to less than $0.995 a share, the fund could no longer round up to $1, and a board could close a fund. Unlike banks, the money market funds weren't required to hold capital or insurance to back up their $1 promise-even though they were investing in securities that fluctuated in value. This structure created a classic investor run problem similar to the runs that banks faced before the creation of deposit insurance in the 1930s. Investors who believe the value of the investments will fall to less than $1 have an incentive to pull out their funds before others. The first investors to withdraw money will receive $1 per share. Those who wait will get only the Oower) market value-often with a delay. As investors run for the exits, funds sell assets to meet these redemptions. The sales cascade through the economy, pushing down the price I ofS 7124nOI8, 1:19PM 54 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00058 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.20181717 Why Congrw shouldn'l roll back lhe SEC'.s money !llirk<l rulos hnps'ilwww.broo'r.ings.edulbloglup-frool/2018/0I/12iwlly.<on8f,...•hou ... of these assets and forcing big companies who borrow from money market funds to scramble for funding, making the problem worse. In 2010, the SEC tightened the rules to reduce the credit and liquidity risk of the assets that prime money market mutual funds could hold. The SEC also required greater disclosure of the assets, but the rules cannot eliminate the risk of price fluctuations and thus the incentive for investors to be the first out the door. So in 2014, the SEC changed the rules, which ultimately took effect in October 2016. Today, the value of both prime money market shares and shares of municipal tax-exempt securities sold to institutional investors float with the value of the securities in their portfolios. (The rules didn't apply to money market funds sold to retail investors.) Funds that invest in U.S. Treasury and other sovereign securities were permitted to maintain the fixed $1/share value. Since the rules went into effect, short-term markets have been functioning smoothly-and in a much less risky environment. Anticipating the change, some money market investors moved money from institutional prime funds and tax-exempt funds to funds that invested in less risky Treasury and government securities. The total amount of money invested in money market funds-nearly$:> trillion-did not change. It just shifted from riskier prime investments to more stable government funds that can maintain the $1/sharevalue. 2ofS 712412018, I:S9 PM 55 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00059 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.30181717 Why Coogrcss sllouldn '1r oll bock the SEC'; moo<y" "11<<1 rules hllp11/\\ww.brool<ing<«<ulblogl•p-fnl<llfl018101112/llily<OIIgrcss·sllou. .• Money Market Mutual Fund Assets by Type of Fund 12113/IS IQI31Ml Source: Securities and Evchange Commission Moreover, the shift has not led to any notable disruptions in short-term funding markets. The commercial paper market, an important source of short-term funding for large corporations, remains at roughly $1 trillion outstanding, after having shrunk dramatically in the financial crisis. Nonfinancial companies have been increasing their commercial paper outstanding, despite the drop in prime MMF assets, and are issuing at spreads that have remained quite low. JofS 712412018. 1:59PM 56 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00060 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.40181717 Wloy Congress shouldn· , roll back lh< SEC's ""'~Y nwi<« rul<s hllp;:IA"'w.brookins><dufblogluf>fronlf201S/Olll:!lwhy«>ngress·shou ... Commercial Paper Outstanding Source: Federal ReseiVe Board 4cfS 71'...11201S.I:59PM 57 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00061 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.50181717 Why Congr<ss <l10111dn ·,roll bac~ the SEC's money m•r!:et rules hupsJ/Miw.brookings.<dulblog/up-frontllOIS'OI/l:!lwhr<OIIgrCSS·<Iiou. .. Overnight CP Spreads, NonfinanciallO day moving average 0.7 0.6 0.5 0.4 0.3 .0.2 .0.3 0!112107 03113111 06/13114 01109118 Source: Federal Reserve Board Most big money managers adjusted to the new rules, but a few-apparently unhappy that the changes have cut into their revenues-are pushing Congress to undo them. These managers want to allow institutional prime and tax-exempt funds to once again be able to promise to redeem shares at $!/share, even when they hold risky assets. Their argument is that these funds didn't cause the financial crisis and reforms have gone too far. But there is no doubt that the structure of prime MMFs amplified losses and spread the problems to many companies when their investors ran. Prime MMFs that promise a fixed $1 are a source of systemic risk. Post-crisis rules aim not only to prevent a repeat of the last crisis, but to reduce the probability and costs of the next one. Reverting to pre-crisis rules would risk a return to high levels of private short-tem11iabilities and another destabilizing run on money market funds, and threaten stability in the financial system and the economy as a whole. Sofl 7/2li201S.I:59 PM 58 RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORKER FROM JEROME H. POWELL Q.1. The Federal Housing Finance Agency (FHFA) has proposed a new regulatory capital framework for the Federal National Mort- gage Association and the Federal Home Loan Mortgage Corpora- tion (each, an ‘‘enterprise’’). See Proposed Rule, Enterprise Capital Requirements (83 Federal Register 33,312) (Jul. 17, 2018). FHFA’s proposed rule contemplates that the credit risk transfers (CRT) of the enterprises would provide capital relief. Id. at 33,356. Accord- ing to FHFA, with respect to capital relief for CRT, ’’the proposed approach is analogous to the Simplified Supervisory Formula Ap- proach (SSFA) under the banking regulators’ capital rules applica- ble to banks, savings associations, and their holding companies.’’ Id. at 33,358. But FHFA also acknowledges that ‘‘the proposed ap- proach deviates from the SSFA in that it: (i) [p]rovides for a more refined view of risk differentiation across transactions by account- ing for differences in maturities between the CRT and its under- lying whole loans and guarantees, and (ii) docs not discourage CRT transactions by elevating aggregate post-transaction risk-based capital requirements above risk-based capital requirements on the underlying whole loans and guarantees.’’ Id. What are the material differences between (i) the rules governing the capital relief afforded a CRT of an enterprise under FHFA’s proposed rule and (ii) the rules governing the asset credit, liability reduction or other capital relief afforded a similar transaction of a banking organization under the rules of the Board of Governors of the Federal Reserve System (the Board)? A.1. The Federal Housing Finance Agency’s (FHFA) proposal on ‘‘Enterprise Capital Requirements’’ recognizes the risk mitigation effects of credit risk transfers (CRTs). CRTs are transfers of credit risk from Fannie Mae and Freddie Mac on a portion of their loan portfolio to private sector investors. If CRTs meet certain quali- fying criteria, Fannie Mae and Freddie Mac are able to reduce the amount of capital held against those portfolios. The treatment for CRTs proposed by the FHFA is tailored for two types of products: single-family home loans and multifamily loans. These products have standardized characteristics that are incorporated in the FHFA’s proposed approach for risk weighting these exposures. The regulatory capital rule, adopted by the Federal Reserve Board of Governors, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (collectively, ‘‘bank- ing agencies’’), similarly recognizes credit risk mitigation effects of credit risk transfers and allows a banking organization to assign a lower risk weight to an exposure. However, relative to the ap- proach proposed by the FHFA, the banking agencies’ capital rule recognizes credit risk mitigation for a much broader variety of ex- posures. The banking agencies’ approach for recognizing credit risk trans- fer through a securitization needs to be flexible enough to accom- modate a wide variety of securitized asset classes without stand- ardized characteristics. The approach may require more capital on a transaction-wide basis than would be required if the underlying assets had not been securitized, in order to account for the com- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00062 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 59 plexity introduced by the securitization structure. Furthermore, the banking agencies’ capital rule requires banking organizations to meet certain operational requirements. An inability by a banking organization to meet these operational requirements may lead to higher risk weighting, relative to the FHFA’s proposed approach. Q.2. Does the Board expect to consider FHFA’s approach to capital relief for CRT, and also the experience of the enterprises with CRT, when the Board next reviews its own rules governing the capital relief afforded to banking organizations for CRT and similar trans- actions? A.2. The FHFA’s proposal is specifically designed for Fannie Mae and Freddie Mac and their specialized lending purposes. The FHFA has calibrated its proposed capital requirements and tailored its credit risk mitigation rules to two specific categories of exposures: single-family home loan and multifamily loan portfolios. Banks have a wider variety of exposures than Fannie Mae and Freddie Mac. Thus, banks require a different calibration of capital requirements and a more general set of rules governing the rec- ognition of credit risk mitigation. RESPONSES TO WRITTEN QUESTIONS OF SENATOR COTTON FROM JEROME H. POWELL Q.1. International Organizations. Background: The Federal Reserve has membership in several international standard-setting bodies. Among them are the Bank for International Settlements (BIS) and the Financial Stability Board (FSB). These standard-setting bodies provide opportunities to push U.S. interests and greater regulatory harmonization globally. The level of participation by the Federal Reserve going forward is unclear. The question is intended to give Chairman Powell an opportunity to describe his vision for the Fed- eral Reserve’s participation in these international organizations. Chairman Powell, the Federal Reserve has traditionally played an important and active role in international standard-setting bod- ies such as the Bank for International Settlements (BIS) and the Financial Stability Board (FSB). This has been important for both representing the interests of the United States and promoting poli- cies that benefit the global financial system. In the Treasury De- partment’s first report to the President on financial regulatory re- form, it advocated for robust U.S. engagement in international fi- nancial regulatory standard-setting bodies as a way to ‘‘promote fi- nancial stability, level the playing field for U.S. financial institu- tions, prevent unnecessary regulatory standard-setting that could stifle financial innovation, and assure the competitiveness of U.S. companies and markets . . . .’’ The Treasury Department rec- ommended in its report that U.S. regulators advocate for inter- national regulatory standards that are aligned with U.S. interests. As Chairman, what will be your top priorities when representing the United States in international standard-setting bodies such as BIS and FSB? A.1. One of our top priorities in international standard setting bod- ies is to consolidate the financial reform gains we have achieved globally. These include a responsible increase in bank capital VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 60 standards, introduction of liquidity standards, recovery and resolu- tion planning for the most globally active and systematically impor- tant banks, and mandates to increase incentives for financial firms to centrally clear derivatives. As we get further from the financial crisis, it will become easier to forget the reasons for which we took actions to strengthen significantly the prudential framework for banks and global financial stability. Therefore, it is important that the United States, with its large number of globally active financial firms, continue to play a central role in reenforcing this message at the international level. At the same time, we believe now is an appropriate time to evaluate the reforms to ensure that they are working as efficiently and effectively as they can and do not give rise to adverse incen- tives. The evaluation work, already underway, may lead us to ad- just various standards to achieve these objectives while maintain- ing the strength and resiliency of the system. Q.2. Can you describe the work you hope to accomplish or new ini- tiatives you hope to pursue in BIS, FSB and other relevant inter- national standard-setting bodies? A.2. One priority is to finalize the bank capital framework for trad- ing activities. Strong standards are necessary for these activities as trading activities facilitated many of the riskier bank practices that led to the crisis. At the same time, it is important to ensure that these standards are well-crafted in order to avoid adverse effects on market liquidity. The international standard-setters are also working to build up financial firms’ resiliency to operational risks, including those emanating from cyber-risks. These risks are some of the most important risks that financial firms face today. These international efforts are aimed at ensuring that we have common terminology to discuss these risks and have a common set of expec- tations for firms’ resiliency in the face of operational risk incidents. Q.3. EU. Background: Legislative bodies in Europe are considering draft revisions to the European Market Infrastructure Regulation (EMIR) that would bring U.S.-based and other third-country cen- tral counterparties (CCPs) under the regulation and supervision of the EU for the first time. The proposed changes would expand the European Securities and Markets Authority’s (ESMA) and the Eu- ropean System of Central Banks’ supervisory authority over third- country CCPs, including U.S. CCPs, that are recognized to do busi- ness in Europe. EMIR’s stated purpose for making these changes is to address the potential risks that third-country CCPs could pose to the EU’s financial system. These changes could also reopen a 2016 equivalence agreement for derivatives clearinghouse super- vision between the CFTC and the EU authorities. CFTC Chairman Giancarlo has expressed significant concerns regarding the poten- tial impact this proposed legislation could have on U.S. CCPs. In recent testimony before the U.S. Senate Agriculture Committee, Chairman Giancarlo stated that ‘‘regulatory and supervisory def- erence needs to remain the key principle underpinning cross border supervision of CCPs. Deference continues to be the right approach to ensure that oversight over these global markets is effective and robust without fragmenting markets and trading activity.’’ The question is intended to determine how Chairman Powell’s intends VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 61 to address this issue and whether his views align with that of other U.S. regulators. The European Union is considering legislation that, for the first time, would permit EU regulators, including the European Central Banks, to directly supervise systemically important U.S.-based and other third-country CCPs, including U.S. CCPs in the securities and derivatives markets. This approach itself could pose risks and potentially interfere with the Federal Reserve’s ability to ensure its policies are being effectuated without interference by EU super- visors. The U.S. Congress and regulators have chosen to not take this approach and instead adhere to the long-standing principal of regulatory deference. How do you plan to address this situation as Chair? The proposed legislation (EMIR 2.2) would subject U.S. CCPs to overlapping EU regulation and supervision without deferring to U.S. regulators that oversee these entities; namely, the Federal Re- serve, SEC, and CFTC. Do you share CFTC Chairman Giancarlo’s concerns about this proposal? If so, are you coordinated in your po- sition and messaging to the EU? A.3. The U.S. central counterparties (CCPs) that may potentially fall within the scope of the proposed European Union (EU) legisla- tion to amend the European Market Infrastructure Regulation in- clude those designated as systemically important financial market utilities (DFMUs) by the Financial Stability Oversight Council under Title VIII of the Dodd–Frank Wall Street Reform and Con- sumer Protection Act (Dodd–Frank Act). The Commodity Futures Trading Commission and the Securities and Exchange Commission are the supervisory agencies with primary responsibility for super- vising and regulating these firms. The Federal Reserve Board (Board) plays a secondary role in the oversight of these CCPs under Title VIII of the Dodd–Frank Act. The proposed EU legisla- tion has more direct implications for the primary supervisors of these firms, and those agencies are actively involved in a dialogue with EU authorities. To date, Board staff has worked to educate EU authorities on the legal framework created by Title VIII, ex- plained the nature of the Board’s role in the oversight of DFMUs, pointed out differences considered in the proposed EU legislation, and expressed support for cooperation among authorities. The Board has a long-standing policy objective to foster the safe- ty and efficiency of payment, clearing, and settlement systems and to promote financial stability, more broadly.1 In that policy, the Board has set out its views, and related standards, regarding the management of risks that financial market infrastructures, includ- ing CCPs, present to the financial system and the Federal Reserve Banks. It has also described how it will engage cooperatively with authorities with direct responsibility for particular CCPs located outside of the United States. As a central bank, the Federal Reserve has a particular interest in liquidity issues. As far as liquidity risks are concerned, it is im- material whether a CCP is based in the United States or abroad so long as it clears U.S. dollar denominated assets and makes and 1See, Federal Reserve Policy on Payment System Risk: https://www.federalreserve.gov/ paymentsystems/files/psrlpolicy.pdf. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00065 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 62 receives U.S. dollar payments. The current EU legislative proposal outlines that the European Commission, in consultation with the European Securities and Markets Authority and the relevant EU member central bank, may determine a third country CCP to be of such systemic importance to the EU that the only way to mitigate the risks posed would be for that CCP to establish its clearing busi- ness within the EU. This aspect of the proposed legislation pre- sents a risk of splintering central clearing by currency area, which could fragment liquidity and reduce netting opportunities. Given the extensive cross-border nature of the firms potentially covered by the proposed EU legislation, we support the EU and U.S. au- thorities’ efforts to search for cooperative solutions to these issues that promote CCP resilience while upholding the aims of both U.S. and international authorities. RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS FROM JEROME H. POWELL Q.1. Supervising large, globally active banking organizations—such as those covered by the Federal Reserve’s Large Institution Super- vision Coordinating Committee (LISCC)—are among your agency’s most important responsibilities. While LISCC supervision tradi- tionally relates to areas such as lending, credit risk, and capital and liquidity risk, many of the strategic and operational risks that larger banks manage are in areas unrelated to traditional banking services and functions. My concern is that as these areas become a larger potential source of risk, supervisory teams may not have the technical exper- tise to properly oversee these complex financial institutions and may in fact be tempted to substitute their judgement rather than apply bright line regulations. In fact, if regulators without tech- nical expertise begin to substitute their judgement for that of bank management in these areas, this could lead to increased systemic risk. How do you make certain that your field supervisory teams pos- sess the requisite amount of technical experience in areas like cy- bersecurity, technology, incentive compensation planning, and human resources management to oversee banks in the LISSC port- folio? Do you agree that supervisory staff should not substitute their judgment on such matters of general corporate strategy, especially when they do not have the requisite technical expertise? A.1. As you note, supervising Large Institution Supervision Coordi- nating Committee (LISCC) firms is one of the most important re- sponsibilities of the Federal Reserve. The purpose of this super- vision is to ensure that these firms operate in a safe-and-sound manner, consistent with U.S. financial stability. The Federal Re- serve conducts supervision of LISCC firms by assessing the ade- quacy of firms’ capital and liquidity positions, effectiveness of reso- lution and recovery planning, the strength of risk management, governance and controls, and compliance with laws and regula- tions, including those related to consumer protection. All areas of supervision—including quantitative assessments—require some amount of judgment. Supervisors undergo extensive training to en- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00066 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 63 sure that this judgment is exercised in a fair and consistent man- ner that furthers the safety and soundness of the supervised firms. While the Federal Reserve has significant experience in evalu- ating lending, credit risk, and capital and liquidity risk, it also has a depth of experience in evaluating strategic and operational risks. We assess these risks by considering the effectiveness of boards of directors, senior management oversight, reporting quality, inde- pendent risk management, and internal audits, among others. As needed, the Federal Reserve develops or hires personnel with the necessary expertise. In all technical areas, the Federal Reserve uses both quantitative and qualitative analysis to assess the strength of firms’ practices.1 We also use cross-firm comparative analysis, commonly referred to as horizontal analysis, to ensure that our assessments reflect the range of practices that constitute safety and soundness standards; furthermore, this tool allows for a more consistent application of supervisory standards. To ensure the appropriateness of supervisory findings, material supervisory judgments and assessments of LISCC firms are subject to a rigorous internal governance process, which includes oversight by committees of individuals from different parts of the Federal Re- serve System. This process is designed to bring the collective exper- tise and perspective of the Federal Reserve to bear on assessments of LISCC firms. A key objective of LISCC supervision, and in fact, supervision for all firms, is to ensure that a firm’s governance, risk management activities, and internal controls adequately support the firm’s cur- rent risk taking and strategic objectives. To this end, the Federal Reserve has well-defined and controlled processes that are appro- priate for technical and specialized activities. Q.2. For several years, banking organizations that provide services such as safekeeping and custody to asset managers, have engaged with the Federal Reserve on the critical need to refine exposure measurement calculations for use in capital rules and credit expo- sure limits. These discussions have led to the inclusion of technical changes to these capital rules in the finalization of the Basel Com- mittee’s postcrisis capital reforms agreed to by the Federal Reserve in December 2017. One of the most important portions of this agreement relates to securities lending which provides a critical source of revenue to pension funds, mutual funds, endowments, and other institutional investors. Given the importance of securities lending to these asset managers which include pension funds, such as the South Dakota Retirement System, enacting these technical changes to the capital rules for securities financing transactions is an urgent matter. I hope the Federal Reserve will consider separating these targeted, technical changes from the rest of the Basel IV package and begin domestic implementation. Is there an opportunity for the Federal Reserve to propose rules to implement these technical changes, and perhaps others, sepa- rately and ahead of its longer range plan to solicit public input on 1Other technical areas include, for example, trading and counterparty credit risk manage- ment, stress testing, and credit underwriting, and risk management monitoring models. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00067 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 64 the broader and more substantive capital changes later this year through the Advanced Notice of Proposed Rulemaking (ANPR) process? A.2. The Federal Reserve Board (Board) understands the concerns with respect to the capital rules’ treatment of securities financing transactions, and Board staff participated with their international colleagues on the technical changes provided by the Basel Com- mittee in December 2017. These changes would provide a more risk-sensitive treatment of such products, including to better ac- count for diversification and correlation. Board staff, in coordina- tion with the other Federal banking agencies, are evaluating this new standard as well as other standards adopted by the Basel Committee at the end of 2017 to determine whether and how best to incorporate them into the capital rules. In addition, the Board has been tailoring its regulations regard- ing the treatment of securities lending and, more generally, securi- ties financing transactions. On June 14, 2018, the Board finalized the Single-Counterparty Credit Limits rule. The final rule applies to the largest banking firms, placing limits on a firm’s credit expo- sures to a single counterparty. These limits address the risks to the economy that are created when large firms are highly inter- connected. During the public comment period, commenters argued that the measurement methodology for exposures resulting from securities financing transactions would not create proper incentives for risk reduction and would not accurately measure the actual exposures associated with securities lending activities. In order to address this concern, the final rule allows a firm to use any methodology that it is authorized to use under the Board’s risk-based capital rules to measure exposure resulting from securities financing transactions. This approach is consistent with other Board regula- tions, including the capital rules. RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCOTT FROM JEROME H. POWELL Q.1. I appreciate your timely response to my written questions from your March 1, 2018, appearance for this Committee. In your reply, you wrote that ‘‘the State-based system of insurance regula- tion provides an invaluable service in protecting policyholders.’’ I could not agree more—and believe that the U.S. system of insur- ance regulation is the best in the world. That is why I’m concerned that recent International Association of Insurance Supervisors (IAIS) negotiations on the International Capital Standard (ICS) in Kula Lumpur (KL) suggest an embrace of a European-centric approach to insurance capital standards. For example, in the KL agreement, it was decided that the reference ICS shall have European-like capital requirements (Prescribed Capital Requirement) and use a European accounting method (Market Adjusted Valuation). In the past, the Federal Reserve has stated that the IAIS does not have any authority to impose enforceable obligations on U.S. insurance firms and that there is no way that IAIS negotiations could result in the application of a capital standard on U.S. insur- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00068 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 65 ance firms that is inconsistent with U.S. laws and regulations. However, if U.S. negotiators agree to a standard at the IAIS that does not formally recognize the U.S. insurance regulatory system or, worse, requires that the U.S. change its regulatory system to match the agreed upon standard and we do not change our laws, then the EU or other jurisdictions could penalize U.S. firms oper- ating in said jurisdictions. Please answer the following with specificity: What positions will you take during upcoming IAIS negotiations on the ICS to ensure the protection of the U.S. system of insurance regulation? A.1. I agree that, in order for an Insurance Capital Standard (ICS) being developed through the International Association of Insurance Supervisors (IAIS) to be implementable, it cannot be unsuited or inappropriate for the United States, which remains the world’s largest insurance market. As such, an overly European-centric ICS would face challenges to being readily implementable in the United States. As the Federal Reserve Board (Board) has suggested in re- lation to insurance firms supervised by the Board, such a frame- work may not adequately account for U.S. Generally Accepted Ac- counting Principles (GAAP), may introduce excessive volatility, and may involve excessive reliance on supervised firms’ internal mod- els.1 Indeed, the Board strongly supports the U.S. State-based in- surance supervisory system, which has proven its strength and re- silience for well over a century. Among other things, this motivates our advocacy of an aggrega- tion alternative, and the use of the GAAP-plus valuation method, in the ICS. We continue to advocate, and contribute to developing, the GAAP-plus valuation method for inclusion in the ICS. In addi- tion, we support the collection of information through the moni- toring period on an aggregation-based approach. We also participate along with the other U.S. members, together with other jurisdictions including Canada, Hong Kong, and South Africa, in the development of such an approach through the IAIS. Furthermore, the Federal Reserve continues to develop the Build- ing Block Approach, an aggregation-based approach that, together with the Group Capital Calculation of the National Association of Insurance Commissioners (NAIC), can be used to advocate the ag- gregation method. Through field testing and monitoring, we will advocate that an aggregation method provides comparable out- comes in supervisory actions and insurance company results rel- ative to the standard calculation method for ICS that is emerging from the IAIS. As a member of the IAIS, the Federal Reserve, in partnership with the NAIC and Federal Insurance Office, remains committed to pursuing an engaged dialogue to achieve outcomes that are appro- priate for the United States. As a general proposition, we believe in the utility of having effective global standards for regulation and supervision of internationally active financial firms. When imple- mented consistently across global jurisdictions, such standards help provide a level playing field for global financial institutions. Fur- ther, consistent global regulatory standards can help limit regu- 1See Advance Notice of Proposed Rulemaking, Capital Requirements for Supervised Institu- tions Significantly Engaged in Insurance Activities, 81 Federal Register 38631, 38637 (June 14 2016). VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00069 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 66 latory arbitrage and jurisdiction shopping, as well as promote fi- nancial stability. While we would refrain from agreeing to any international standard that is inappropriate for the United States, it is important to recall that the IAIS has no ability to impose re- quirements on any national jurisdiction, and any standards devel- oped through this forum are not self-executing or binding upon the United States unless adopted by the appropriate U.S. lawmakers or regulators in accordance with applicable domestic laws and rule- making procedures. RESPONSES TO WRITTEN QUESTIONS OF SENATOR TILLIS FROM JEROME H. POWELL Q.1. Chairman Powell, I’d like to turn to S. 2155 implementation. Many of us are hoping that you and Vice Chairman Quarles will be taking a robust role in crafting the rules to implement the newly enacted law. What role are you currently playing in the implemen- tation of S. 2155? A.1. The Federal Reserve Board (Board) is working in an expedi- tious manner to implement the recently enacted Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The Board has a well-established governance process for implementing rulemakings and ensuring that such rulemakings are compliant with the law, including statutory deadlines set by Congress. Draft rulemakings are carefully reviewed and considered by the Board’s Committee on Supervision and Regulation, which is chaired by Vice Chairman Quarles. I meet with staff on a regular basis to discuss regulatory proposals and provide direction. The Committee’s pro- posals for amendments to the Board’s regulations are finalized only after a vote by the full Board of Governors. Q.2. Many of your staff are the same staff that helped write the implementing rules for the Dodd–Frank Act. In some sense, the new law mandates they revise their own prior work. From experi- ence, I would say that such a mandate will take robust oversight on your part and on our part—do you agree? Can you give us some insight into how you and Vice Chair Quarles are managing these workstreams and orchestrating the workstreams? A.2. As I mentioned above, the Board is working in an expeditious manner to implement the recently enacted EGRRCPA. The highest priority of the Federal Reserve is to implement the laws that we have been entrusted to administer and to work to protect and en- hance the safety and soundness of financial firms and the financial stability of the U.S. financial system. The Board has a well-estab- lished governance process for implementing rulemakings and en- suring that such rulemakings are compliant with the law. I meet with staff on a regular basis to discuss regulatory proposals and provide direction. Of course, Vice Chairman Quarles has a statu- tory obligation to develop policy recommendations for the Board re- garding supervision and regulation of depository institution holding companies and other firms we supervise. He is actively involved in the development of proposals to implement EGRRCPA from the ini- tial design through finalization. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00070 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 67 I would also note that, in general, Board staff regularly revisits, revises, and tailors previously approved rulemakings. Through the rule implementation process, the Board receives feedback from af- fected banking organizations and other interested parties. The Board also learns from the experience of the on-the-ground Reserve Bank examiners. Because of this continuous dialogue, the Board may conclude that aspects of a regulation require amendment or streamlining. Q.3. One area where I would hope that congressional intent is fol- lowed is with respect to the SIFI threshold in Section 401 of the bill. My view is that all banks under $250 billion in assets are out of the enhanced prudential standards and that those above $250B are able to take advantage of the mandated robust tailoring so that the larger regional banks are not treated like the money center banks and that we are taking business model and risk into account when applying enhanced regulations. Is this your view? A.3. Section 401 of the EGRRCPA raised the threshold for auto- matic application of enhanced prudential standards for bank hold- ing companies from $50 billion to $250 billion in total consolidated assets. Under this section, the Board has the discretion to apply enhanced prudential standards to bank holding companies with total consolidated assets between $100 billion and $250 billion, based on consideration of various factors, such as capital structure, riskiness, complexity, financial activities, size, and any other risk- related factors that the Board deems appropriate. The core reforms put in place after the financial crisis—stronger capital and liquidity requirements, stress testing, and resolution planning—have made our financial system more resilient. Firms with assets of $100 billion or more can present a range of safety and soundness and financial stability concerns, depending on their risks and systemic profile. These concerns typically increase for firms with assets of $250 billion or more. Therefore, the Board has tailored, and will work to continue to appropriately tailor, our regu- lations to the risk profiles of the films subject to those regulations. The Board is carefully considering the statutory criteria under the EGRRCPA for determining which enhanced prudential stand- ards should continue to apply to firms with $100 billion to $250 bil- lion in total consolidated assets. The Board is also evaluating whether any changes to the enhanced prudential standards appli- cable to bank holding companies with more than $250 billion in total consolidated assets are appropriate. Board staff have begun working on proposals to amend these as- pects of our rules and we look forward to hearing feedback through the public notice and comment process in the coming months. Q.4. I also expect the agencies to take a look at all of the regula- tions where they used $50 billion as the asset threshold for applica- tion, including those outside of DFA Section 165, and raise the number accordingly. What are your thoughts? A.4. As part of its implementation of EGRRCPA, the Board is con- sidering which of its regulations require changes given the amend- ed applicability thresholds in the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act), including section 165, as well as section 11 of the Federal Reserve Act. In addition, VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00071 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 68 in light of EGRRCPA’s amendments to section 165 and consistent with the Board’s ongoing refinement and evaluation of its super- visory program, the Board is evaluating whether any other changes to the prudential standards applicable to large banking organiza- tions are appropriate. The Board’s capital plan rule utilizes a $50 billion asset thresh- old and was not affected by the changes made to section 165. Per the Board’s public statement on July 6, 2018, the Board will not take action to require bank holding companies with total consoli- dated assets greater than or equal to $50 billion but less than $100 billion to comply with the capital plan rule. Q.5. Chairman Powell, the Federal Reserve and the Office of Fi- nancial Research have studied systemic risk and have determined that banks under $250BB do not pose a systemic risk and Congress passed and the President signed S. 2155 to raise the threshold to $250BB for the application of enhanced prudential standards. I be- lieve that the FED should expeditiously follow this directive and should follow the will of Congress, and not wait 18 months. Will you commit to me that you will direct Fed staff to effectuate this new threshold and then move on to tailoring above the $250BB threshold? A.5. As stated above, the core reforms put in place after the finan- cial crisis—stronger capital and liquidity requirements, stress test- ing, and resolution planning—have made our financial system more resilient, and I would not want to see any material weak- ening of these reforms. The Board has the discretion under the EGRRCPA to apply enhanced prudential standards to firms with total consolidated assets between $100 billion and $250 billion. When doing so, the enacted legislation requires us to consider var- ious factors, such as capital structure, riskiness, complexity, finan- cial activities, size, and any other risk-related factors that the Board deems appropriate. The Board is carefully considering the statutory criteria under the EGRRCPA and is evaluating whether any changes to the en- hanced prudential standards applicable to bank holding companies with more than $250 billion in total consolidated assets are appro- priate. Board staff have begun working on proposals to amend these as- pects of our rules and we look forward to hearing feedback through the public notice and comment process in the coming months. Q.6. The relief in S. 2155 is not immediate, and without prompt action, the relief will not come until Nov. 24, 2018, 18 months after enactment. Do you plan to take action immediately? A.6. There are a number of provisions in EGRRCPA that provided relief immediately upon enactment. The Board, along with the other Federal banking agencies, have taken action to address the EGRRCPA changes that took effect immediately. As described in the Board’s July 6, 2018, statements, the Board will not take action to enforce existing regulatory and reporting requirements in a manner inconsistent with EGRRCPA. For example, the Board will not take action to require bank holding companies with less than $100 billion in total consolidated assets to comply with certain ex- isting regulatory requirements. These requirements include the en- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00072 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 69 hanced prudential standards in the Board’s Regulation YY, the li- quidity coverage ratio requirements in the Board’s Regulation WW, and the capital planning requirements in the Board’s Regulation Y. The Board’s statement and interagency statements also discuss other changes that took effect upon enactment and the interim po- sitions that will be taken until the relevant regulations are amend- ed to conform with EGRRCPA, including the treatment of high vol- atility commercial real estate exposures and certain municipal se- curities in the context of liquidity regulations. EGRRCPA also raised the threshold for automatic application of enhanced prudential standards for bank holding companies from $50 billion to $250 billion in total consolidated assets. Under this section, the Board has the discretion within 18 months of enact- ment to apply enhanced prudential standards to bank holding com- panies with total consolidated assets between $100 billion and $250 billion based on consideration of various factors. The Board is care- fully considering the statutory criteria under the EGRRCPA for de- termining which enhanced prudential standards should continue to apply to firms with $100 billion to $250 billion in total consolidated assets. In addition, in light of EGRRCPA’s amendments, and consistent with the Board’s ongoing refinement and evaluation of its super- visory program, the Board is evaluating whether any changes to the enhanced prudential standards applicable to bank holding com- panies with more than $250 billion in total consolidated assets are appropriate. Board staff have begun working on proposals to amend these as- pects of our rules and we look forward to hearing feedback through the public notice and comment process in the coming months. RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED FROM JEROME H. POWELL Q.1. If changes are made to the Community Reinvestment Act that lead to financial institutions, including those that have an online presence, to take deposits from communities but actually make less of an effort to reinvest in these same communities, would you con- sider that to be a good or bad outcome? A.1. I would view revisions to the regulation that cause financial institutions to make less of an effort to reinvestment in these com- munities as an undesirable outcome. In addition, a successful up- date to the Community Reinvestment Act (CRA) regulations should encourage banks to spread their community investment activities across the areas they serve and encourage them to seek opportuni- ties in areas that are underserved. Currently, a bank’s performance in its major markets is evalu- ated most closely and weighs most heavily in its CRA rating. This emphasis has resulted in what banks and community organizations refer to as credit ‘‘hot spots’’ where there is a high density of banks relative to investment opportunities. Meanwhile, other areas have a difficult time attracting capital because they are not in a bank’s major market, if they are served by a bank at all. We believe that any new set of regulations should eliminate such market distortions and avoid creating new ones. No matter how we VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 70 define a bank’s assessment area in the future, new regulations need to be designed and implemented in a way that encourages performance throughout the areas banks serve. RESPONSES TO WRITTEN QUESTIONS OF SENATOR MENENDEZ FROM JEROME H. POWELL Q.1. In response to my question about the joint agency rulemaking required by Section 956 of Dodd–Frank, you said, ‘‘We tried—we were not able to achieve consensus over a period of many years be- tween the various regulatory agencies that need to sign off on that. But that didn’t stop us from acting, you should know. We—particu- larly, for the largest institutions, we do expect that they will have in place compensation plans that—that do not provide incentives for excessive risk-taking. And we expect that the board of directors will make sure that that’s the case. And so, it’s not something that we haven’t done. We’ve, in fact, moved ahead through supervisory practice to—to make sure that these things are better than they were and they’re substantially better than they were. You see much better compensation practices here, focusing mainly on the big firms where the problem really was.’’1 Your response suggests that the relevant agencies have ceased work on this rulemaking. Is that correct? A.1. After the Federal Reserve Board (Board), Office of the Comp- troller of the Currency, Federal Deposit Insurance Corporation, Se- curities Exchange Committee, National Credit Union Association, and the Federal Housing Finance Agency (the agencies), jointly published and requested comment on the revised proposed rule in June 2016, the agencies received over one hundred comments. These comments raised many important and complicated questions. The agencies continue to consider the comments. The Federal Reserve believes that supervision of incentive com- pensation programs at financial institutions can play an important role in helping safeguard financial institutions against practices that threaten safety and soundness, provide for excessive com- pensation, or could lead to material financial loss. In particular, su- pervision can help address incentive compensation practices that encourage inappropriate risk-taking, which may have effects on not only the institution in question, but also on other institutions or the broader economy. Additionally, The Federal Reserve continues to work with firms to improve incentive compensation practices and promote prudent risk-taking at supervised entities. Q.2. Please provide a detailed explanation of how the Federal Re- serve is either limiting or prohibiting incentive-based compensation practices that encourage excessive risk-taking through supervision. A.2. The Federal Reserve, along with the other Federal banking agencies, issued Guidance on Sound Incentive Compensation Poli- cies (Guidance) in June 2010. The interagency guidance is an- chored by three principles: 1https://plus.cq.com/doc/congressionaltranscripts-5358712?4 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00074 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 71 • Balance between risks and results: Incentive compensation ar- rangements should balance risk and financial results in a man- ner that does not encourage employees to expose their organi- zations to imprudent risks; • Processes and controls that reinforce balance: A banking orga- nization’s risk-management processes and internal controls should reinforce and support the development and mainte- nance of balanced incentive compensation arrangements; and • Effective corporate governance: Banking organizations should have strong and effective corporate governance to help ensure sound incentive compensation practices, including active and effective oversight by the board of directors. The Guidance explains how banking organizations should de- velop incentive compensation policies that take into account the full range of current and potential risks, and are consistent with safe-and-sound practices. Relevant risks would vary based on the organization, but could include credit, market, operational, liquid- ity, interest rate, legal, conduct, and related risks. The Guidance also discusses the importance of considering compliance risks (in- cluding consumer compliance) when evaluating whether incentive compensation arrangements balance risk and rewards. Currently, supervisory oversight focuses most intensively on large and complex banking organizations, which warrant the most intensive supervisory attention because they are significant users of incentive compensation arrangements and because flawed ap- proaches at these organizations are more likely to have adverse ef- fects on the broader financial system. Q.3. Please provide any guidance issued to regulated institutions or materials provided to bank examiners on incentive-based com- pensation practices. A.3. Attached to this response are: • Guidance on Sound Incentive Compensation Policies, issued by the Federal banking agencies in June 2010;2 and • A Report on the Horizontal Review of Practices at Large Bank- ing Organizations, issued by the Board in October 2011.3 Q.4. What metrics, thresholds, and standards is the Federal Re- serve using to evaluate incentive-based compensation practices? A.4. The Federal Reserve’s approach is principles-based, and recog- nizes that organizations have unique incentive compensation prac- tices that vary depending on the firm’s organizational model and operating structure. The supervisory process focuses on assessing how firms have integrated their approaches to incentive compensa- tion arrangements with their risk-management and internal con- trol frameworks to better monitor and control the risks these ar- rangements may create for the organization. Supervision also con- siders whether appropriate personnel, including risk-management personnel, have input into the organization’s processes for design- 2https://www.federalreserve.gov/newsevents/pressreleases/bcreg201000621a.htm 3https://www.federalreserve.gov/publications/other-reports/incentive-compensation-report- 201110.htm VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00075 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 72 ing incentive compensation arrangements and assessing their effec- tiveness in restraining imprudent risk-taking. Q.5. Which institutions are subject to the Federal Reserve’s super- vision of incentive-based compensation practices? A.5. The Guidance, issued by the Federal banking agencies in June 2010, applies to global consolidated operations of all U.S.- headquartered banking organizations and to the U.S. operations of foreign banking organizations with a branch, agency, or commercial lending company in the United States that use incentive compensa- tion. Because of the size and complexity of their operations, Federal Reserve supervision focuses on large banking organizations, those with the most significant use of incentive compensation, and those with the most complex operations. Q.6. Were those institutions selected for supervision by asset size or some other factor? A.6. The principles-based Guidance issued by the Federal banking agencies in June 2010, applies regardless of size; however, the Fed- eral Reserve focuses supervisory oversight on the largest banking organizations, those with the most significant use of incentive com- pensation, and those with the most complex operations. The banking organizations involved in the horizontal reviews4 were selected based on asset size and complexity of operations. Q.7. If there is no rule clearly delineating prohibited practices, how are you ensuring consistency across regulated institutions? A.7. Supervision of incentive compensation by the Federal Reserve is governed by the Guidance, which is integrated into the Bank Holding Company Supervision Manual. Federal Reserve under- standing of incentive compensation practices was developed through the information collected during the horizontal reviews. With that understanding, the Federal Reserve has integrated in- centive compensation in ongoing supervisory reviews, whether tar- geted (such as sales incentives or compliance reviews) or within in- dividual lines of business (such as mortgage lending operations, or trading). A team at the Board monitors these reviews to encourage constituency. To foster implementation of improved incentive compensation practices, the Federal Reserve initiated multidisciplinary, hori- zontal reviews of incentive compensation practices at larger bank- ing organizations. The primary goal was to consistently guide firms in implementing the interagency guidance. 4For additional information on the Federal Reserve’s horizontal reviews of compensation practices, see: ‘‘Incentive Compensation Practices: A Report on the Horizontal Review of Prac- tices at Large Banking Organizations’’, October 2011, available at: https:// www.federalreserve.gov/publications/other-reports/incentive-compensation-report-201110.htm. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00076 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 73 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00077 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.10281717 fedoral Register /Vol. 75, No. 122/Friday, june 25, 2010/Noticas 36395 an exemption under lhB ftoodom or wish to utiliU!the exe-mption in that from lhc National tnrorm~tion Center lnfonnation Act (5 U.S.C. 5521bX4Iand sectton to provide a notite to irs broker· web.~:;ito at 11'1.-.w.lfiec.govlnic/. (b)ISI). The confidentiality status ~f the dealer panner regarding nam,. and Unless othcl'\vi.sc noted. commetlls infonnation submitted will be judged on other ide11tifying information about regarding each olthese applications a =·br..:ase bas~. bank emplor..s. 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King. d in ir s e ti c t t u o t r i s o o ns f s th u e b i i e n c $ t \ l t r o e d th d e e tr p o o v si e t r o s r i y gh t. c lo la a s d s . of S<~ries of seoorilic:s are no! no C H o en m n m ep u i n n i \ A )' v A e f n f u a e i" , M Of in fi n c t e : r a ) p 9 o 0 l ls, " D 'i i 4 t s h c . l R o R e s e p u g o r u e ~ l R a t t i e i t o l q e n u : i I R r t e e m co en rd ts k e A e s p s i o n c g i a at n e d d Sy ll t o lt o m rd . ) o U: f 18 C 2 9 '2 • , 2 m 0 ~ tG o . r iM fo<lm!KIW!'~ M Ri i r 1 n e . n r F , e i s l m l o fC t a H ., 5 P o 5 a ld 4 rk 8 in 0 R g - 0 i D v 2 e > 9 r m 1 , N : p c o n r y th o D f a P k n o r t k a ; to ~t8~~:, ~::~ ~:!i• • J s e .. n r n t . M ifer r ) y . o Jo ft h h n e sl S )n .. . r d. S es b ta e b y l t i n s n h e a B 1 a v n b c o o ll r y p . o l w o n c e ., d P s a u rk b s R id h i · a e r r, y . Freql1ency: Ono cx:asicn. IFR Doe. 201o-1~!)2f'UII!Id6-2Hitt.4~ol i\orth Dakota, and thereby acqu.ire 100 Repo~e1>: Commertial banks and flllU't3CO()(UID-01...P pen;ent of the 1·oting shares of First savin&s associations. ----------- Sharon Holding Company, Inc .. Ane!a, ESfimared onm.rnl reporting hours: North Dakota, and indirectly acquire Section 701. disc:losures to customers- fEOERAL RESERVE SYSTEM votingsharos of First State Ba1lk of t 1 o 2 b ,5 r 0 o 0 k h er o s u - r - s 3 ; 7 S 5 e h < o ti u o r n s ; 7 S 0 e 1 c , t d io ~ n lo 7 s 2 l 3 l , r nS Formations of, Acquisitions by, and S co h n a n ro e n ct , i S on ha w ro it n h , N th o is n a h p D p a l k ic o a t t a i . o I n n , rocordbepillg---188 hours; Se<tion 741, Mergers ot Bank Holding Companies Sheyenne Bancorp,lnc., has also S d e is c B c H s lo t o im s n u o 7 r 0 t e e s 1 d t . o t d J i c v s e c u r l o s o p s t u t o h r m e o s e u t n ~ o l c p u ~ er s O t ~ O o p m o h n o e s r u s c ., : , ha T ve h o a p co p m lie p d a t n o i e t s h e li s B te o d a r i d n f t o h r i s a p n p o m tic v e a l, a co p m pl p ie a d n } t ' o · become a bant holding S b re : m c o o k in r e u d r t k s e - . s 1 , ; p 5 S i r e m > c in t r i u 1 o te n 5 . < 7 m ~ 0 : i 1 S n , e u d c t t i e s i s o c ; n l S o 7 s e u 2 < 3 r t : i e , o s n t o A ( p B u c H r t s C o u a f A n m c t t ) t 6 o , R ! (1 b e 2 e g u B u la a .s l n i . k o c n . H ! Y o 8 l 4 I d 1 l in l t g C t F C s R t o q m P .) a p n a ny S R y .o b s b t e r tl tt l d l d ,j G e t V : f n C . e F o 2 v r " i e t 2 t : r t , . ' M O l0 f n t $ 0 , o . r the redmt RestiVe 7<11. distiOSUfC;S to customcrs-5 225), and all other applicable statu:.. 0.}1fJtyS<m!aryoftheS..rd. minutes. and regulations Ill become a bank Number ofl llSpomknts: Section 701, holding company and/or to acquire the disclosures to customers-1,500; assets Oi the ownenllip of, control of, or Section 701, disclosures to broker:s- the power to vote shares ofa bank or 1,500; Se<tion 123, reco<dkeepins---75; bank holding company and all ofthe DEPARTMENT Of THE TREASURY S 75 ec 0 t . i on 741, disclosures to customl!fS- 0 b 1 a v n n k e s d a b n y d t n h o e n b b a a n n k k i h n o g l d c i o n m g p c a o n m io p s a ny, Office of the Comptroller ot the C.neroJ description of reporl:T his includir:g thecompanios li~ed belo". Currency information collection is required to TI>e applications listed below, as well (Do<l<et IDO <:C-2010..0013) obtain a benefit pursuant to section as olhor related filings roquirod by the 3(a)(!)(F) of the Securities Exchange Act Beard, are a\·,ailable for immediate FEDERAL RESERVE SYSTEM (15 U.S.C. 7&:(a)(4)(F)) and may be inspection at the Federal Reserve Bank IDo<!<oiNo.OP-1374) gi\•en oonfidenti.'!l treatment tmderthe iDdicated. The applications also 11'itl he authority of the Freedom of luforrnation a.vailabls for inspection at the offices of FEDERAL DEPOSIT INSURANCE Act 15 U.S.C. 552(b)l4) and lbXal). the Board uf Cul'etnors. Interested CORPORATION Abslroct: Regulation Ri mplements persGns ma~· express their views in certain exceptions for banks from the writing on the standards enummtcd in DEPARTMEtiT Of THE TREASURY definition ofbroket underSedion tho BHC Act (12 U.S.C. 1842(c)).lfthe 3(a](41 of tho Securities El<change Act of proposal also involves the acquisition or Ollice ol Thrill Supervision 1934, as amended by the Cramm· Leach· a nonbanking CQinpany, the rc\•icw also Bliley Act. Sections 701, 113,and 141 includes whether the OC<JU~ition of tho (Dooi<et 10 OTS-2010..0020] ofRegulario11 R contain information nonb anking company complies with the Guidance on Sound Incentive collection requiremenls. Section 701 Slandards: in sedi on 4 of the BHC Ad Compensation Policies reqllire.s banks thai wish to utilize the (1?. U.S.C. 1843). Unlessothorwise e>:emption in th3t section to maku noted, non banking activities will be AGENCY: Office ofthe Comptroller of the ceciain disdascres to lhe high nel worth conducted throughout the United States. Clurency, 'TreasUl)' (OCC): Board of customer or institution31 Cllstomer.ln Additional information on e~ll bank Covemors or the Federal Reserve addition, section 701 roquircs lllnks !hal holding companies may be oblained Sy•lem, (Board or Pedernl Resarve~ 74 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00078 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.20281717 36396 Federnl Register !Vol. 75, No. !22/Friday, )une 25, 2010/Nolicos foder.ll Deposit lnsurnnceCorporation It is clear, however, that thro~out tho banking indusky.' The (FDIC); Office ofThrifi Supervision. compensation arnngemenls can provide proposed guidance'"' based on lh,.. 'lmsury (OTS). executi•os and employees IYith key principles. TI1ese principles ACTIOlt FinaJ guidance. ir.ccnli\'C:S lo lake impmdcnl risks tht provided that incentive compensation are nol consistent with the long·tenn arrangements 31 <lt ba11~ing organiution SUW!AIIY: The OCC. Board, f'DIC and heahh of the organiution. for example, should- OTS (collecti"ely.tho Agencies) are offering large payments to manager> or • Provide employm incentives (hat adopting final guidance drsigned lo employees to produr,e ~iU!bfc inaeases appropriately balance risk and reward; h(llp ensure tbal incellli~·e in short-term revenue or profit-without • Be compatible with p,ffectivc. compensation policies 2l banking regard for the potentially suOOI>ntial controls and risk-n1anagement; and orgauiutions do not encourage short or lttng-term risks associated wllh • Be .<upported by •trong r.orpornle imprudent risk-taking and areco1tsistent that nwenue nr profil~n encourage governance, including actiV"e and ~<ith the safety and soundness of the managers oremploy.,. to toke risks that effective ovmight by the organization's o O r A g T a E n S i : « E ~t f i fe o c n. t ive Dote: 11m guida.llc:e is a fi r n e a b n e c y ia o l n i d n s t t h it e u c t a io p n ab t i o l it J y n a o n f 3 t g h c e a nd a b r o n B a 1 r e d 1 c g a o e u f m s d e e i r n in e t c s c t f e o o n r r t s i e . v x e e t c : o u m th p ·e e n an sa d t i n o o n n effecth•e on Jun~ 25, 2010. control. executi•·e employees may pose safety FOR RJRTHER INFORJIATlON CONTACT: flaw00 ince11tive compensatiOJl and souodness cis!<.! if not properly OCC: Ka«!n M_K wHosz, Oim;:h>r, o pr n a e c o ti f c m es a i n n y t f h a o c t f o in r a s n ct c ~ ia nt l r i i n b d u u ti s n t g r y lo w th m e SW<tured, the proposed guidance Operntiolllll Risk Policy.(202) 81~- fin•ncial crisis that began in 2007. applied tos~::•,iotexeculives as well as 9~57, or Reggy Robinson, Policy a.n~ing organiutions too often other employees who. cithe.c Analyst, Operntiolllll Risk Policy, (202) rewarded employees lor increasing tho iodi,idually or as part ofa group,~~" 67l-i!36- o~ganiution's rsvenuc orsllort.tenn the ability 10 exp~ the relev~>t Board: William F. Treacy, Advi,.r. profit without adequate recognition of :~~~o 01~~i~tion to matori.1l (202) 452-3859. Divi~on of Banking the ris!<.s tho employees' actiYitios posed Supervision and Regulation; Marl: S- to the organiution. With respect to the first prinoiple, the Carey. Advi,.r, (202) 452-2781, H"ing wito\e.<sed the damaging proposed guidanco, among other things. Division o(fntematiorutl Finance; consequences tbat can result from pro•ided that a banl:ing organiution K1eran J. Fallon, Associa1e Gellernl misaligned mamli\IBS, many financial should ensurs that its incentive Counsel. (202) 452-5270 or Mich.acl W. institutions are now te..c:Q.rrnnmg the1r comptnsalion arrangtlmf!nts do not Waldron, _Cotl"'?l, (202) m-27 98, compcr.sation structures with the goal encourage ~horl-le:rm profits at the Legal DJ\'tsto~. F? r users ~r t~rbeuer aligning the intere.~ls or expense of s.hort· and longM-term risks Teleoommumcattons Oe\•tee for the Deaf managers and other e1nployees with the to the organi«~tion. Rather, the MllD'J only, contact (2~2) 2ii:H869. long-term health of the institution. proposed guidance indicated that FDIC: Mondy Wast, Ch•.•C Pohcy and hlignillg tho inll>rests of shareholders banl:ing 0'8'11iL1tions should adjust the Prosram Development, Dw•s1Gn of and employees however, is not always incenti~·eoompe•,salion pro\lided so Supervision and Consumer Proteclion, sufficient to p~tect th8 safely and that eonployees bear some ol the cisk (202) 898-722t,or Rc~rt W. Walsh, soundness of a banking organi«~tion. associated with their activities. To be Revoew i!ltamm<:'·.P~hcy and Pr~m Because banking organiutions benefit fully effecti,e, thesa adjustmentssbould Development, Oo,soon of Supen-~oon dinlctly or indirectly &om the takoacoountol the full range of risk< and Consumer Proto ctoo n, (202)898- prote<tions offered by the Red oral safety that the employee.-:' acth1ilies may pose 6649. , . . net (including the ability of insured for the organiution. Tho proposed OTS:Rit~ Gaffin, fman:oaJ Analyst, depository institution.< to,..;,. inS\ored guidance highlighted "'""'I methods RIS~ Mod~hnga nd Analysos, (202) 006- deposits and access tloe fed em I that banking organizations could use to 6181, or R1chard Brulnett. Semor Reserve's discount window and adjust incentive compensation awards Con!pli~ce Cou?sel, Regulations and payment servictS), shareholder$ of a or payments to take acoouot of risk. Leg.slatton Dnli.sJon, (20219?6-7 <a09; banking organization in $0me cases may WiL~ respect to the saoond principle, Donna Deale, Oorector,Holdmg_ be willing to tolerate a degru of risk the proposed guidance provided that Company and International Pohcy, (202) that is incons~tent with the banking organi1~tions should integrate 906-7488. G_roYOtto G3rdineer, orgonitation's safety and sou.ndness. their approaches to incentive Managmg Dtrector, Corporata and Thus, a reYiew or incentive compensation arrangements witli their ln!""'tionaiA<:Ii•ili", (202) 906-00611; compensation amonge.:nents and related risk~management and internal control Office o~Thnft SupcmSIOn,l70~0 C corporate govemance practicts: to frameworks to better monitOT and Street, NW. . Washmgton,OC 20>52. ensure that they aro efre<ti" from the control the risks: these. 81't'8Jlgtments SUPPLEMEnURY l~RMAliO~: Sll!ndpcint of shareholders is not may create For lhe organization. sufficient to ensure they adequately Accordingly, the proposed guidance I. Background protect the 53fety >nd .~<~undness of the provided that banking orgoui«~tions Compensation a.'T3ogcmc.nts arc organization. shuuld ensure that ris~-management c m ri a t n ic a a g l e t m oo e l n ~ t o in f l f h in e. a s n u c c i e a e l . , i ~ n f s u t l i tutions. A. Proposed Gtridonce d p t e i r S s i o g n ni n u e g l h in a c v e e n a ti n v a e . c p o p m ro p p e r n ia s t a e t r io o n le in These amngemenL~ serve several In Octobor 2009, tho Fedond Reserve arrnngements and as.~ing whether the important and worthy objecti•·,.. issuod and requcslcd oommcnt on amngcmcnts may encourage impntdent including attracting skilled staff, Proposed Cuida«:e on Sound lncenti" risk·taking.ln add ilion, the proposed promoting better organiz.ation-wLde and Compon.<ation Policies ("propo..d guidance provided that banking employee performance, promoting guidane<")lo help protect thesaroty and organil.ations should track incentive employee retention, providing soundness of banking O<ganitations oomptm~tion aw·ards and payments. retiremer.t secttrily to employees, and supervi"'d by the Federnl Reserve and risks lakcn.and actual risk outcomes to allowi~1gan mganiz.alion's pC'I'S{)nnel to promote the prompt impro\'cmcnt of oosiS to Vlry along with re'"nuss. ittten~vew:n~n,<alion practices 75 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00079 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.30281717 Federal Register/Val. 75, No. 122/Friday. )uno 25, 2010/Notices 36397 determine whether incentive • Thn thloc core princi,,les are control, and eorporate governance compensation pa,ments to employoos appropriate ami suffiticnt to hclp proce<SOS. are reducod oc adju.stod to retlect ensure that inccntiYc compensation U. 0\·erview ofC omments adverse risk outcomes. amngements do notthroater. the safoty With respect to the third principle, and soundness of banking organizations; The Board rer-.eived 3~ written the proposod guidance providod that a • There are any m3terialleg,tl, comments on the proposed goi~ance. d ba ir n e ~ c i t n o g n O sh ll o l'n ul i d za p ti i o a n )' ' s a n O O in . f rd o r o m r ed and r p e r g o u m la p to t c ir y n , p o le r m ot e h n e r r a i t m ion pt o d f i n in le c. n :e t n s l t h o •e t h< o w f b t i h c e :h A " g " cn " d s e h :s a . o C :d o m an r d n c r n e t v e i r e s w in ed c l b u y d e a d ll active ro!e in ensuring that the compensation arrangements and related banking organizaUnn.s,linancial serviC6S organiution's oor.tpoosation processes that would be oonslsicnt wilh trade associations, setVi:.e pro\lide:rs to arrangements strike the proper balance thDWprinciplcs; financial organizations, re~resentalives i o b b p b n c r : f u ) i t o d • t t ~ p i o e i v a r ~ o l c e t e 1 i c d o 8 m e n . J n d o I r e g r i o o : n s :; u : f n k t s s a i g h d a o o o c a n i f o n u d n t m c l g h d p e e b p r i « p o a e r w r s f n o o i i s t i s r v e a g . M w i t a T d io n · e h t a n i d o z u n a p n s t d l h . r l i y o t 0 a a h g p 1 t a e r a p b t n 1 r m o t o h a v e . r e d s . c O g t. o . ' o < l f . • m g n l e p a e l F n p y l r o i e a o a u y n l n n l e t s ) n i d e ' a o o u s t s n i t r o o o a s r t n u i o . c b n " ~ s a l ~ d ' p i h n · m n e o e k e u c t i i l h s i t n d f s s < g i c o o l r i o n k r a t r y e b g p i p l n a a p y e n c n l s p i k e i e z r o n i d o a n l f t m g i i \ o '3 o n t s e ; lhe o c d o i r p n i r o r o r s g c o m k i . e n a n p · n n m t s o o a t i t Z t i s i e k Y t e e C n u i d n e n ' t I t e c t i g g c i o o r o o a u s n n u m t s i s a r d , b u a l p a a a g p s e n n n e p h n d k c o . i s a m i e r i a n r n t - t c e g p i t d h o d o r o i o u n v c e t l d i h d a g n d e e m c a s u n n n g u a t n i , r o l l z o e g a s a a r . e : l t t b h M u i m o o o n a f n o r e d t t s s n u h . t t e e s : t i h n e a~ o n r H g \ , • a e n i C 2 < 3 l t m io p n e , . r n e s c a e ti i o v n e s a y n s d te r m e s v i a e a w o ss bro • a M de a r r i k in el a : f 1 o c r i c a e l s s o er r v p ic ra e c s t i i n ce d s u i s n tr t y ll , e s uch C th o e r u p m rin e c n i t p e l r o s s a · l b s a o s g e e d n a e p r p al r l o y a s c u h p o p f o t ~ h e e d periodic evaluaUons of whether l11cir .as the usc of•goJdcn pa.rachutc• or proposed guidance. for example, many organizations' compensation systems for "golden hands~ake" am~ng..,cn~ to commenters specifically supported the a a l r l e m ac a h jo ie r v s i o n g g m th e e n i t r s o ri r s l t : h :- e m 0 il ' i 8 g ' a n li i o l3 m t ion i c t h la al i l n e n o g r e a s t t f r o a r c b t a em n~ p l l n o g y o e c e g s, a p n r i e u s t e io n n t s in a av ll o a id p a p n ro c a t c o h r e f s o t r o m i u n l c a . i e c n o ti r \ ' o t ne~ill!-fiJs. objecliv<iS, and directly approve tbe dc"Jclopingand maintaining balanced compensatiotl in the proposed guidance. incentive compensation arrangen•enls itl;ertHve compensation arrangements; These commenters noted financial for senior executives. • Ttte proposed guidance ,~·ould org::anitations are \'ery di,·crso and The Board's proposed guidanc:e in1pose undue burdens on. ur have should ho permitted to adopt incentive applied 10 all banking organi-za1ions unintended consequences for, banking compensation measures that fit tbeir s H u o p w t · r e v ve is .r t . d th b e y p t r h o o p F o e se d d e r g a u l 1 id \ a e n so ce m a . l so O co f m 8a p n l i e z x .a t 0 io '8 n a s n , p iz a a rt t i i < o : n u s la , a rl n y d s r w n h a e ll t u h ) e I r ~ s n a o r e e d a s n , d w s h o il u e n a d l s G o J b )C ei t n at g io c n o s n . s S i c s v te t! t r ~ n t l with included provisions intended to reflect the:re are \l"ays such ~enti~J burdens or comruenters also asserted that a the diversity among banking com•Equene&~ could be addressed in a rom10laic approach would inevitably org.miutions, both with n>Spec1to the manner r.onsistent with saftty and lead to exa88eraled ri>k·taking scope and complexity of their activities. soundne.'l.S; and inc:enti\•as in some situations 'l'hile as ~><II a.s the preval~1ceand soopoor • There are types ofi ncentive disooureging emplo)'e<iS from taking incentive compensation amngtmellts. contpen.salion pla:1s, such as reasonable and appropriate risks in Thl!.l, lor mmplc. the proposed organization-wide profit sharing plans olhezs. One comrneoter also argued that guid8Jico provided that the revieiVS, that proYide for di~\ributions in a uni ntandcd con~uence.~ would be policies, pra<edures, and S)"ttms manner that is not materia.lly linked to mere likely to rosult from a "riRid implen10nted by a smaller banla~ the performance or specific cmpiGyces rulcmaklnf than from a flexible. orgat~iz.ation that uses incentive or gcoups of ernployoes, Ih at could and principl~d approach. compensatkm anangements or• a should be cxcmptod from, or lre.ltcd Many conunenters "''uested lbat the limited basis would bo substantially less differently under,lhe guidanr.e t«ausc Board revi"' or clarify the proposed extensive, fonnaUzed, and detl!iled than they are unlikely to affocttho risk·taking guidance in one or more respecl.~. For those at a la.oge, complex hankins incentives of all, or a significant numbP.r example, several commenters asserted ocgonization 0-CBO)' that.,.. or employees. that~" guidance should impose e in x c te e n n s ti i \ v 'e e l c y o . m Jn p a e d n d sa it t i i o o n n , a b r e ra c n au g s e e m s e o n u t n s d B. SupeNisory lniUalivts s c p o e m c p if e ic n s r a e t s i t o ti n c l a io t 1 b \ a S n o k n in i g n o c r e g n a t n i\ i l l e o atiGns inoenti\'e compensatiGn practices are In conneclino wid' the issuance of the or mandate certain corporate important to protect the safety and proposed guidance, tho Federal Rosorvo govunance or risk~managen1eot soundness or all banking <>~&ani,.lions, announced two supervisory ioitialives: practices. One comment or the Federal Reserve announced lhal it • As peci>l horiaootal review of recommended a requiremcnl that most wa.uld wlX'k with the a.ther Federal incentive compensation practices at compensation ror senior executivas be banking agencies to promote application lCBO's;and provided in the fonn or variable, of the guidance to all banking • A rcYicwoftnccnhvccompcnution pcrlormance·l'cstcd equity aiVardslhat organizations. practicos at other banking Ofganizations ac• dalerred lor at least five yoars, and The Board invited comment 011 all as part orthe regular. risk·focused lhat stock option compensation be aspects ol the proposed guidanco. The examination process for these prohibited. Anotheroommentet Board abo specifically requested organizations. advocated a ban on "gold~• parachute" comments on a number or issues. The horiurntal review was designed paymenls. and on bonuses based on inch.tding whetbe:r. to asss..~: The potenlial for thase metrics related to one year or less or arrangements or practice$ to encourage perfonna:nce. Othe:r contmenters improde.nt risk-taking: the actions an sugsested tbatthe guidance should ~ J ~ l: l l~ b p e ." l ' t p r p m S L ( C d I ! I \ O l i ~ fi ( S l U m i l e e d d u b 1 r h l is l f l s e t F b e t d nl o:ganizatio11 has taken or proposes to require banking orgaotzations-to have an l(ft utiHud by ll~e F'edmlftmml ~, d4r.nlligg take to correct dcficicndcs in its independent ehairman of the board of SIJChoc.g,taiztlio.'K.lbefiul8'1Nill:.c:el:Se'.Sibt incenti\'O oompc:uation practices; and diroctnrs, reqt~ire arrnua\ majority \'Oting C . 1 I 1 . 'I l ( . ( 1 ( D C o. I w ) . J$ g lf S . t t i e $ 'S . t n . m ~ l . i . ~ ~ "'" 1 " 1 ' 11 r 1 . 1* . b e )' o tM ~" 0 " 0 " : " . c th o e m a p d e e n q s u a a t c io y n o ·r f e t l h a e te o d r g ri a .• n k i · z m a a ti n o a n g 's e ment, s fo h r a a re ll h d o i l r d e e c r t s o 1 rs 0 , h o a r o p c r o o \ v 1 i o d t c e f ( a s r o c~llcd 76 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00080 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.40281717 36398 Federal Register/Val. 75, No. 122/Friday, june 25. 2010/Noliccs •say-on· pay" voting pro\•i.sions) on the retain qltalified .staff and compete wilh the safety and soundn~" of banking ince1~tiva compensation amngemenls other linancial services pn)\'tdcts. In organi?.atlons.~ for certain employees ofb anking light of these concerns, some Tho final g~tidance applies to alllho organizations. Otherwmment615 common tors suggested that tlte guidance OOnking Olganizations su(M)rvistd by the requosted that W1ain types of t1xpres:sly allo~\· banking ruganizations Agencies. indudil18 national b3nks, compensation plans. such as to enterinlosuch compensalic9 State member banl:.s, Sl2te nonmember org>nlzation-wide profit shari113 plans arrangements as the)' deem necessary banks. savings associations, U.S. bank_ or 401(kl plans or plans covered by tlte forrecruitttlt:nt or retention purposes. A holding companies, savings and loan Employee Retire:nent lnCO!Ite S.CUrity number of comnu~nters also encouraged holding companies, the U.S. aperalian.< Act (29 U.S.C. 1400 et seq.l. be the federal Re.~e.rve to ~\-ork \\·ilh other ol foreign bonks with a branch, agency e g p th x u r e e i o d i m v r a i b d p n a e t c e n e e d k m b i f o n r p c o g l a n o o u t y r .s t g e h a a e e n s t h s i in u e c y c o t c i p w n o e l n e i o \ r ' t e C l o t u S h u n o t n o l i d k e u x e e l p y o t s o e a d s p t u o r a m t a n h c d 6 o l a 5 l r c r 1 i e t d i s c i s e a a s f t n o to d f r i n i f p n o a r c r n o e e c m n i i g a o t n l i 1 v i e s n e u c c s c p l o m i e m t a u si · p l s i i r t e o e o n . n r n s s s t a a a ti n n o d d n a o o o U o r r n g r c i a p o t n e o m d i t z a m S a ti t e o l i a r o n t c n e s i s a s ( , ' l c ) a . l o e n l n l d e d c E i t n d iv g g e o c l o a y m n . t d . p t .l o a a g n r1 r y l o d i o n n m g t e h n o t ri~k. level competitive playing field far Sevaral commentm, however . .did not financial service providers. A number of ch.a.ngc:s have been made support the proposed guidance. Some of to the proposed guidanco iu response to thest commenters felt that the proposed The comments rocein~d on the comments. For example. tho final g p u ri i n d c a i n p c l e e s w u a s s e u d n ln ne t o h c e s s p a r r o y p a o n se d d t hat the b p c r l o O p h o " s . ed guidance are further diSCil!sed g de u s id ig a n n e a d t i o n c r l e t d ~ u d c es e s b e u ve r r d a e l n p o r n o v sm isi a o l n le s r guidance were nol needed. These IU. Final Guidance banl:.ing organizations and otller commentersarsued that the existing banki~-3 orgillii\lUo•l \bill•e nol system ol flnanc~l regulalion and Alter carefully reviewing tile significant tt~ of inoonti\•e enforcement is sufficient to address tho oomntents on the proposed guidance, compensation. The l!gendes also have concerns raised in the proposed the Ageucios h01~ adapted final mode a number of chongos to clarify the guidance. Several comnte:nters also guidance that retains the same l:.ey scope1 intonl, and terminology of th& thought that the proposed guidanco was principle> em!>odied in the proposed fiuaf guidance. too vogue to be helpful, and that tho guidance. ·~th a number oladjustm~•ts ambiguity of tl10 proposed guidance and clarifications that addross mattcrs A. Scope ofG uidonco would make compliance more difficult. rajs.ec:J by lhe commenters. Those leading to increased cosband principles are: (lllnceotivo Compensation practices were oot lho c g t r h e o u g e m i r d u e l a o a n i e s t n o c i e r l n e y w s r u u s a n f s a f c i l n s c e n o i r e u t a n w i r n t g a e t u y m v e . i d d n S e t o t n b e m d a c t e • b t t e h h c e a a ' t U Se c e b b o m o a m l n p a k p n lo i e c n y n e g e s r o e a i r s s t g k i i o a n a n n c n i o a > d r n a r t f t a i i i v n a n e n a g s n e s t c m h h ia o e a l n t u r t a l s d e p a s p p u t r r h a o o s p v i r i n i d a e a t e ly s < o t o h O f l t t e u y h s e c c . a e e r r u - e t a s s a e p f i a ; o o 1 c n f l t y d t r h e w o . e n c a o l f r s i g e n l n a a o i n z a c e c o i ~ d n a l t l b l r f c y i V b r 9 e i u y s 8 t i o i s p n , f e g b r u ce l nt incentive compensation praclices manner that does not encourage ba:nking01:ganizations engaged in c fi o n n a t n r c ib ia u l t s e t d 3 b to i l s i a ty (C p l) r ' o a b n l d en s u o , u o n r d ness or t e o m p i i m Gy p e r e u . d .~ e t n o t e ri x s p k o ;( s 2 e ) t t l h tO ei S r < o : rganitation.~ i w n h 2 o 0 le 0 s 9 a b le y b th an e k I i n n s g t i a tu ct t i e v o it f i l e n s t e e m on a d t u io e n le a d l quostioned the authority of the Federal arrangements should be compatible finance and publicly by a number of a R se " n " c " ie e s o t r o t a h c e t a in th I e b r i F s 8 e r d P e .a ra . l bonking w m i a t n h a e g f < ie m c e ti n \' l e : a r n .o d n l ( r 3 o ) l s th a o n s d e risk i M nd o i r v e i o d v u c a r l , t f h iu c a p n r c o i b a l l e i m ns s t c it a u u li s o e n d s b .' y ex I p n r e a s d s d e i d l i a o m n 1 c a e n m u n th 1b a e t r t h G e f c p o r m op m o e s : e m d e rs s a t r r r- o a n n g g e c : o n r e p n c t. r s 1 s t h e o g u o l \' d e m be a s n u o p o p . < i t n < c te lu d d b i y ng n im o p t r li o m pe it r e d co t m o p U e . n S s . a fi t n io a n n c p i r a a l c i t n ic s e ti s t u w t e io r n e s, g11ida.nc~ would impose undue burde.1 :tctive and effective oversight by the but \vtre e~·ident at major financial s o m n a b l o le n r k , i l n e g s s a r c g :o > : n np lM le t x i o o n r s s . a p n a iz r a ti t c i o on l> s r . ly o 1 r \g g e a l n lc iz ie a s t i b o e n l ' i s e v b e o a th rd a t o i f t d is ir e im ct p o o rs r . ta T n h t e th at r in e s c l o il g u n U tz o e n d s h ll y o'o i r n l t d a w m i a d t e i , o a na fa l c b t o dies such These comment"' believed that incenth·e oompensalion arrangements at inoonti'ole r.ompensation practtces. at ! g i e m n a o l r le a r ll h y a n n n k t i p n r g o o b r l g e a m n a iz t a ic t i f o r n om s w a e s r a e f Bty b in a c n e k n i t n i g \' e o s r g fo a r n e iz m at p io lo n y s o d o o s t n o o t t a J k lr e O r \ i : s i k de s t ~ tlh ~ cr ~ it)" ; i• t Sl s !'di ~ on. ~ s o ~ ll : lte ; f'o ! im ~ .l D " tpo e si ~ l ~ and soundness perspective.> An umber that could jeapardile the safety and lu':lf'lllee{fl)O Ad. Ouid&auis tied eo i&Alify s o m n h w f o o o s n u o t b m l s d e m r m b o a e c l f n l e e o t x r e o e r b m m s a s m n p u t k e g f i n g n r t o . g e , m . r o t s e r e t d g h x a t e p h n g r i a u z e t i a s a c t s l i ! e l o a d n l o l s r c ~ /1 g s c ~ o o o u u u m i n d n d p a n d n e e n n : c e s e s . s a s s s t e i o r o e i f n s k l k s h p s t c r o o a o f a c r i d t g l i l a d c c n e r e e s i n z s b a t s i y t v t i i o f e l o e n c . s u T a s f i h e n e t g y f a o in n n a d l p I W l ~ l ~ C r n i u t t ' t i i l t , c h ~ l o . ~ O t t A h i I ~ M a l . : t S . t ~ U l ) f l . L ' 1 d b } . i e l e . . A c ~ O ' g v O I p : S t t U U o . ~ . i ( i c , [ l : . $ ( f l U c 1 ~ g J r s ~ o i a b b d \ . t . . N h l & « i i e ' u o e y b t t O O : t b t ! w p a o J lc c r d l a f d p l m i c : n t : l i i . f R o o y c r t r I ~ ( i s : i m A 1 k 1 f . 1 l t l e c w o o n u c l o d r o im s t p h o a s t e t h u e n : p "C ro a p s o on s a e b d l g c d u e id m :l a ll n c d e s r th is e l: . b -m as a i n c a p g r e o m b r le m m t p th e e r y sp c e a « n i v p a o , a t e h a fr t o i m s:, a U ~ I s Z s w o C l r f l R m d S - 6 . t J & o . : 3 O ~ 9 T 1 . S M " r s . •~ S ;~ , lo f o i' n $ t S r. I lp ~ iO l ) * 'I " ll r en . l \ « o <~ l ! l .l 1 i d d S on the boards of direc!ors of banking incentive compensaticm amngemenls l$ot.lt!Ai:lltoofb:oma:.iolulfl'~lnc. organiutions and t$pecially srnallct i e f m im pi p G r y o c p c e s r i l n y c s e lr n u ti c v t e u s r l e o d t - a < k a e n i m gi p v r e u dent ! , 2 , 0 . 1 . » , ~ . C ,l « ' n r p o r p rtJ u O . f , i« j l l i 1 n w :I' . J ._ m .. t , r . i . fJ ./ l S « s C r I li > m Of .: ~ c or o g S n a e c a v e b e r a r n t a i t l o l t n c a : . t o ~ m t . h m e e p n m te p l . ' '> $ S a < l l s d o g e u ~ id p a r R e. C s O so , d i l ris T k h s. e Asencies bel:evo the principles of l ! · W a ~ , - I " . W W ' .o " t ' .i i - i l, $ '. 1 t,W. 1 •_ : ) 1 Wc ! W .Omrv .M A,t.: . M I./.C c .I b '.I l . m f / l o p i l d l $ & J . . p f l d i l r M f t - PsC p f.N. i . / .~ .~. . implemented, could impede the abil:ty the final guidance should holp protoct CBS.Sbul!lbo!d« Report OllliliS'I WriteOo;vU. ol banking "ll•nizations to attract or o th rg e a s n af iu et t y ia o :I n S d a S n < d > u t n h d e n s o t s a s b o il f i t b y a n o k l i t n h g e A ~ co ! p n f r t e r il W : 1 b o a . . l l 1 t t . ! r i 1 B : 0 S ~ 3 . ( g ( ~ p R o p t J . : 4 * s 1 L . - l ' 1 . t l 2 l J i I l ( ) O i f & i l s p s a r a : K A in ! ti f O - ! . N t in t a e w s d b .t J i U 'l R 't S duo lQulhtolbr:t.ud,o::t<OCilfhe:lltt•oquesto:l financial system, and that adoplion of tot:.:pott:r=eiOtbt~me~tmaM.} l~lhep!Of'J(ISI:dCG~~beCilfOICtJd the guidance is fully oomistent with the ltalll!blt~ 1:-lr-pih!b'tt.Aibf.e«nni/Siw.r~li'GifJI d U ii O 'f r « s e i t l: l l l '. ) 't:lotJ'Sf!'l~lMIMtstlldylltmustof Agancies' statulol)' mandat1 to protec! 5 i /m m rA . o.'& ~ w/ ? \tp ~ C< k ! ,4 J /. 1J~IIICIIO&f>ll. . 77 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00081 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.50281717 Federal. Register/Val. 75, No. 122/Friday, june 25, 2010/Nolices 36399 as the Financial Stability Board (FSBJ do not originate buslness or ipprG\'C coor<iinatinn in this area is important and the Senior Supnrvi~ Croup.«~ tra11sactionsoould Siill expose a banking both to promGte competitive balance Because ()Ompensation arrangemllnts organi1..ation to material risk in some and to ensure that internationally acti\'e for executive and non~ec.ulive cil'C'Um.<;lance:s. Therefore, thAgem::ie.<; banking o~gani>ations are subject to '"'ployecs alike may Jl""' safety and do not believe it would be appropriate consistent requirements. For this reason, S<lundnoss risks if not proporly to provide a blanket exemption from the the Age.ncies will continue to work t.,ith structured, these principles and the final guidanco fot any category of their domestic and international final guidance apply to senior co1•ered omploj·cos that would apply to COU(llerpa!U to foster sound executives as well a.s other emplo.yees all banking organiutions. compensation practices across lhe who. either indi\•iduaUy or as part of a Afte.rroyiewingthcoomments,lha financial services industry. hnpo.rtantly, group, bave the ability to CXJ""" the Age-~1cies ha\'eretained lhe principles· tb(l final guidance is consistent with bankingocganiutionto material based framework ofthe proJ"""d both the Principles for Sound amounts of risk.' These enlployees are guidance. The Agencies believe this Compensation Pru<ticc.~ and the related refened to a.~ •covered emplo}·ees." in approa~ i$lhC most effective way tn Implementation Standards adoptt<! by the final guidanco.ln response to address incenliYe compensation thei'SB in 2009.• h number of comments, tbe final guidance clarifies practices, given the differences in the commentcrs expressed concern about that on cmployoo or group of employees size and tomplcxity of banking the levels ofc ompensation paid to"'"'' has thoobility to exp<><ea bank in$ "'l!aniutions oo1·ered by tho guidanoe employees or bankil'8 ocgani>ations. As orsani7.ation to material amounts of risk and the complexity, diversity, and range noted above, several oommentfttS if the eruployee:s· activities are material of use of incentive eompen..10;Uion r"''ucsted thot tho Board eliminate or to tho organiz.ttion (lr are matttial to a arrangements b.y those org3J'Ii7.3tions. limit certain types ofinoentive business line: or operating unit that is For example. acth•ilies and risk.s may compensation for employees or banking itself material to the organization. <arysignit.can~y across ban~ing orgGnizatioBS. Other eommenhtrs Some commenters sugge5ted that crgani?.ations 2nd o:~cross employees advocate<! that oenain forms or certain categories of employeos, .,ch as within a parttr.ular banking compensation 1M! required. For ex.unple, tellers, bookkeepm. administrative organization. For this reason. the some cornmentcrs ~d a ban on assistants, or cmployoos who proc::cs:s methods used to achieve appropriately incentive compensation payments made but do not originate traosactions, do not risk-sensitive compensation io stock options, while others suppo~t<! expose banking otgauizations to anan~ments iikely will differ ar.rGSS their mand2tOl)l use. Comments also si&nificant levels of risk and therefore and within organizations, and use or a were received with regard to tbe use of should 1M! exempted irom e<>verage singlo, formulaic app...,ch li~ely will olher types of stock-based under tho final guidance. The final provide al !cast some emplO)'OOS \\.lith compensation, such as restricterl stock guidance, like the proJ"""d guidance, incentives to take imprudent risks. and stock appreciation rights. indicates th31 the facts and The Agencies, howt\'er, htwe not Consislent toJith it:s principles-based. circumstances will d&lerminc which modified the guidance.&< some approach, the final guid"tco dOC$ n01 jobs: or categories of employees h:n-c the commenters reques.led, to provide that a mandate or prohibit the usc of any ability to exp<>se the o~ganiutioo to banking mganization may enter into spoci6c forms of paymcnl for inccnti\!C n1aterial risk:s and whiclt jobs or incentive compensation amngeruents compensation or establisb mandatoty cat~ries nf employees rna)' be-0\tiS-ide that are incon~i.~tenl wHh lhe principles compensation lc\lels or caps. Rathcr,the tho soope of the guidance. The fi11al of safety and soundness whenever the rnrrns and le\'els of inrenlive guidanu ~nizes, for exa111ple, that orga:niution believes: that such action is compeosalion varmonl.! at banking tellers, bookkoopm, couriers. and data needed to retain or attract cmpiO)'OOS. organizations are expet:ted to renect the processing per>OMel would lil:ety not The Agencies rec:<>gniu that while principles of the lin.! guidance in a expose wgani2ations 10 sigoifia.l:'lt risks. incentive compensation serves a manner :ailored to the busjnes.s, risk of tho types ruunt to 1M! addressed by number of important goals for banking profile, ond other 3\~ibutes of the the guidance. On the other band, organizations, including attracting and banking organization.lna~ntive elllpiOJe<s or groups of employees who retainingskillod s~ff. these goa~ do n01 tompensation stJUCtllres that offer override the requirement for bao~ing cmplayeas rewards for increasing sh()[(· 'Sst.1'ilt.I.IKi.ltSt~litJFONJll(1(0)1 fSF organiutions to have incentive tem1 proGt or revenue, without taking . l 1 p P l U c : , $ l b i t P l r r i p l c D ~ p o i { F f / r ~ h t J i t o ( l J " B . i . r ' l l a ' $ & f l . / e e f ~ r .~ i r i , f a . S l s » d C i i 4 r ~ · J i ' p b ! l J m o . i p J e ! d l t n . O f l $ j ; l ' l 0 . t a d I f 1 : # V i ld F J ~ M S S l t I J e l ' I d ' c . i r . A . r i p o ~ x A r t s : i ' l $ f . r p ~ i 1 O a a e M \ ! j · r S r l J l i l ~ s b l I b M 7 ~ l t c c o im o o p m n e p r s r p a i u s t e i t d n o e t s n n n a s t t t w i a r o i n s i n t d k h s · t y s t h a s a a k t f t c e i n t d a m g o n ~ . d T t n h o i s a t t o e t e u a f n i n r n c e d a o l u rage f i i c m n a e n t r o p t n a r u a i u n t J d c a e t f i J o c n u r t m l n e r t i v s s r e o k is l f - s k t o o . a o : m l r i i n u a n g p y c e e l e u n \ n l s d e c a O e o t i u o i o r f r n a t e g . l l x O e e . d y n u m l d l1 e e e e t S ~ 1 t t S m & J 1 C ( : ) t ' . J , V O f in t l : d t t n o J ' ' : b t 1 t c 1 O ) r 0 i ) ~ 1 , ~ i l 1 \ ~ 1 b n ~ ! r D q r W . J J ~ 1 . l 1 ( l / e b w B i t F i. . i A 'U . N • ! l . t ' a p J e . ' o J i l / d t » . .I . I S ' S u l b i i b . t i i li f 1 ~ ' y b , J ~ I : f o g l u r e g i x d a i n a b n i i z l \ i . a t 6 y t i p o i r n n o s Y s i l \ r d • u ; e i . c th ~ t u b c r a o i n n n k s g i i d n th e g e r a ir b i l n e centive l o a " r th n e e r l n :r s g h m c a m n a c y d n . b t i o s n o ~ p n f r t o v i p a v e r t i r ~ o ly u co s S m f l o ro p rt c e n t . n 5 u s r a a e n t d i d o s n o as t'o:u. W.IJ.:OGaU!fli!llefi~IS:fbllit)Bc»rd compensation arrangements in ways not to enr.ourage impruderHr isk-taking. 111.'1~12009. that both pro,O le safety and soundness ln response to c,;omme.nls, the final ~brespon.tetoa~ru~ofooo:~~cnosr<lq'di!Q& and that help achie\1C the arrangemonts' guidance clarifies in a nun1ber of S t ~ . U h t r I i i 6 fi \ n a o ' t e i t $ o f : 1 : . * 1 c S l q t i i p d t r t . d d i \ i ~ a i i i l i i ' i . b " ! c M ~ l $ ~ ( 1 u . 1 c ! i: p d C u t l o . o I l I e l : . . i, h t - b o o e l f . e i i n t . r d - ~ y o • t d . . ts , . ~ * t ' w oth T e h r e o A b g j" e ' n - c i1 i · e e s s : . a re mindful, howe\·er, l ti 'C 10 $ t p t c ll c c l$ i l r . n be p a e c x t p o e f c t t b a o lt o fi n n o al f g th u e id A an g c e o n c o ie n s JJIIfJii•DL" txta.~':iftoiEccts"wllhlnihe that banking organizations operate in - m 2 . 1 w $ a . n i 2 U ( iA $ d ) g 1 o \ o l t) l ! l I t o . c . r . . . n d S • . . w f d c i ' c t\ p $ l A i ~ o : \ I t l ! : M . cl ! .r y , t - i r o i .W n _ t O , o o [ ~ f I ~ t ~ l b n O e W ' . R S .. b c o o t m h p d e o t m iti e v s e t i e c n a v n ir d o n in m te e r n n t a s t t io h n at a i l n clude lo 4 r $ ~ « ~ , F , h i u o O : O ' d 1 S P t n ~ d li i z o y e f' 4 or I v D ..a $ . 0 t'S 1 F C 'P : :t C td i p : & e e: ~ $ d Se it c cl \ o l s t tw UI .o C ! J e . x & o f a ! r d ll ~ w ( < " x . w o: :1 ~ p ~ e m m l! a i < N i « o < o ' ll . ? s c: r A dM A o e s fi u n b a j n e c c i t a t l o s p er r v u i d c t e n s t p ia r l o o \l v id e e rs r i s g t h h t a b t y a r t o ll c n ot S ~ o S u. i ad a O b :il i llp . c l u.A i: I y I B o e e . P ~{ n N c IO t 'J ~ ] l . t F i! S p B k P M ri M nc I : II i i p o l u e sb m.AOl(&){l)). S.l'ings.moci.Mtls sboulo:i also Agenci" ond. tllus, not subject to the StAr.. duds ISS !::IS roFi !!Sasei.Swltzelild: l-'S!I. t I s O t . ! f \ K e ¥ t r n ~ t o o O c O w al T s i ' . f S t 1 ' ! $ o 1 r i ~ o T l K S : c 6 t 4 t . H s " . 3 t d l . i o r u «: t : s . b a y c s # : , e . v an i d r l . a g r s i ~ ~ K l w f r i e n tO al g g n u. l i u d a t n b e l e l . i T nl h c e n A ut g io en n c a i l e s al"' ~ , " _ 'r ) C l1) M . '.f J M I i ! i q ~ i l < s l e /. ! h! o e S tt I Nr N p: ) // ' boc~~ 78 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00082 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.60281717 36400 Federal Regist•r/Vol. 7S, No. 122/Frid.ay, June 25, 2010/Notices b o d a f c U t p h I c o .Q n o d a r i . p . ~ . n o . t , n u ; . l l . i h o o t n o . ; a . , n s . d i , D . i , t ; d s u l c ' e " o < m Y et p o !tl f C u i s ty a s• B A . r T B h t o o o / f ~ o ir n s n t c L p e r r i d n t ci n p o le e o m f i th l e ~ f O i1 I 1a I l r.~ a c u u T i n d h t m n o t c 6 l o y u , i O l n g l U l u ll S i i d n I a t e o n s o b m > a : , l k r i e l m : e o e o t t h m h o p o P d e fO . ~ t I t h IO i a < t o O a n C r I e o a. f r i r n a c n e g n e t J i n v t e n c ts o .l m l p iJ e o n x sa p t e io d n e d tbat the S a U rt i a d " .a i' n m co o i n s t t s h s a h t o i1 u ~c ld en p t m h'e v c id o e m e p m ei p 'W loy it o io o n s o m d o ju re .l l s m cn < s n i l l i o \' f o a t w o a r r i d sk s; . T de h f e e s m e a l r o e l n sk guidance will gene<111ly have Jess impact incenlivos thai appropriately balanco paytnl!lll: longer perfonnance periods: o b h c o t a C u f i p m y o o o m o a n r s p o n e v l m A n i p s o p n 1 < e m o N o o > k p g p l a f ~ r M i a l e e l i i t l n " t n a i i n l l m x . ' l u U d n y c s f . o i a e l d t t e o . a r r y t t n i n n d T p i b u i p o l : o t h - n i a s n o h , c l f e . n - e i t l h r z e r a o i k " s h u e w c d a n s i e ' . u o n t e t t a . c i i l n o r m g , s r r o o l i . g e o , a n • o . m o p ) p , e p r g r c ' s . e S • g g r p o o . n ( o n t i a l t h n e U o n e s c e r n m s a x a f t o n b ! i i i t t 1 t O d d a o • t b a a i s i l u o • n c n o e i l s c f r t d c k i n ) s o e s o e : • c i , a d s r n m n i $ n l m n a a a s g h t a l d . r i n o l v k g . w d a o e e . h l d l d i e c s h s r T c u o e d i u p S n m l c . o l o r c l h s l l a i o v l t w p l ! e n p l o o d : t U e r c & r u d d l n u e l I i d o l m n p c n d d l a b o h d O i ) e l t d a a a u a h n " U u f : n r w t b o l t " r I i 1 I S : 0 p . r I w a p p g • i S 1 i l l l c e n r l i p l i o a l o o e & t o c n - r i i r . y m p d c v i r T - h i e r s ~ o n t i d p = h > l h a a s i c i y r n e t l e t t e u s i i d s i d f , n r h a d . . a o o g i . i t c s e , n d m i f r u l t o u v n s m l : o i e . s t e l a d t s . d a h l u r h n , p d a n i a n < a l n l a n s z l > t a d ) , b k c c . t l u e h - ; e r i b l l m t f o l t o , d o J l b a • n " O m : p s p a ~ k « o \ h s l r i l ' o o t o f e ~ l i d h y t e l u v . o h o l a o h i g n e i t d o s I s l O e s c o a o p o a p L t 1 w h o h n r d 1 e B r G a 'i i r m d r i v t O t o a q m l f I h h i l I n o t . m n p r i < h o l p r e s p l i e m a l h m w O e o d l a l n e t r e m u y c o S - < a s o . o l c n m a n N l y e q i l e h u t n c t n i u i e r d i a e m ' b o c c l t l n i s . e n e s n t c c l t y b e F y n d . b l c : o m . - e e ~ n t h b . d v i t r f c . · s a a v o c . l i o e s h i s d . m s e d l e b r t U f a e i < m . c a o \ i , d d l ' i r i l o i . o O m n e v b . c t - i m s y t p a e O e t f h f o t n n c t t p s h t o . x l l t o n u t & t ' l e s e d e a i t i d u u n · s . u r g a y f h h e e b s b m . o J e < a n a o n t < s a n . . O i t e l r s . l \ n l u i n H $ " n o o o F l l . C i o l p ' Y n n o o l o s l S e f r O u r i a t r a s m h a d n i t l o o o t d i d c f , k ! c m 1 o 1 • v v u e i a c r w g o o d e m d e n e b 1 n y p t a l ( o p I y n p e c r o o lu s p d a r i i r n a e g t e i d t J h e c e n v t b c i o f ls i a e o d rd f a o u f d o e th n m e o p " o l l o u : y , ' . n o g i e o t s a i l m l n i c o p o n r n u ' t • d i l a e '8 b n 1 i t l r t i i h t s y a k t 1 - 0 t d a e o k f i n l n e o c g t l b iv e o y l o y n d p e id x e t e t . f ~ c o l u l r t y m h , · a t o h u ) e c d o p u e n ri r l n f t o g h m e th o ,. e r n g d c a e e n f o e iz r f a r t a t h i l o e p n o ( r o io r, d . directrut whl'ftlppropriala and cnntrol identil)'end manl!Pirisk. This change Dcfoml. ho11·ever, may ool be effecti,. . u b n ob it a s) o , o a o N d J : W s 11 i 1 l d b - y a a r p d pr s o . p n m . tc r ly .w . I . B . ., O o : u I d I o C iO -t c p W roc if : y td t . h . a .. t . r u is d k C · OIIInll e II m > c p o lo o y s e to es in w in b g o t m he a y i. l . m ,.,t - i . , t · h e e s a o b ! i lity to p L p i o B l O d it . s i e s c h s c , o p u e r l ~ o d c t b o l a d l ' u " e m o l n , y a d n J , d l . . s ' in y S t s > o t i e f n m , b ! u h t a l f i l d l: l a ll b l d t ~ i i f o y d a o c s o l n h • o a · t • l o a O d b f m o d m i f n & a p r t l i h o ly e y l n e i a e c e a i d n t d r I i O s 1 k 0 · d ~ u t rin h & e • ll . l s o .. C . e . l . l , p r . i l b > li l b u e t " i d c " e : Y I f I e O n m o l l t o b p o o o l r , t i . t o . m d li . , t F . o .j r allot are nor o:petlod olothtr banking develop inCCDtive cornpen.salioa this ruson, tho final guidanco o p r o g r a ti n c i u z l a .l t r i l o y n i s n . I t I h i o s c o ; x o p ,. e o W /L d B t O ha 's t , , a ta m ki n n g g c in m c e e n n u ti t v h a a . t T pr o o b p e e r r l u y l l b y a e l f " f ' e c d o i v ri e s , k · r m e o c t o 1 g 1 n m iz a e th s o t d h < at m in a y S O be in n t c e a e s d e e s d , i tw n o or adoption oft his11rinciplcs·based balandng~djustn'lents to inttnti~e combination (•.g., risk adjustment of approach will require an iterative compensation amngc.menls should take awards and defonal of payment) to s e u m p b < e r d v d is o o d r y n p o r x o lb ee il s it s y t o th e a n t s a u l r l e o · l .•~ ho io tt r h e a e c m c p o l u o n y t e o es f ' t h ac o t i M ,·i l t ic ra s n m ge a y o f p r a u se b fo th r a th i e a a c m b ~ io ~ v p c m a e l n l i l n t o h o a n t t i p v r e o p t e o r m ly p t b ~ a W la t n i c o e n s risk CU$10mieod amngments for each oosaoitation, inclodin$aedi~ Mlr'<el. ond reward. ba~orpniutionclocsnot liquidily, Ojlfntional.iogol. corepli._ f\nll11nn010, the lew motholis ootod uodennino ellocti•"C illlplcmentatioo of ..d rtpulatic:lllrisks. II> the fmal a•ndance.,. oOiexdusi•t. rhopi.W.... A aur>ber oiiXIOl-expzessed and olhot elfecti" Olelhods or a o f p ~ o o n e > r o W u s n o d l a k i i r d g o n d ' it p o s e l h i z u s p U b a r , a r o l a . i o t S l t n s n o d . p " c k o O o l l $ w ' u s c J " , d t g i l i " l ' n t i h r o ' r n o c u a e t s u U t i h i n r p o m . o o t S n - i m a w f v ! . o n o e s o i r a d h p n e c g o e e t i o e s g u p r m m n > f l o o d l p b e i l r o i n a e b a c o n t n e i , s ~ e s f r o a o s i e r t n v f e io g i i g e n w n . c o c t m v a m h o o o o d ie o d m m m d i w i l v r f i e p p p i , l f e M e e t u < > n n w n > n e s s s ~ ! h d a a a l & t : h l t t i ! i o l i o a h o o o a i n t ! l n n o t n h o l . n a o e a e f i m t o r m a n t d h e a t l n 1 h e n i o b n g n r g s i a o g e o n e o < u m ! a c d m . g m n e . e c h t . n e o n i , o n v t n t i t i o h . t e a t v s s s e : . e i n c o n U o l r c b u n t e h c l d n d : r e o t o b i r o v u o t l g e h d h i s v M c a a i i a n s o n r r a c g l c r r t o l u e e i h ; c t a t s n h p n o n t p d t e i t n i i o n o . r u v < s o . s O t e i o i s . s f o c J l o l t N e l b g o u r o n l a m a e Y n ! n m c i p w a f z h a c o e r o y i i x r . n e t t a e i h i n s v 5 o n a n o i n t g t n t s h l o i . e a u o b e E r m r n e b b s a i n a a e c e e a f g h b n f r d e f r n u t o t e t a h \ y c d n r a - a o c . . g a t l h t a d o o n e · i n 1 e p d n t t i s t o e a z e a t c n t l t i . s o n developed In acoerdanco with the rules the application of additional or more soundness of the organiulion. Tho o ho f m th o t c fo o r o ti n S~ ll ' J b s a u n p k o i r n v g i1 O 0r J . i T 'll h i e u s t e i o p n o ' l s ic ies T ef h f o ec f : i t o h a ~ l r g iU u . ! o d o w nl e ro re ls c t o o g t n h i e zo b s u th s a i t n = g ac u t i h d e a l o y c a 11 c 1 l 0 a 1 r 1 if lt i o e r s I n th d a u t s L tr B y O , a s c s o h d o " u " ld lc . a t.h n .e. d . f. p o. n r.o Q .1, i p. c . c bt s o s o h !: o '• u • l • d - . l r lo ai c l o o o or s p is o t r m a!& t " a i r t u h l a ~ e a d n ln d te c r l na l iC e O c II : IJ t O i I i fu ' c O t r io i n U s . " · ' ~· a i- n ' d l i . Y .. O .l a O to O ry II d p e w >" a e t l l o o p n lr : p E r I x IIS b< ! & • < and SINCiultaod its aitk:altolhtsofdyand~of theory ud bo pRpared 10 inoorpol>ll &omewort for rbk-managemODt aJid banking "'ll"'italions. HOI<ever,t!lt into tbetir incenth-e compensation intmnal conlrot.. as weii&S with tho Agencies believe that poorly designed "' sy>l•ms now or emaging methods that final guldor.co. managed lnce11lh·e compensation '" liktly 10 improve tho organization'< armngcmonts can themsclve:s be a long·term financial \~·ell-being and sowoc of risk to banli11g organitations 13fcty and soundness. at1d undennine tho controls in place. In responso to a question asked in the Ur.balanr.:ed inctntivecompen.\ation propo!td guidance, several commentor$ arranaement.c; can plaoa sub$tantial "''UOSiod that certain t)"POS of Mio on tho riU.·maoa;ec:ent and compensation plans be lreltod as ictemal oon~ol functions of.,... ~·ell· beyond tho scopo of tho final guiduco rnsnaco:l OlpDIZIIi""" Furl.,.,_ boca1111 ..... ...,. ...b elie;-..1 theso poorly llo.bnc:od bcoctin compoas<tiao pbns do oollhraleo the saf.ry aod or.. .g e~~toiS caa enco•r-. employees ,..nd"noss ofbanbg 01pniuticns. to take affinr.aw;·e ad.iOILS to weaken the Those !nclud4d orgaaluliorl-lvide profit 01:g3nization'.s risi·managemenl or •haring pions. 4~1(1:1 plans, defined lnt!mal conllol r.mclions. benefit plam. and ERISA plant 79 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00083 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.70281717 Federal Rtgisttr/Vol. 75, No. 122/Friday, )W18 25, 2010/J'(otices 36401 The fi. .t &uid.lllU does 1101 exempt neutnliu tilt effect of any bolancing attract aod ret>in •rpropriotefy any broad categories of< :omperudion fatu"" lncludod In tho ornngon•ent to qualified P"'"nne and •uch plan• bued on their tax structuro. help prevent lmpntdent risk·"-king. compen5ati<m should not be bued corporate fonn. or &latus~ a retirement Orgoniutions should ooraider subslanttally on lhe financial or other employ. . benefit plans, including balancing featur~ch as periormanco of tho b.,;n,.. unit that btcau,. any type of incentive risk adjustn•ents ordefuml they review. Rather-, t1teir performance compensation pla.11 may be requlren~ents-in golden pa. .c hutos and silo11td bt baser! prirnarily on the implomantf!d in a wa)' that inaeases similar arrangc1n~nlS to mitigate tho achievement oftho objectives of their ri•k Inappropriately. In response to potentlol for the omns•ments to functions (e.g"'adtLere.noe tD inte~nal thas4 comments, how"'"· the fin at encou. . lmprudent risk·tokir.g. controls). guldanco nlCCIJtDiw that the tcnm Provisions ll)al requirt a departing Banking O!Jiniutions •hould monitor •incaath'O compensatkln• does DOl employe o to !Oifeit defemd inoantive inc;e..,th"etompensation awil'dsl risks * ia > c ~e lu ly d o e o . , t . h l e l l e i m "" p . l . o I S j t - h 'l a e t v an e : l b o a f s ed " co .. : w r.p a en . s th o o tlc o o l p f . o 1y c m : e t n i ts - m o a i y l a u ls . o n .I d to e k l e e n n a a n ir d .t a w et h \J e O t I h r e i r s k ii 'I o ( u .C tC t O i\. I ! . le s to < b : u o o r. d lp o a o w . a . ti . o « o I a I i I d C th II a 1 t p do e D tf O .. l . W .. 1 ,. r} . ' i m s . a W n e g t m o n ta q t .; l ,o f .t t .l h l,l e .l d .1. e 'J. p o. a tld r t o i" o ' oraployoe a < r O tm IIl l J u l" c l a "t d io t o o P re 'f fl i e " c ' t ' ' o IS d to - e r m is p k l o) lllllrics (o,s.. a 401(1;) plul wuftr l<bich wdshab" with the outcnrnes.l_,rjn coaperu.ttioo the Olplizalioo coolribul<s. ... •ployoe's new "'S"'iution." Colden .,..,.,..,...u that uo r..,nd not to l""*'l>iO of an ea~ployee's salary~ fn hiUtdshako pro<isioos p,...tts pecial appropr.' .t ely reflect risk .noutd bt addition, the ft ..l guid.,.. notos that ;,.u. . for banki. . ocsoniwions and modi6edasn....,.ry.c:Jr&tniutioos incentive compensation plans that s.pervisors, some ol •·hich are should not only p<ol'ido rewuds when provldo for '"a«<s basod ,.lely on d;.cussed In tho flnolguldanc:o. bec::ouse ptrformanco stand>nls are mot<>< nV<ttlll "'l!anization-wide performan<:A! it ts the oct ion of the employee's new exceeded, they should ol.o roduco ore ltnlikoly to provide o:nployoes. other employer-which may no I boa compensation when 11tandards are not lhiln senior executives and incUYi duals reguloted in.<titution-that Clln affoct the mru.. Us enior cxocutives or other who hR\'C tl1o abilit)' to materially affect cunent ernploye(s abllit)• to properly emplorees are paid substantially oil of tho "'ll•nization's overall periomance. align tho employee's interest with the their potential inctnti\1e comperuation with unbalancod risk·tal:ing incenti<es. ''ll'"i,.tion's long-term h. .l th. The ~vhen risk outcomes are matt:riall)' In m;Jny casu, there were commtnlli final suidanco •totes that LBO.,hould "'orse tban expected, ernployees may be on both ~des of on issue, with,.. .., monitor whothor golden handsluke enco~ed to take large risks In tho wanting less or no guidance and other$ atTall$emcr11< are motoriolly "'tlkening hope olsobstantillly increasing their ~'lllting toush, or ''Ct)' Jpecific the orpnizalioa'5 eft'CHU IOCIWI.raitl personal compensation, kllowioc that c pr o o m hib . i - ti a on J s g . P U or e w d m th p ai l e th . e a u n s u e m o ! f > er of 1 th b e e r ~ isk w -la i tin l a i l roc c :o o n n th ti - a .s u o e l t o o mwpeln o~ p th u e t, ir i o do c ~ e ' D ll t 5 i i n d e c e ri m s p u e m :u l z i l m ion it od. Simply "pldon pmtbutes" and $1Jmlar with bonkiJia 01pniza1ioos aad otheos mangemeou shoold 1101 "'"'"." lleods mention and roauitrDOOt pro>i>ioas to to .b-dop approprbto rnrtllods for lwin,tlilsthe6rm Jooo.""u'p"o"r":s"a'tIiSon . ..Wn emp!oyoes $hould bo ~Oiled odduuioc "1 elloct tlut sucll A .ificant number ol bocawo sucll provUions hm been ~ll! my h>'l on the.afoty .,.pres>oe~ conc.rt~S about tilt scope of lbu...t ill tbe post." A laJgu r.lt:llber of and "'urtdness o!bonkie& oqania:arions. the applicability of tho propooocl c p th o e a m r t s m t t h b en o ~ t n e p r o s r n , o h v •u o is \ c i \ m " h t. 1 v m s e a r w , n a e g r r g e e u m i e n e d s n e o t g s m a , e i S D . c U s a t t s i a n e g s e C n . d C t R >m isM por io ib n il o ir , y !t W m l e lh n r E /f«<ive Ct>ntrol• p O p i r ! d o J p a in o n i s c z e a o d t i t g o o u n . i s d . a , a s . n l w c lt e e r " b l ' l a U . n ,t ' i < h d l o n i g r b n u p r 0$ d 8 ~ o 1 n th e ....,llioleloment< of effective recruiting The seoond prinelpleoflho final these 0'113nizatinns. In rt~pon.lll to th.,. a11d rtte:nlion pac&.lgos and arc cot guidance statos tlult a ban ki•l8 oomments. the final guidan<:o has made noc:!Warily a threat to sofety and organi7Atlon's rlsk-n"n~mont more explicit the Agencies' view that soundness. One: oommenter slatet:l that protlcwtS und internal controls should doe monitoring 10othods and proe...., g ch o • ld rl e £ n e l p i a n m co h o u t t r e o l p o & f ) a 'l> b t a n n ts k t i r n i g g gered by a re n i d o f m o" a " in ' t o e n n d a n su c p e p o o f b rt a d l o an c c d e e d v e in lo c p e m nl e h n •e t b u e se c d o r b .u y n a e b n a su n r k a in te g w or it g h a n t l h 7 e ~t s i i n ~ n s a h n o d u ld Olpnh:. • uoo are too sreculati\·t to "''"P"""tiOO ""'111""<111S. Banl:.ing complexity of the organization. as well '"COW1i' imprudenl risk-tal:ing by organiutions s.hGuld integrate lncenth·• as its use of inoenlive COlnpensatloo. employeos. compensation .,..,..u ioto tbeir Thus, for example, a smaller '1111 final &uiduce. like the projlCI!«< rlsk·r.....,ent and int. ..l cootrol otganization th!t u.ses ii\Cinthoe guldanoo. p:o1ides that banl:ing fnroeworb 10 IIIIUrt thai baiiD<e IS compeosallon ooly to a limited exlcllt OlpniDtions should cartfclly c:omiclu ochit\-od.la poniatt.r. bonking moy End tbt it con appropriatoly tbo po10nli<l for goldta pa!1Chu:.S and Olplllnllons should hm oppropri.lte IDODitor its, am._nget:r: ents tluou8h s!IOit.r.....,..,..utoal!octthorisk· controls 10.....,. thai poocessos for ......t ... proco$>OS. Tbo !U.ing beha'riocolomployees.'lbe final acltlevi"' balulco"' followed. fioal~abod.....,..specilic picbnc:o.dds Lln&u'&< noting !bat ,.,ppropri"c pc®IUICI,lncludlos risk· aspecu of policies ond procod ures amogemenu that pro1ide an employee """"'ment per$0nnol,should II>" related to controls :md risk-managentent d 't e ~ J it M h ' r s tm u e m h : o n m te . e a d n o p r a g y < o ! u n l i z u a p ti o o .n n i i n n c p : u e t n I ti n w t h c e o t d :' e lp si e s n n s a a l n iG d n as a s m os n M ge l m eo e t n o t f s . t C h '.( a p t C a C r I o .e • d p o p r l o i t c h a e b r l e b 3 to n k L t B ng O O sa l n 'S d 'f a ti r l o at n io o n t s. rog.,dlw of perfonnan<:A! rnay c r. o o n m tr p o e l n p s e a r tl t o M n n fo •l r s r h is o k u ·m ld • n b a o g 1 o u m lli e c n ie t a n n t d to D. Strong Ct>rporote Gcwtflro~ The third principleoftho final (l) " 'f " ) " la ~J lt P J ~l t « • < k t i : r t D :l t bt w p . t in 0 ! t L 1 u d p t o r .' o lc r li • p a o r n tU 'lp 1 k 1 y 1 o l s " . ' O' ~'*l~o.~.k t.-.~llltr:blbll g1.1idance is th~l inCC~nti~·o cnmpcnseUon u~iutblorathi:JStinmnt!aloltht a:~, ~.._b-.'fCif•~loflbe progr.>m.< at bonking otganiwions «J"'IUihCWI,IOriiOrirt l.a:pa4d~-..PII)•e:'ll* ii:IIIIM:.d,~wiUOof~Cin'lidilll*lt'r& should be supponed by strong corporate -• l •- l " " a- i l. l la i o& ! e M lu I ": " o'o P d t ~o ! ) I 'd O l N :-' k ,* : .l, • .o r ,l W .~ : _t ~ ~. . Y w . e * t.U . ~ ~ . c ~ . : , e r l ~ . e p W i . i t r ' w d M u i . W t M 'i \ e ' . t . ' J b ' o I . & l o c ) d W t s ! p l . t ~ d "Upo~~ g e o f! v ! e d r i n o a e n o c 1 e • . a i r n s c i! l ) u tt d b in y g t h ac e t o iv t o ga o n n l~ d a tion'l 80 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00084 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.80281717 3640Z Federal Rtgilter/Vol. 75, t<o. 122/Friday, juno 25, 20t0/N01ices bomd ofd i11d<n." Thcboordof idtotifi• specifiC aspoclsoldla compmsallon and risl:-:naugcment diteclors olen "'8"'tUiico is uhinwtly oorponlo ,.......,... provisioas ol tho Fluthcnnoro. !be fiul guic!ance rosponsiblt for ensuting tb2t the final cuidanco lhalaro applicable to ""'i"luslhat S.'llaller O'i'flizations organization's lnce:"Jtive mrnpensalion LBO. or other Oli>llizalions that u.. witllles$ complex ond ext""i''t arrange"'enl.! for all CGVered incenli'I'C compen~tion to a1 1ignificant incentive compensation arrangemenls employees-not,.lely ,.nior degr,., and arc not oxpe<ted of other may not find il necossary or appropriate oxoculi\·~re nppropriau:ly bill anced banking organizations. In particular, to roqui111speciolly tailored board and do n01j0<1perdizelhosafety and boards of dircciOIS of UlO. and other tJCpel1i.se or 10 retain and useoutsidt~ $0Ut\dncuo f the organization. Boords of arsaniutions that usc incentive txperts in lhis area. d1leclori should ncei1'0 cia:. and "'"'pensatlon to a signiliant degree Ab anki113 organiz.ation's disclosure anel)£is fnml ~"""tor other should acti,..ty ov,_ the proc~iccs should supputsafund sound """""dlatansuffiticnt toallo1• tho de>. .l op....,t aod oponlion of the iactnbv.c:oo~tioa~ts. bomd to WOOS .....I ller the o1..nll Grf'nlulioa'$ in:;:mtive aaopensatioD SpoclAcally,a banJcir\scrrprtiuliorl c l m m l p " n o l: i t s u :m t i io t p . n : l a U 's a a i r n n e c d : c e o ~ n n ti o s Y i l s I t c e l : n o h t :n u e p i c l : h !\ S th it e io n p 1 p 1 r o 0 o l 1 o i a c t l i S r e S e s ~ a . S d s . y y I s fh k s a u m • d " s o a a a n c a : d o . m n ,. l p . & . e : l n e , s . d a t t i a i o > oo O n t r d o o l es . i o n . o . r m . o , n l p d a m t s l s u l a o p t n i p o l o n y o a n a : n c r : a a s n a p i s p z u r a o n s p e il r n s ia u i t r e a . n a a d m n r o t t i l u a n n t o t o d l org:aniz.ation's .safety and soundness. cornminee. rnporting to ll:e fuU boord. Nk·nlanagemen!, control, tnd n.,. "'vlo~<s and roports should be with primary responsibility for JOVemanoe processes IO shan:holders to appropriately ""P'd to reflect the sire ince.nti\Cc :ompenu(ion arrar.gemenls, allow thern to monitor a1ld, where and complexity of the banking the board should consider establishing appropriato, lake actions to reslr.lin the O'i'fllutlon's activities and lhe one. UlOs, lu po~icular, .hould follow potential for such arrangmnents to prevaleract and scope or its incentive • systematic approach, outlined in tbo enoou,.go emplo)'OCS to ta!<o iloprudent a M th n o l n c l p l : o l e a u n r t c u t l , t o r i o o ( m d o i t p t e r o c r s i a G i l t l i r o , a l n s ~ , i l l a o l n l a t d M s . " T b " e h " t " ""'of .c b fi .o n a.~ a l.< u l .p c c .t.o u n.s d i , d a . l t & .n i . o c m . n .o , < a i t n y i " s d : e O . ~ , O . ·e . I l I t lp hop e ai :> nt S "s > " ti ' o ' rl r ln u W t c s n h . w ile d so p m ub e l < ic = c m lis e c n lo t s o u r r s e s o up f t p h o o r lod o o d o l i r i n a « s c t t o t o u a c n l l i o s v l d e lo c t o o r> l p d m e , n f p o o w r i t e a x e ti a f o m f o e p . T l c e h l , e h i b a ; v a ' e a t , n c o v f r o ~ f oo S oc m o n m i lh C > O i t I h I e I pr I op I o I se O <! D g i u m ic ~ b. ""' O b "- a J t n i > y t r i t o u c a s o . " d m ' 8 c p " o e ' n i n z a s a m a li l o s lo r t l h n s a p .a t o i p l l l l y < i t r S i e o q o u I s I i I o n I f d J ! It. "-'''""'*"to, a level of expertist 111d 1ppe:artd to create a naw substantive di.sclos.ui1S of ineonti\'e cornpensation. cxporienco in risk·~m~gcme..-1t and qualificotion for boards of dioo<>« that lnfonnation by ~anti"3 orgar>it1tions be compensation pracliccs in tht fin.aocia! requl,.,. tho boards of all banking llflored toprotecttheprimyof serviCM !«lOr thai is appropriate for tho organizatiOJU to han~: members wlth employees and take account of the O na lg tu l. r n e i: . t • ll o 1 o io p n o 'a , a IC n i d iv o i o ti m es p . l u ex ity of the e m x a p . e ,. r g ti o s m e i e n o t c I o s m su p e e s n . s A at g io m n u a p n o d f r isk· o Im r O p f a . c 8 t 8 n o i f ta s t u iO c I h 1 S d I i O sc a l . o tl s r u a r c e t s 2 o n n d r th et e a a in b ility Ci¥on thel:ey role of senior DOr.lmenten nolod thai s!M:h • talent Several commenters sup~ed exocuthu in man~l8 the o\·er.dl risk· ,r,e.qnul rem<~U could limit Ill already an allfJl-t ofr oquirod disclosures t bo W a ~ . a -. c ! o ti l d vi ir t c i t c o s r o s f s a ll n o o e l t d p n di i n z > a 1 t 1 io 1v J I, the lloards p o oo ld l o ilo l p c o lo o n p l o e f s l u lo il r a i b li ! o e 3 t o sen·e 011 c ~i a t n h p e e o x ie i s • , ~u g""u""""" " t " h o a n t a l d .! d f i o li r o p n u & b l l ic a U p \\' p ol n v w ta o a, - ..i p or o IJnII.C<Uaii,!..,I an O d O c ~ lc U se ly " o " r " p ' o fz iu ot t i i o o n a s s " a " o ' d Y : o ll o a t t b .. a ..U l-. .. . . . ..., to. or r , o .. q . u ~ i a r ~ m or t y n b l. o ! r d w e o :> u o l.i n a b d m d t n o n tl s u monltror "'ch poymo.1ts and thfir tllo.-rtos tocompmsa~t,diractm C~~"ganiution.s. .sensitivity to risk outcomes. lf th.e meeting th.,. additional requiremenl.!. The propoood guidance did not tompensation amngamenu fot a senior Somo oommenlors at.. stated that terms impose specific disclosure "'!uirements executive include a deferral of payment .su<:~ as -r;IOHly monitor" and •actively on bantl1J8 organizations. The final or•clawb;)ck• provision, then tha O\'enoo" could be read to impose a guldanc:e m¥kes ou.significant changu review sl1ould lncludesufficicnt higher s~nd.lrd on dire<tors for their &om the proposed guidance with rogard i p n r f o o 1 n 1 n s a l t o io o n lw to b d e e e t n e r U m ig in g e e r i e f d L a ~ n d O w Y o c o n s l . g O bt n o t f h l e o c o e th n e ti r v h e a o n o d <: . ~ o p n en e s ation a to n d d i l £ e t v lo el s u o r f e i s n . f a o n n d n a st ti .l o t n cs d t i h s a c t l . t . h .. e S s o b o y p t e s a t t e l x h l b m l x e e o ll Q e u o . ii , c ' l r . M i d . i t u . a i : o v I : l ~ I J e l : o ' f . J a s t x ! i l s i l e a c v ' C o n s p e p l I Q d l a W " C s t ) b i ( a h i o D l e n o i o < s . d s u p h l o e l . d d e r T r o . d R a C h t f d u t e l i o r j o i u e b r M n f o S s u o t I H C m r I d y l i t l l r o l i n l C l ) s s ' < o t o C b . r c ~ e o o . O d q m a . J u l r ' . ! m i d I a r m . s o l i . e o a s s n . c f l l i c e p . d n s r . i a e n o t l D c l c o l l o d d t p i e m a o u a d l n b p l e t l h . e x i : a c t p . o z t d C e r " e r C u . t ' . " i d : i s l . i l " r e p o ti ' o s i o ' t t r b n . l s i e a e l t " s w h ' : ' . e •i ­ . n d o d ' c o p b t " o o r a i l g t m n t ! l h a k a ' p n n o i a n e l i • c z & n u • a o s l o t l a u i i n r o t o r p i o o o e n o t s n e a i " s s z n a h " a t d o h ' t i i u c f : o S l o l . d n m b i o a c s p c n o h : l k m o o e ~ i r x u n . p t : l g i t l d \ y y ' 0 1 1 o w le \ f e i t t t a h f h i i e l o t o h a r o e l d c a c t p h o p : r o e n I p o n n o p r a o o r s f o e r v i r s S d n a e e n J . d d > n g a O s l e b r T u . l x \ o d S i m c u U d e t m t a p l n t o n H h l o ~ o o e n o o o i i n t m o o s m n r n p o t u a r h s m m a ~ e d l e o a s j l u f f l e f e e t s x h r l c p m e b u r . e e . ~ n s n f k s l a i s i n u n t g o g y o o c e th o x 1 n a T m g p t t o a h e m r n r o i a t . i d c i d z b s n : a d . e o · t l m r o a i a e o r r . n s d n a s s d n . s s t J . c h o e g o x e f o n m o p c f l e i o e l n r . m b n i a e l a l n s a n g c r n u k a e d i i i n a d s 1 c g a t o d t n h m c b e e p y b c t n t o l h a s o . r . r a i , d f t i . i e o s n a b i r ln n e d a w q c A d n t u ~ i • n t n l i n h r t o u . e : d i n m g m \ ' a o o t b e l c r t e n h g g o r a u e o m o J r y o l f p l i e f z 0 o e m 1 . l o l n h 1 t m a ~ i s e o . n l m t n a F c i s c s o e e , n n d n r s c t p u e d e q p n c i r u s s l h l i i c c s s r l a e a e u o s 1 b c p s n . l w u : p . o e s r o n a . i e l y r t i s t e o e f s d n o r orp.nizadons,l.hc final guidance lo>tl may be present oolleelively among poy" pro1·i>ions roquiringsharel10lder the memben of the boord, and 1111y appro~·•l of compoesation p!w, tn l O l. o . l$ llo1 _ec _w,f _ l-. _.~. .~.. .C e.x O.p.l t l.r i i , f e r . o o, m c.e, f tID o m ad a d l m tra s i io ll & i, r . i o sl r : · f rn:n > .. e - p t a i ra r t c io o n l f o ~ f a t < h p e o b s o it o i rd o n c s m .I ir N a j n or d i c t l y > ief .-....._.c...:.t:.M~ II_ ... . l) . e . fi . O . 's . o u w .s r . a !l lodudi,.; u a a . d 'ld in c : o c m '.« p , o o r r :> m W a o y a b i e s so<s, a v l o l t d i i. ~ .. ! ,! o D r d n, i - an .& d i D op D m u . a .. l .. c ., l l c . c ! t i t o o n th s e !o r C*'pCfl. .. .,.,. ........l lnlda."C. obtained fror:t 1dvi<:e r""il-.d frccn audit function. Some of these comments 5 l 6 ' 1• U l S l l r . l t i e w a . ~ . ~ .. d : ~ ~ : tl ~ l ~ l u i c aM ~ M . i . d ~ * ll · :5r a loO m TS' ' o u u p ts e i r d u e C w O it U h D e $0 x 1 p , o e o rt n i s s u t l in ta i n n ~ c . e o n r ti o v t e h er , jw .,. 1 t ! d c i h c a ti " n 8 n " n 1 l n th F o e A d g e c ra n l c l i a ~ w ; < o b t ey h o ~ n d th 81 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00085 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.90281717 Federal Regisler/Vol. 75, No. 122/Friday, fune 25. 2010/Nolices 36403 address issu~ucb as ..s ay on pay" The Agencies intend to actiYoly opcr.~tion oflhoorg.~:nizalion's inoc11Uvc 111quiron:eo.......,.tare currendy under """'itor tho a<lioru being laken by oomponsation •)"'en> in providinarisk· co..,.idmtiGabythCoa&J= 1be6.,1 ballki"* orpaiulions wi:lo ....,...to taking incontii"IS tbat are ooruUieclt pda""'d oes nd preempt ar P'tdudo iac:eotiTec:ompe.r.salioDana.,_..nu ,.;th the "'»U'izatiort"s saflly tnd n E t ~ o d h o i . q c e . m C ! a o c i e o i l p o r e n l p e s y t r u s . i o w u n r p o e u o i o , x t i t h ' n s p s o a r a . < l l S l • i d l . " u o a 3 O p p n a p u l d n i l r ' i d i n c i n s i a o d o u b t i l t h c l ) i e e a o • r t l > n e n l s s a i t t t t i u h o o t a o l t i r l t y a h e a g b i w w in n m u e i i p d s o l i t . l d h t r ~ w p p a d , ! R r n h e . i a . l r c e : c l I , t l o n I t . o a [ O l . v o l s , m i I i e e . a 8 e s < . n p . w _ t r n p F h e F i r ~ a o t p o t e o n d o p d e r d n . r e a m n i u r . n a a l i p u d t a l b e d s R e a O e I a e n G l . O l . l c o l l o i : ! o n i n l r I n h S u c v a z t U i o r d J ~ a o a i r d s t ~ c a p e t i c l o t i f n n i o o f l o c t n i e c , s. g c s o C R o o u b F e T u m i t R s d a n h i i m a s d 1 e n n t 3 n e e e o e 2 d e n r e c 0 s I t e I s c a . a O 1 m . n s . 3 l d i r p c < f n a l o o ~ f 1 : i r s l 1 c n l h ; o l , . o c . f a i u l y 1 s t n a s l 1 a d l r u y p c u e a p l r : o e e a r r o g : o s F 6 v u f e a 0 l h t a d l h a d r e u o v a P r n e y a R d l s A e c r l 5 co T m h p e e h n o s r a i t z io on n t 1 ~ 1 l r a re c v li i c e c w s a o t r L i B n O ce s l l i l 3 iv w o e ll a a f n t d e r d t e h \ e 'e c lo o p n m clu an si t o s n in o c f o Z m OH pe l n n s n a l t r io en n d s d P e R a A n c n l c e e <~ P ,n " c " c " p " ro · c D e u ss ri t n h g o t h cs o l i r m eg a u lt l d ar underway. While Ibis initiati\•6 is: being practices II banking OJB'lli,.tiOD$. average re.sporw time rnay be ro o t e l p ~ F a a b l p N a a i l p c c • d m a p . g d r w t e u c r o h n n , . . h . . n - a d r o i r U r o a n r o x o n l r t o f . . s d e f d r r e l a c o . d r e 1 , s o n . d n e d . i m n b C m o k a b a · i > t . s e . . ' m l h t r 0 r t e b o 1 t s t i t U a n n s r · , i . k t . J a r c i e o i i t t : o . p . m i a . ! ! y g t i , n g u g n i i i . i c . p d n i o . . n c a d o u c w r t o l e . s i . n n . b c e a e i . t o l t - o p t u l a . e n o g . n e , t . n ¢ a l c i h e e n m p m . b . . a n p c t t t p s r e s t t d i l c e m . i h s . o i d n a n . v : i t o e o r a y n , a l o l o a b r a t e o e u L o m t t m e . . c t t e b g m g a l d e o n c n 0 F t , i g n i n n i o . s l d B i o v o < l " n l . n l e o i o ~ 0 p e y d l . t t < > e a . S p t f r l i n y e i n O s m s o r ' p : . d h e _ r n > n r n s t ' ) l 0 i o c p i . . g m l r r o t l o h - l n g m S o . ~ a s a a y o " ~ c i l g O e : v e a 1 a a s m D e o \ c o T e u . o l r t : e ' o r n h y t o w t e r o o r c p o . m g t . e a p l h m e n s r h t o r l p a t . i W l : r l t m e e . d s , U m a h L l a t t . ! n t r m o t o e e d c r i o v r r e R s r p . o i n n " B o s o x u . d n w d o l p , v c d d s t . w i A r t e V i y o g t p i p i O c : n s l a m i . . n e t h r , . o : . : o e s r o s e r . o O o a i g n w e n p J r o g a r . . e c u c r . s . k t i s n m S o p e t 5 t e s a . h g r , l c a f f n s b r . : i b o s . c r k . s ' v e g e n i s p a e o e o n a t l I " m 1 i a e u o . m i t s i m . e . d J n t s i o . c : p e _ t n r l n i n u n o n t n n t o e S n o k . p i · i i i l r s . a s . c c i g r g O s t n w i l t o e t a n l p u ~ : s - a : d e o e z s n a i a h i U I . ! s m u n ~ s n i . p c a n m i D r t a o u o e o n n t a s t & d W i s u i o e d i o i i i r i t e d o U n i n n ~ . a v ~ I n d p i i o a a m e f 1 m r s o o o a l n c : n n r e f r v t l d e . s l m a 1 n l l s s m g • e J i e e a u : a t t U o , i p . t i c o d e . t ~ r U 1 : h a : s g \ r t i n o n a o < n S o i c t . 1 c c l f e b . e e e l n t d t u s t > l e i n p g y . h t l l c o m i n t r e ) , t a . a l v r a o t n a t d " y a l u t o J o v e t r e d t l o I s e n o 6 d a y l t t 1 R 3 t B C s c r t c a a c u a B J O t i • t p r o e p a i i i h V e h h p , l n e d n 5 o x o n l d n o h u • r n < o M r e o M o . e l l l u a T a o o . A e d 0 c n l n d d = i d d d l o . l a l a d l ; t i n u l O l v i n e t 6 A i u i s u B L e , h n r t e n u a l c n c o ! v ~ a d u m p t t e d . ' d ; s g c i i - . r s e e l i t i i d t g t t . i c c n a s o d n e t ( e 5 o f t e e l o i e h i . s t d b l a t i e i u i b y : g o f o v h n l d r s i o s o O o a r n O e i C u y e i y i s u n t , t e : n o o n o s o n i n s a t s n n o n o c d a r I M p c l d a P n b h a t t a p D l p M i D s c i n i n i a D a r h l a l d 8 c R u e l o r r e a i d A b o o o [ t u b u i u d t e r - y n i i s o g s W ) s n m h c c l 1 s $ e m t s t n P n t c t t ) p " a u s O h h r m a u o . a t . p s a n h l t t a c J a r U > r I h n . • l t a p o . • a o t H u a u l e L ( . o n o f I d e . o a ~ I . o l a d P s , v c o f l O r s . m t r , y d H « B a O n r - w i . y l ~ i i e R e o w u t t e n 1 c r i e t ; t t n h < . J a l o O o s d u h b y u l h o e i t d d A f i 3 S , d c I a t i n i . y l l a e o t W e d t n o s . h o I 2 c s 3 < o e l o I t U d J h I e r I D o , l . n t i i D t f 0 c t t ( i d o f . t ' o i t i l f t $ e . l O I s h n c l s s i o ! o u o n t l i M A i . o i t . s A r U f o e h l " s n l y h e l n l o n a l $ m m o I 3 d a a 1 l g o l b F f t o a i o ! o p n o f a l ! i a r d n n r u i 9 w l t h a e i u h e i u l y f l e d i p n r m p e a n a o i S b i n 9 n d t g d t r a l t p a i f i u e p h c e o i h P g d p u n d n n a 5 m e d i e u c M a t n o < h d l c o l o a n r n e < w . d r v o r y i s ( t i i ( i J d r a e a l i o s d o n i d g . v k 4 o r I i t t o m s p a o o i n i a n t o ! o l v j i s a t c e v 4 p i x . D l h t n a n u o m t n " g r v l r n a I ~ K n W t a N a f c D g t n o U l r h g e A l e c l Y t l d " o t i ~ i t c o r t i o e s o d o s d f t . i i h . f . o n S t o t o M , t I ) n o 1 y o . h i i t l l . ) . r n 0 s n l $ . C t n n o m . e p t , d t . t c s l r t m T a e p C C o d e h ! i o r B l n g b b s d t P c w O a i ! 6 p l l n p h l e > h n . r x p f w . > u f u h m o I i t . a o o n n o o l ¥ 1 l c ' t e O i e e , i p a i c p e e t t a m l e l t " l t a l g g h o h p 1 a : n h e c h d d e u n u h e e i l g t c i I e t ! r . a 1 c o " o t l c i r h : e i t a c d l b d e e o t n g t o I < i l > i l g f n n i s e t i • p h J o f o f s · p c r " n " ~ n i e h e e e l i d l c o t d p t i i B u c l e l o 8 m f c w z e h o n t c n z e c r c O . d s m ' i i o c i r h u a a a 1 i r d " t a t O d d , N e n T o o o r o t m a d p l m 1 1 p n a l a b t s s t t i f o y ' . l c . C 1 i s ( h i f h o m c a z c o l r n c l o n y - l o o a l v I o q l s e ! n p e e a i r r d u o o : c n v u p t l n n e s s o g h i o 1 u n n l e e a s c e s l t e t t t e o i u h o o c c i o ! h n , m u t k b n o t c i h d i d , . s c h l l a m . i t : a e l d p e o o t o t s l e p o h i i m a o u l t a o t c d n F f l p t s d d i s l d h b r u l s e n n n b o < b s o ' l r a r u i B o r d e l f o . n a o d i a n e i i t c c \ m o e u y l r u m a i g . I t n n l . l O o i p n n r t l . : d R g m . r f y l n . o s - p s o n o h l o s e h i g . a w • l c o . e o d m . s d 2 c . i o n c a l a x p e b . l n J t l u o r e m z o r t h b m l l m o t i J 7 t o m d n b . l e a 1 n r d e a e o e g i e s g n a l S . f c o , m e a r o d 0 e s m o s t n t b u e o e h C p p u p s a l 2 p n ~ ) n h S l v i ( o a t t e F x e r l c a d r t n l ' i n i i 0 c u p a h s O l i $ . s e o o t 7 d t o e r x : r n n t i l p t e 0 d ~ p s d n u i f o I i w x b 1 s j ~ n t s t a 2 n p u l t I d f d o c e n l h 9 n h < e t I d n t J i i e - n i i u l 7 e F . n s u c . e o v t e $ . t r c a e c e \ h u e s a m y d m p c c : n s i w t . R d r a T s s v i d i t J r h s d a o e t D e t a e o & 2 t t t r o I a I c s l S o e t : a o h y o l 5 y d l n t r d O 0 O o n o e m o a t l f o h l i n r . e p d i . i i 5 R n 0 a d c n k o d t f U f i o ' t < f t e b " a c U S h h i i t B d 9 e U : n f I n o l a o a s o t e y g e T ' ' i . u N o ' a t h i a r n i n 7 t t i t n 1 e l s a l h s h a . n y t l i t . l e r w t o i o t • e t < d e " h t < Z r ' o -C in O c IT o -O n C s t i a st n e y n d t w ef l i t- c h ie .s n a c f i e e ty s t a h 11 a d t may be a e p st p a r b o l v is a h l m is e n n e t c o e r s m sa o ry d i f f o ic r a t t h io o n of b ba u n t k th in a g t a or n ga n n O iz ( e a x ti p o e n c s t . e d ol other soundness.u i ( n ii c i e e n m li,· i e t i C ll 0 ld 31 r . u pt i . n is l a l t i io ll n s a u m l n li ; c . i e e m n ~ t l ls.; tn~ In o a ro a: s : p o o u 0 n $ t 1 th lo e C c: O o Q mm S " id ' e ~ :t a ti n oi d u" l " ak " in " g " ' ~r.s.c.a..l.f..r. ..-..~..t..l.o..,................. 4ocurlmllatioo 10 pamitiD >udit of tbe diswl:sod .....t ho Board 1$ - _~tt - :_b« - h.W_ , u. u l,e .l..l . . l.o. . a.os u ltlha<d< I.M ..I . . a..b morlb a o co rg m a p n e i n u s t a io tio o n 'j l p m ro J c l8 e 0 ss 1 e 1 s 'e f n o t r s i : n (i a ii : ) n h t a i\ v 't e t m h o e d b i u fY n i i n e g n p e o st l i i m cie a s te a f n o d r p im ro p c l o em du e r n o t s ir t . o g oc I• to ldtrJifr tM (w~ot U.C.~it'O plai~S in p!M 4ny ruaterilll exceptions or adjuslmcnts monitor incentive compensation. for l ._ p b . t t ( . o . t b . t w ) . 1 . l ' _. ll . o ~ . n ~ ' . C " ~ f " \' ' O d Y_ 4 o G N l id .t ~ . th _ l . 4 _ \ cb . ~ . x t . '. . a . . m . b . : b i l _ a o i : . . l .. k .. f . t e o , :« . t . < h . U . e . t i . i n , . e . c . e n . n a u t p iv p a e m s c b o t h d m li a s p a h e c e .n l < d s l : o a fo : c io r u n s m e n o i o o l r e ll o t l h i o m i n s i s t p e t u d i r t 1 p u D o l i u ~ t. , I . l c . l o , i r n i ~ n l i . d t . h e ., e r . a . f t t i i n i o o a o n l o £ o f u o b l i l d u o a r e d n l o i c o o n n is . = ~ o l ' D t C f ~ q t l ' p l & ) l t : S ' a t l ~ _ O . ~ i t -= t . l ' o t i . l . e o N 4 l l . d ' - l l t l . i s . ! i . o F: o f . a u . o . o M . . . . - t t : C , d . t h ' .. ! M A u C. c .M . I q. : • : .o q :u a . s c * . w t l a " .~ : : p - l . l t o • k . o ' . ! a _ d r: o c l b y l a t a i o k . t r n t . f J i l l: l i ~ l q k \ J u : _ ' t . o = h v t , n ~ o . ~ r . l \ l : b t e t. . . b i r b t f h e y a s . v o s i b i i t e- e s o s f w . a f b o e r . , o n d c o a t. o . n i r v . d f n a .. e d . c n n . i f , e : m r . d s n e rs i n c r c o e u n t l- < l n ~ l t > l l o b r o o- e y n r t d ; m t m - a e : a i n s o \ n · i d o O - r 3 o & " a 6 f n O • a. r 1 d e r. m . q d. b e - u n v e t n e o t f w r a " B b n e " o o i s d t " a w h p p r p i o d s n w r n ( t o d l t s c w a h e t e i t e n o m d i l I u o t . M ~ a n r a w t e o o O . . n s o : 1 n t s u t h i l o t l n l h s e d g m ] a B t o t t a o o t o l , k n 5 a t m e i h 0 r t . d o e o 0 2 r d e P 1 l 1 a i s i R n f t : r y i c g . A m c ~ p o . · n o a 1 e l l t m h l e b g " c s e C t l , ! ~ h 4 < a 8 0 t 5.058 ,...nrospond"'ts ~-..ld tth. on 11011i1ot!Msetrf~attopedcd :o,bt ..........n . ............j illl .....- .. ar~. an hours nwo busine!.< ......, 82 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.01281717 36404 Federal Re&i<ter/Vol. 75, )lo. 122/Fricby. )uno 25, 2010/Nolices to &llahlish or modify policies and J)rOCOdu..,: large rospor!dents 486 Estimo"d numbtr ofr tJpondtnls: procedures to monitor incentive hounamall rtSpolldtnls 80 hour$. Implementing e< modilyi•ta policlas and compensation. The total one-time: Mainten.lnco of polt•ies and procedures: procedures: l..gc '"pondent>-10: burden iustill'~ted to be l.125,&l0 40houn. small responde:nls-4,870: Mainte:nanct h th o a u t, r s o . n In a a c d o d ; i t t l i n' o "u n "i , n & t g h e b"a · B s o is a . r r d e s e p st o im od a e te n s ts Lt. E rg ~ e i r m e o s l p e o d n n de u n m ts i , !f t r . o SO fr t r : s S p m on a d ll o nl$: or t'~~:d':~~=~~u~::; W bu O s < in tld e s t s a k w e e . e o k n ) each )'eM 40 to h m ou a , i . n t ( a o i n n e res&;i,,~~~·~~f.l!'nnuol burden: O 59 T 4 S ~8 00 hours. policies and procoduros to monitor 1.388.000 hours. i a u n o d c O nt S iv \I e m c a o tc m s p t E he m a S u a n ti u on a l a o r n ra -g ng o e i : ll ~ f n : e nls an A d s 0 m 1'S en h ti a o v n e e o d b a ta b i o n v e c d . t e h m cO "B C < C ft , c F y O IC, Inc T e i n ll t e i v o e f C l n o fo m n p n e a n l A io t n io C n o G lk u d ld l a o n n e : e S . ound burd. . to ho 261.400 bows. The 10101 approval onder 5 CI'R 1320.13. The ~r,s~:; ~~~~ ~l~l29. ' a C o a n u - o . T S l o . l h ' . l o h a Z . o - O c a i G r s l l i r i l i o P I d n O D l - R f l d S o t A i s n s o p b a r w c u l l t i a u n p i l o d i W i li o r u < t u » l o I l e 1 t I c I o t 1 d o o « ( l f a : l 1 l e ) t l o h t , t p b 1 1 is o e i 1 o 1 i ( 1 o i n l ) . l 3 i , o s 2 8 r r 5 8 n , .0 a a t 0 n io 0 d r l O O o O p r t f s o e r r S C T . i c r u i e i C S 6 t i p < c m i 0 v a a u t a e a r o n d e l e t f d > e t ! e h p . h s y 0 d F h o o a s 1 e o o : b o B d r ' s r S a r o l o . t c i n l d h o • l o w i o n l R o s l o ! s i < : m t r o m , t b e J . i t < a i l u C - ! l a a a l s o O l e t l t i n e a r s h n I s , D n i s , a . s t . o I l T . p I t I I t , o I t I i a O . s h c O . O : e i l e t I o i r C : I o ~ J y: b t o o s C r r t . d a r t t , h h a i , t m n , n o o l e d y d l 4 7 n 6 0 l r A F E E 5 ! b - : . / l s p s o f < t o U q l r w i ' o < m l m p l l s t U i o o n o . t d l t < . t t d C d l y ' l . : n l ., b A m u . l . r n i , c n s n . : b J u : a s t i a r o .l m o l.y a ; f . n , r r t . c J s . p s , p . o . . . u n - e u W m < . c p a t d l o $ s t . : ' o I . S r O: 2SA oliho Fedenl R!serve Act (12 rq;ul.!r PRA doonnco p.....,, Doring Estimated latol annual burden: 30.roo U.S.C. 2AS(a). 248(i), 602, and 611J, the resular PtV. clearance process the hours. soction sol dlO Bank Holding Company e.<ti:nated avenge response timc may be The Agencies have a continuing Act (12 U.S.C. 1844), and se<tion 7(c) of ,. ..v aluated ba5ed on enmments interest in the public's opinions or our th• lntti<~ationol B>ltking Act (It U.S.C. rii(Oived. The FDIC is publisltiog in this collections or information. At any tin1e, 3t05(c)). notice tho rovlsod burden ostinutos comments regatding the burde-n OCC-12 U.S.C. 161. and Scction39 dmloped by I he Board ba.sed on the estimate or any otherospoel olthis or the fodcllll Deposit insurance .Act (12 comments receh·ed. The FDIC will issue <:ollcction o£inrormation, including U.S.C.t831p-t). a Federal Resister notice shol11y fa< 60 suggestions for rodurlng the burd•n. FDif~'ioclion 39 of the Federal days or comm~tiiS pan or lhc n:gul.lr may bt sent to: lloposit lnsunrtce Act (12 U.S.C. PRA cl""'oce p.-s and, durir~ the 1831p-1). recuJar PRA clear1nce process. the llr>crri OTS-.Sectlon 39oltlte Federal .uitUted • ...,.r uponso time may be Sombry. Board oreo.. ...... ortJ>o llopostii.,...._Ad (12 u.s.c. rH\'Iloated !wed on cornzne:>l.s Fedml Rosorve Symra, 20'.h and C 1831JH) and Secliom 4, S, and 10 o! naived. Slr1ets.~<1~. . wasl-~.DC2055t. tllo Home O~<nert Loon Ad (12 U.S.C. occ oa; t463.1464,ond 14671~ The Agt<~<ies oxpod lo r..W.· tile Tilloll/ ln/cmtGtion CtJI/oaion: CosomWlicatioN Di•isioo. Ollice or policlos and proc:oclures for inCOIItive Guidance on Sound lnc:ontivo tile Comptroller of the Omency. c lh o e m irs p u t p l" e ' i t V :o i o sa o r r y n p ng ro <~ c ~ e ~ s e se n! s. S T as o p th a e rt ol Co ~ mp ~ e 8 n ~ .u ~ t ; i : o~ , P ~ o ~ lic : :i ~ t- t 1. ~ ~i~;~45. M 25 a 0 i l E st S o l p r e 2 e - l 3 , . s A w IU .. W Dti a o s n h : i n IS a 5 to 7 n .. , 0 D 2 C 4S , exlent lhe Agencies ooHect information 20219.1n addition, comments may be durin.g an examination ora Mnkil'lg F"'9utncy: Annually. sent by fax to (202) 874-5274 or by organization. confidential treatment Affe<ttd Public; 6uslnesw or other electronic mail to O m S ln J S a < fo ! y o ( n m b b n X p e o t a i a l o ) i f . o n f o n 8 r d A o e c l d t t h I ( G F e O t r h ' I r A e o e r ), e d 5 o o o m U rc . o l S s r . C u n . der l 4 o 0 r R & E b -p o s c r r t . t u i o p m m r f o s i o a n t . . l t d e e c d d n • n l • s u ~ : m m N J b o : t t • i r o h o n o > f . u I ., b n p a o p n e n k r s l k r . e n s t p s o~ : :se: c p S re o e W g r m s s . . , o m c W n o e a m n a ll t s n y s h r a e i in n t n g s t t h p s to e t o o n c O c , t D c C a . n C C ltt d , J 2 2 O p 0 5 h 2 f 0 .3 1 o 0 E 9 to V . S c F . ~ o Y o e p r o o y l u , n 111y llr>crd 1.6 E 5 s 0 l . i mottd toto/ onn110J burden: 66.000 . v so is c i u to ri r t s y : r r r . . a a t s e o . ns . , > t p h po e in ~ trn re e q n u tl i o re i s n t s h p a o t e l 1'>11e of lnfr>rmalion U>lkdion: hours. oommena. You maydoJOhycolllna Reccrdkeepin& Provisions Associ>led [202}874-4700. Upon arrival. •bitor< wilh lbC tziclaoco oo Sound lacenti>~ FDIC will be roquirod Ill pre<tnt valid C..porualion Policies. Titlt of lnfom>olioR Co/loctioll: gonmi!Wit·issuod pholo idonbfic:oUno Alftqf otm numllrr. FR 4027. Cuid.nce oo Sound lnaotive and IGRihroit to ""'rily saeeni• i4 ().\IJ oorJrolnolllli<r: 11011-lo ho Co•pensation Policies. order to insped and phOIOCOpJ wiplld. comments. F A ' f r ft r t J : j tt ~ d t P q: u A bl n ic r : .u B al u ly s . i...,., e< other l ~ 'l t tq : u Y e . n : c , y : : ; A : on : u : ol t ly ; . .~t7S. FDIC for·profi:. Affe<ttd l'llblic: Bu•lnosses or other All comments should rtferto the Respondenls:U.S. honk holding ror·profit. name or the colloc:tlon, "Coldanco on componles. State member banks, edge Rtspondcnls: ln!Urod SUtc Sound lncanlivo Contpoltl3tion and agroo1nent corporations, and! the nonmember bank.t. Policies.· Commentsu,.y he •uhmitted U.S. opcraUoru of foreign honks "ith a &limolcd u••croge hnun por response: by any or the following methods: branch, agency, or comntcrdallending lmplmnonlhl& or modifying policies and • hltp:l!llww.FDIC.govlroguliJiioMI conopany subsidiary in the Unitod procedures: Ia~ respondents 460 lows/federollpropo<t.hlrnl. States. hours; .<ruallmspondents 80 hours. • t.moil: comrnenrs&fdic.$0v. &limortd oreroge hours per response: Maintenance of policies and procedu..., • Moil: Cary Kuiper (202.8983877), lDiplementi'l or modi{yL'18 policics ar.d lOhours. Coullltl, Fedmlllepasit lrt.!Utlnct 83 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00087 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.11281717 Federal Regisler/Vol. 75, No. 122/Friday. )une 25, 2010/Nolices 36405 Corporation, P-1072, 550 11th St.re<t, the comments ror.ei,·ed on this issue. In guidance is intended to a.ss~t b.ln)jng NW., Washington, DC 20~29. response to theseeomments,tho final organizations in designing and • Ho1td Delirety:C .onunants rna)' be guidance includes several pro\lisions impleJnenting incentive compensation hand·delivcred to the guanl station at designed to reduce burden on smaller a110ngemcn~ and related polidcs and the rw of the 550 17d> Str"'t Bui Id ing banking nrg3nization.(. For ftxampla, the procedures that effectively consider (loco!Od on f Stree:), on business days flnal guidance has made more explicil pohmtial risks and risk outcomes.' between 7 a.m. and 5 p.m. tile Agencies' view lhat the (nonitOiing Alignment or incentives provided to OTS b m a e n t k h i o n d g s o a r n g d a n p i r l o d c ti e o s n s e s s h u o $ u C ld d b b y e a s e h m a p re lo h y o e ld e e s r w s i o th f t t h h (t e o i r n g t a e n re iu sL~ t i o o f n often Information CollccUcn Cc))ron~tlls, commensurate with U1e si?.e and also bencfi~ safety and soundn&<S. Chief Counsel's Office, Offi<:e of'l1lrifi complexity of the organiU~tion. as well However, aligning c:nptGyee incentives Suporvision, 1700 C Stroct, NW., as its usc or inoontivc compcnsatLon. with the interests or shareholdcr.s is not Washington, DC 20552: send a facsimile The final guidonco also highlights the always .sufficic.ul to address safety·and· transmission to (202) 906-6513; or ,.nd types or policies, procedures, and roundno.."-S concerns. B&eau.~ of the an e-mail to systems that I.BOs should have and presenc. of the Fodera\ safety net, ~~~:rrf.i o~·::::~~=t~ o m th ai e n r t a b i a n n , k b in u g t t o h r a g t a a n r i e z a n t o io t n e s x . p L e i r k .t e e d th o e f ( d i e n p c o lu si d to in r g y t i h n e s t a i b tu il t i io ty n o s ! t o in m su is re e d in .sured indox on OTS lntemel Site a1 httpJI proposed gu.idance,lhe final guidance deposits and aeoess the Fodera! wWlv.ols.!roas.gov.ln addition, focustS on those emp!O)'W w\10 haYe Reserve's discount \~indow and inlc!tSiod persono may inspect the ability, either individually or as part paymeJlt services), shareholders of a comments al the Public Re.lding Room, of a group, to expose a banking banking OJS3tli23tion in sornc cases may 1700 CS treet, ~'W. . Washington DC organization to material amounts of risk be willing to tolerateo d'SJ"eofrisk 20552 by appoinlment. To make an and is laiiOJcd to actOunt lor t.he that is inconsistent with the appointment. call (202) 906-692Z, send dil!erenc~< b<tw. .n large and small o~aniza.tion's safety aud soundness. an e·mailto public.info&ts.tre;JS ~ov. or banking organizations. Accordingl)',the Agencies expect send a facsimile transmission to ('2:02) banking ocganizalions to maintain 906-1155. V. Final Guidance incenlive compensation pr3ctictS tha1 OMB Tbe text of the final guidance is,. are consisteot with sa rely and fo\lOIVS: soundness, e.ven when these practices yo A •~ d c d o it m io m na e l n ly ts , b pl y '" " s " e " s e to n : d O a ff c ic o e p y o f o f G Cc u m id p a e n n c s e o o ti n o n S o P u o n li d c i l e n s e tnti.-e s g h o a b r e eh y o o l n d d e < th a o n s d e e n n eo Jp d l o o d y e to e a in li t g eo n o sts. Managcn:enl and Budget, 725 11th To be con.slstent wilh sarety and Street. NIY., 110235. Papen,orl< l.lntroduclion soundness, incentive compensation Roduction Proje<t (insert Agency OMB Incentive oompe!'IS8lion practices in .arrangemenls• at a banking organi28tion control number), IVashinglnn. DC the financial industry were one of many should: 20503. Comments can alsn bo sent by factors contributing to the financial • Provide empl()yees inoonli\1ts thai fax to (202) 395-<\974. <risis that began in mid·2007. Banking approprial•ly holancc risk and reward; While the Regulatory Floxibility Act organizatioM too (lf\en rewa.rded • Be cornpatible wittl effec;tive g ( a 5 d u o i U d p . a S t 1 e . t C d c e . a , G s b O a ec J r a ( u b u ) l . ) e s . o d , t o i h o t e s i s A n n o s o e t l o n b c p e i p e i l n s y g h t < o lv t e h is o e p m r r g p o ! a f o n it y i z w 8 a 8 i t . t i h ~ o o f n o u 's r t a i T n d e c e \' : 8 q n 1 u : 1 w U a B t i e n o g r r e t s c h h o e o g r n t- it te io r n m o r g c o o • y n t e r B m o e l a s s n u a c p n e d p , o i r n r i t c s e : l k d u · d m b i y a n n s g a t a r g o c t t n n iY l g e I c n ! o a t; r n p a d n o d ra te c o i a p n b o r r o g o n th p v a s < i e n e d , l i S e " , t . U r ' h d t e i P e g o d P A n u t U i h s g d U . e e a E F n n p H o c o c T r i o t e A e t s h R o n b e r Y t . o i a r m s l e l i m F e a i v s O m a o J c l p l W n t a b s h c A a a : d l O n . t i o s O k c f N i u n t g h ss e e d t t w n r h o e t e u s c t u h n e r l e i b t t s b e c o k d a r r s t o g i t e n a f h d b n e t i a h z t e n h e c m k e t m i i p o r .n i i l n s g s o . k a y 1 c s l : e i T M g a e h n n s g m e ' d a a s n c e e I i t = n z i p a ~ t · r t o i i a o t f c i n e t t s a : i h s c a t e p e n a o s d s ed e b p b f o a o f T n a l e i r b k c c d e i t i n i e s o v g s e f e , d o p p o r i n r , g · r o e n e a c r c c n s e t i i i o d p g z r u a l h s a t r t . i s e o b , s a n y . n s a t s d h n h e d t o h s o u o y rg l s t d a y te n h p m i a o z v . s s a e o I t i h f t o o a n l ' .s issuance of th.e Jlrt:lpascd guidance is interests of employees with the long· help eosurc compliance "ith them,'"' a c n b o e a t m o n h d k r p o i ' e " l d l . t : 8 ' t l o t s o o a r t g h t i h a o e n e n lp i s 2 a a e a n f n t a e i s o n t u y n g r . a e e s n m , t d i h n e a $ n t t l 0 l u i s u n d d n c i o d e n n n n g e t o s i s v t J s n e p o a o f l s l e s d l t n e o o r o u c m c n u r d m . \ t \ n i ' e v e e n l e s l t - s c b p o o e r m f i o n t v p h g i e e d a n i e n r s s d o a g t r s i g u o a a i f n d n e a p t i y z n r. a a c a t c e n io t d o i n o n $ o . s s T o to u h n is d d o in i r s T c g c e a h u n n e s t i s i t A v e a e t d g i f c o . l o n a n m c t s e i e t p r o s i e n e r n e x s t g p a h u e t i i s , c o a g t r n b J u y a o id r n r r a e k a v n i n n c i g e g e \ e l . o m ' t e h n e l i s r b.mking organizations. The Soard inl.h.c banking orgaoizations .supenised by the w pr l o te p t o h s e e r d t h g e u g id u a i n d c a e n $ c 0 e U w g o h u l l c d o m im m p e o n se t OA C Fe o d m e p ra tr l o R ll e e s r e o rv ft e h , c th C e U O m ffi u o c o y o , f t t h h e e Federnl cbn. ) md "N 'l, S .. f n. ! ,.c ! , l w. ~ ,.. t s l l W ' l lo d M l c I h / w i t c . i c t P l s l f l u t i :. . u c . t . P l i r b i : r y ' 'I J C . G . J J . p d ! f u l l l f > t o ! d r r a . ~ c f i J > i l ll undue burdens on, or ha~·e unintended Deposit Insurance Corporation. and the SI01ily bdI FSBl ill Aj\(112Ct». and with lbe a ct n u d ts w aq h u e e t n h c e e r s th f e o r r e , s w m m al l o w r · g ay a s n s iz u a c t h io ns ( O c f o f l i l c e e c o ti r v T el l y d , r th t S e u • p A e g r e v n i c si i o es n " ).' Tbis f p ' o S i f o r < s . l p r l . o t f , .i o s . o l : f < t d .N !o t~ S S o . p ~ l I . d .. c .. l , d .. $ ., ! . o ll~ potential burdens or wnsequences ~ID lhisplcf•xe.tl\et.a'. "illttr.tiw c c o o u ns ld is b te e n a t d w d i r t e h s s sa e f d e i l n y a a n m d a s n o n u e n r d n~JSS. d~ ' ~ F ~ : · a ~ ta ~ p 1 l b e d s S o ( lt I i U s r b . ~ d ~ r pt . e . : e I s C s I l U t .a l l c b l : u u d : e IO « ~ i ! t s ) t l ) l i o e ~ ye d · e t r ' G e s ~ C r O U e I , r I ¢ \ s c ' 1 : f o l l l t t o l C r ' « p ' . c. I t : I t M l p i t i o . l r l " t c O a M $ c x p o l e p o a c n 1 i s ~ f a i :i c O : A lhal It i.~ estimated lhallbeguidanoe ,~·ill ac<~a.n...t.t.:~y.o,....iood,lqool, l:lttria(~.&.•lo\'dof$tles.r~<finetJrnt). apply to 8,763 small banking (Oit~e.l:xifl!lp'J':allionaltisb. lo«n:ii"'o-.perl$llio"d:~tSnotinclucle o n r o g t a o n d i< in al i t o h n o .< " . S S u e p e p 1 l• 3 m C e P n R ta 1 ry 2 1.201. As ( t I O t ! « J A l l s D u ~ i s b T e . u d a i b ~ : . " s ' S l i i t l d l t i a t s d t g e ~ o s ~ r l ! . W l O : t i C o ( ~ n C b a O e l I b r ' & I b n " l U b n . i S b r l . . l ' a t : . \ ~ Y i l " ~ . O e p : O t ~ f ) p ' i I k ' ' y N I n I : l * t l K U o I ' l ( i w t i o o b & C . i I s d t W l l t b & h r i . O y M l . . k ~ l . ' l ) \ o l . l a e c : r d d d e i I d ( t I ~ i . o } ( ' ~ O t ~ o d • t i ~ t. a t u t e n ; d r d l ' ~ ll cbM Jnfonnation'" above. a number of ~ioai:.U.S.bld::t-.oldiflll<XIOpM!~U~ lld.icdviJcc:orJpo:uallico~IDISt~Mt ' c u p ! o b r n o n d e p 1 u A m o e s g e e b e n d u n t e r c g d r i u s e e i s e n d x h a o p a n u r v c e e S e s D s c w e 1 a 3 o d r ! e u 1 o f e l u o d r n l o l i c r y n g e 1 c a m p o n o n i t z s s h a e i t a d io t e t B r h e S e d . r l N ~ l o . . n " r k O l p k d r l o . l ~ r o i t a ~ .l 1 t t i e ! o l J ! M d ( b 3 o ' ~ l ~ . : d l w i l . t ~ < d t i ~ : l a l a. n ( o s t p. ; a l n U D 5 0 ' . e S t I s . . I ~ o £ l \ d p g ' ( e m I . i I t t : . J i - o h & . M . • .: " b 5 o ' ~ r f J ' l 1 t i o C . n : .a I ~ ! I i A g e c l n i lt o c I ~ " o " S t t ' m . K M l e . p c ~ h e t . p l : . ~ : } a t . : < - . . k S t , e t ~ e d l t o i ! l g , . . o , J l .' c o N f. l · a l. d x i . . t ~ . e " ;~ d f .. 1 f ~ e t i i 1 b . l o 1 r t l y t ! y t l ; 1 ) D M c k . : t C :$ u . : i ( l \ ~ n q e l t J . l b t .• a ~ e . 4 p t. l 0 e o $ J d r ( C t e ) a C e p I 's l O ~ • l n c I . I l , t ~ O . l . e ( l ~ o : l ­ 84 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00088 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.21281717 36406 Federal Register/Vol. 75, No. 122/Friday, june 25, 2010/Noti~ ror all executive and non-executive As discussed further below, because any, additional examination work is employoos who, either individually or of the .size and cornplexit)' or their expected for smaller banking as part of a group, have the ahilit~ to Optr'i'!lion:s, LBQst~ should have and organizations that do not use, to a e.x.pose the organization to material adhere to syste1natic and formaliud significant extent, incentive amounts or risk., as well as to regularly policies, procedures, and proct.ssi.S. oompensatiol\ arrangemenas.• rt\'iew the risk-management, control, These are considered important in For all banking organizations and corporate governance processes cnsuril\g that inctntive compensation supcn•isot)l findings related to 1in centive related to those amng<men~. Banking srransements for all r.ovored employees compensation will 00 communicated to or&ani7,.ations sltould immediately aro identified aud Te\1iewed by the organizatioo and inc.luded in lhe address any identified dellc:icnciw in appmpri•te levels of management ntlevtmt report of examin~tion or these arrangements or processes tl1at act (indudins l.he board of dircclots where io.spcttion. In addition, these findings i B n a c n o k n i s n i g st G en rg t a w ni i z th ,a l s i a o r n c s t y a r a c n ~ d - s p o o u n n s d ib n l e c ss . a th p e p y r o ap p p ri r a o t p o r a i n a d te o ly o n ba u l o a l n < un e i r t i s m ), a n a d n d th at i ~ n vi t i o i b th e e i n o c rg o a rp n o iz r a a t t i o o d n , ' a s s r a a t p in p g ro priate, lbr ensuring that their inCGntiYe te\'lards. In se\•eral pla~.lllis guidance oomponent(s) and suocomponent(s) oomp3n.Qtion amngmnents are specifically hightl,lhiS the types of rotating to risk·management, internal consistent with lhe principles described policies. procedu.,.·es, and systems that controls, and corporate go·mmao<e in this guid.Jnoe and that they do not LBOs should have and maint~in, but under thB relevant supen•isory rating encourage employees to e.<poso the that generally are 110t e.<pecled of system. a.s well as the org-anization's organitation 10 imprudent risks lhat smaller, less complex organizations. overall supwisory rating. may pose a thmt to the safety and LBOs warrant the most inten.si\'8 An organiUltion's appropriate Fedet!l soundness of the organization. supervisory attention because they are supervisor may take enforcement a<:tion The A&encies recogniu tltat incenth•e significant u.sers of in~ntive 18aillil a Qanking organiUltion ilits com~nsation artan,gemenls often seck contpen.-.atiM arrangements and incentive compensation ammge.ments or to seTVe seven'll important and warthy because flawed approachesot th.,. related risk-management, control. or objcctiv().S. For example, incentive organiutlons are more likelj• to have goven1anu pfOC(l.$:$C$ pose a risk to the compensation arrangements may be a.dverseeffects on the brooder finaucial safety and soundness of the used to help attract skilled staff. induce system. The Agencies will Wllli with ruganization. particularly when the better organization·wi.dc and employee LBOs as necessary through the organization is not bking prompt and pcrlormance, promote emp!oyoc supllrvisory prouss to ensure thatlhe.y effective measures to correct the retention, provide retirem~nt security lo promptly oorred. aay dclicicndcs thai deficiencies. For example, the e o ex m r p g e p a n n l . o ~ iz y e. a e ~ l e i t o s o . n o v · r w a a r i y l d l o e w w b it a h c s i r s o e . v m M en ~ o u r ~ e e o t o v i n " o r n a , n th e s m o a T u y n h b d e e n p e i o s n l s i e c o o i n f e s s th i , ~ e p e r o o n r t C g w e a d n i u i t z h r a e t t s h i , o e a n n s . o d f S el J y 'I a • n m d s a a d p n ef p e ic r n o i f e o p n i r ' c Q i l a e l t : ; e r s r . F a e r e n e d t a e fo c ra u ti l n o s d n u p t U o e w r e v x .a i i s t s o e t r r i i n m al t a h y e t ake anoiJ•is and methods for ensuring that of smaller banking Olg3ni,.tions that organization's intentiYe compensation t i a n k c e t ~ a U p i p ve ro e p o r m ia p te o o ae sa c l o i u on n t a o rr f a r o is g k e m sl1 e 0 u u ts ld a u r s r e a i n n g c e e m n e ti n \1 t 6 s c 7 o a m re p c e x n p s o a c ti t o cd n Ia be less a m m an n a g g e t n m te e n n t t s , o oo r n re tr l o at l e , o d r r g is o k v · e rnance b bu e s t i a n i e lo s r s e s d t r t a o t e th gy e , s a iz n e d , c ri o sk m t p o l l e e x m it n y o , e or e th x o te se n s o iv f e L , B f O or ~ m S a u li p z e e r d v , i a s n or d y d r e e t v a i i e le w d s t o h f a n p p r r o om ce p ss tl e y s . d o e r v t e h lo e p o , r s g u a b n n iz ti a t t , i o on r a fa d i h l e s t t 'e o to e r : e ~ q c u h i o re tg d a w ni i z ll a l d i e o p n e . n T d h e u p re o s n o t u h r e c es s in m c a e l n le ti r v , e lo c s o s m .eo p m en p s l a e t x io b n a m nk a i c n g g e :meJits at o it n s e in ff c e e c n ti t v iv e t p c l o a m n p d e e n si s g a n ti e o d n t o ensure that c in o c m e p n l t e iv x e it c y o o m f p ll1 e e n s f a ir t m io n aD a d m it n s g u tn se ,e o n f t s. o A th r g o g e a s n e n c i o z ie r a g s t a i a o o s n i z p s a a l t V r i t o I I o n I f s b · t e h r i e e s o k e n v ·n d a n u lu u c a a t t e g l d o e n m b y o e f t m h e , a im rra p n ru ge d m en e t n r t l s s k d · o ta n k o in t g en a c n o d u a ra te g e c onsistent i F m or p s le o m m e e n , t t i h n e g t c a o s m k o p f e d n o st s n ig io n n in g and g in o t v e e r m na a l n c < o e nt d r u ol ri ~ n . g a n th d o o r o e r g p u o l r a a r t . e r isk· w As il h pr p o r v i i n d c e i d p l u e n s d o e f r s a se fe c. t 1 y i o a n n 8 d o so f u th n e d ness. a in rr c a e n n g t e iv m e e s n fo ts r t c h :x a o t c p u r l o iv p e e r a l n y d o n ff o e n r ~ r f e o Y cu ie s w ed s e w x i a ll m b i e n a ta ti i o lo n r e p d ro t o o e r s e s 0 . e T c h t t t s h t e F U e .S d .C m . l 1 D 81 e 8 p ) o , s a i n t l e n n s f u o r r a < n c c m o c A n c t a t c (1 ti 2 o n c.xccuti1,·eemployecs to pur:ruc: the: seope and complexity of an may. among other things. require an organi2ation's long-tenn well·being and crganization'saclivities, as well as the mganizalion to take affinnative action, t ta h k a i t n d g o i s n o a t c e o n m r.o p u le m x g t e a s im k t p h r a u t d w e i n l t l risk· c p o re m v p a e le n n s c a e ti a o n n d a s rr c a o n p g e e o m f e i n ts ts i . n U ce t n tl t o iv , i e f s p u la c n h a th s a d t e is v e a l c o c p e i p n t g a b a l e c o to rm tl c te ti \'e action require the eommitment of adeq.,.te appropriate Fedeml supervisor to rectify resources. safety·and·soundness deficiencits in its While issues related to dasjgning and ~•r.d~~llwtst.ltool~core incentive compensation amngements or implementing incentive compensation ~I • J f b 0 l 1 l S l l c l i p l « l Vl d s u « s ' t f t p y i . r po$$$.tbt}.p::.0es~t related processes. Where wammted, the am~ngements are eomplex. the Agencies =~=:.o~~ appropriate F'edera.l supervisor may are committed to ensuring that banking require the organization to take o in r c g o an rp iz o a r li a O t J in JS g . m th o e v p e r i f n O c lW ip a le rd s i d n C SC'ribed ~ t p b a ie r ec p .$ G , i S zo C . ~ ( S :Q ( ' ' I I t l f pl _ l e: l : ~ Q l t ~ c y. ~ . t1 ~ ' 1 I d ! . tl O ~ $ O k t s pr i ~ o l l e i l le y ( .F ~ r o l ~ t n : ~ . ~ b c a o d r d N i n ti t o e n d a y J a d f e f f ir i r c n i a e t n J1 c , i · e e s a c re ti l o at n e d to t o c o th rr e e ct in this guidance inta their ineenti\·e compensation praclices.s ~oiu*u~fiedbfi.M:P'tldeuiR«tc\"1! bf.J:JVf:n'isoryflllrpostS:UillheOO::.Ibt~est ~T~f.ei~:.o•loso~.'.I·Me.a~e.• 'loDeaab&20ML.itFtdt:r•IRcstm!, wutar.a 4 ~. r o 4 , \ . 1 . l .o.«c.o.a ~ p - !e l -< > M o i o cf l l l t d l o ~b C a ~ s . d eli~ i:11he S ~J 1 : 1 r 1 r 1 ir ! . 1 p e l t l b l« a l n l ~ s ~ lo - d - t 1 k d l m nl l l e ~ : w w J i id u h e o rll aitnt.WOilM:~es.bo\.iti&h:claspdl~ Qxll('lt[l)r.tr'sl~.bock;~i9tbcFOIC.~ .sinon:.li\·tacper.$U~~e:~ISto.a ~I:Ot:fal14'\'lt'.A'ofbcot.lll'\'l~:i.Qn C(llllp)«lilwuttddtposi!Clf)'i~i:utiol:i(lOki:•lld SlgRif~Ut:lexttc.tlult$bu$lr.0$$~[011$.A. ~ClltJUldrd.t:edri$l~t.CIIX!trol. [il·)lhears.~~el~ar.d!JIOI$I.co:~q~!e:xsaft!IS' ~!kt bahllo,a o:pn~UIIU will odb e c.oui&rtd alldeotporatap'trlW)OIIpOOiu:sofaa.bMl.ixlf: ti50ci~andwi~arxllol11bolding •~lb!ttsaoll~~t.t~~ll.iveoorn(:nl.l!1iol ~(Uia.~Thi.sillililfi\'IWJ;Sd'~ tompMOies. "":1111aut'.ll. simplyb.nwelhe ocv~illlticn hu t<ISpCifandi:IOilitortbtladu.<l)"s~mtow.vd.s 'Thl$g.ui<b~dCieSI'Iot•Vfllytobanl:~ afim·ll'iikp:o11t~N~JJ.plt.,IN.Iis ~~.cir~~pknlc:~lai~Mtl~reu.cJ~I~"'· ~iDtiooslbar:d!:ir.::KUWiinu•J:ive t.so.to:~IJ!ebortl:'s~.ablliiJ.e't'Cfliftbeplan ~~Lo..~:lr~l&ntirr~Cfliasbo;t C:)lflpttlQi!Qc. COTetS.allcr!IOifolt~.l.dk.ct'sw'i"~Of'.'CJo 85 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00089 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.31281717 federal Regisler/Vol. 75, No. 122/Friday, june 2;, 2010/Notices 36407 organitation's incenti~·e: compens.atlon for ease ofr eference, lhese executive Moreo~·cr, poorly balanced iAcentivc pradioes. and non-executive employees arc compensation ammg<~ments can Effective and balanced inconliw. eclle<ljvely roferredlo hereafter as encourage fH'lll)loyec.s to take affinnali\•e compensation practices are likely to .,covaed employees" or .-employees." actions to weaken or circumvent the e\·olve significantly in the comingycar.s, Depending on 11\e facts ond Giganization's risk·mana.gcment or spurred by the efforts of banking circumstances of the individual internal cont.rol functions. such as by organizations, supen1iso:s, and other organization, the typeso( emplo)·ees or providing inaccurate or incomplete stakeholders. The Agencies will ,.,;,w categories of employees that aro ou~ide information to those functions. to boost and update this guidance as appropriate 11\e scope of this guidanco betause tboy the employee's personal compensation. to im:orpomte best pr.actices that emerga do nol have the: abtlily t{) expose 1he Accordingly, sound ecmpensation from these efforts. organiulion to material risks w·ould j)I'3Ctices are an i1•tegral part o(s trong II. Scope of Application likely include, ror example, teller$, risk-management and internal control bookkotpc!S, couriClS. or data functions. A key goal of illi s guidance is The incenti\1e compensation processing personnel. to encourage banking organi1.ations to s s a o e e a p h a b x x r o r r r o o i e e m a e l c c c u i n t p t e u u ) l g y d e ' d t l a e i i . u t a v v n m b o s r e e d e e 3 e e o p s c t x s n i f e o o o o p t f r s u n n f i o s c a b u s s o a e i n e a d s r n r d r n t s n a n a e k a e e r n n b i s s e l g n a t s l " w e n g a . w " f m t k ' o h e i e l i t n l o r e d n h l g o n h g a p a e t p a s s o n o n r \ r i f l · i l f z g e i o n i o c \ a a r c r • l i t n e h o i n i p o i s e o - l n a z e n s a n s · t d i o o r n f a o o t b h u r a r d e I l g g n n l o i e r k v r r o d n a i i & U n u n e e g a t g r p a e n a n s e o r t , i r m e e o z f g d a v f e a i t n m i t a i b n n o i i y n h p z n , i g a e l o ( t s t r h i t w h y e o h e e n o h e n o e t u e o s m t r l t . o d r i h s g m p e m k c a l r o o a s n a a y n y a i t n z s e e r O a i r i e e d s X i t ' m a i s i e J n o l r l p O g n r t i l h " s o f u ' r k e • y s o e , e m s e , , i c d c m m r. n o o o o . t c m m a t n o n n n l p a r r o p a o p g e t e s l o c n e o n s m m r s b s t a a a h v c e t t t e i a i n n io o a t t t t t n n h o f e p r e r a r i a t d n o b r r m i c t i r e n o s e e a k n a d w t n s e r h u i g o e r e l n e e y d r i t k l r m S a l f . e i b a t a m R e n r r n d o ~ i i i s d t a n k t t d r c o o r i i c e s s i p : n n k k r r t · c o i i t s e v a p k n e k e i t r n i l v y g e 10 matcrialan:ouuls of risk may, if not ri.sk·manaac-ntcnt processes or controls batance risk·tttk.ing incentives. properly stmctured, P"'" a threat to the to limil tht risks such activilies Ill. Prinoiples ofa Sound Incentive organizalion'ssarety and soundness. ultimate!)• may P"'" lo the organization. Compensation System f i A n o C c r: c ( o ln rd lh i · n c: g c l : y o . m th p i e s n g s u a i ti d o a n n a c r e r n a n p . p g l c i m os e n to :s g M b u e o i m d re a a o n t v e c t e e i r a i , l f r i f t s h e k e r s y p s l a l h i r 'J o e )O u m l S d e a $ t b e e o r i r c a t o l h n t i o s s i t d h e e r ed lo P Jn r c in e c n i t p iv le es \ : Balanced Risk·T aking • ~oior executi\•es and others who organiution, or are material to a lnce.ntivtl compensation amngements are Tl?..~ponsihle r{)r oversight of Ih e business line or operntill& unit that is should balance risk and financial results organization's fimi·Wide activitie.s or itself material to the organization.1l F'or in a manner that does not enoour4ge material business lines: to plli'J)OSe$ of illurntion, assume that • employees to expose their organizations • lndi,;dW!I employees, including banking organiution has a structured· to imprudent risks. non-executive employees, whos.c fmancc unittbal i.s material to the a to c t m iv a it t i e e r s ia m l a a m y e o x u p n o ts s e o t r h r i e s k o r ( g e a .g o . i , 7 t . . a r l a i d o e n r $ O w ! i g th !O in iZ t > h t l iO lt l u l . n .~ i l g w ro h u D p o o ri f g e i m na p te lo yees typ ln ic r. a e l n ly ti \ a •e tte c m on p 1 t p t e o n " s ' a c t o io u n r a a g rr e a n a g c c ti m o l n !n s ts o w c i g t t h !U la iz rg al e i o p :a o ' s s i o ti v o e n r a li l m l ri i s ts k I t e o l l a e t r i a v n e c t e o ) ; th e e s x ~u p c o t s u e r t c h d e · f u i n n i a t n t c o o m tra a n te s r a ia c l t i r o is n k s s t h sh a o t u m ld ay f th or a t t h re e s o u r l g t a i n n i g z r a e ti a o t n er . H rev m e ' ! l ' e tu 't e 'ar o , r s h p o ro r f t- i r t u n and be ecnsideted "covered employ...,. for revenue or profit can often diverge :su • b j C ec r t o t u o p t s h e o i s e am m e p l o o r y s e i e m s w ita h r o i n a c re en tive t p r u a r n p s o a s c e ti s o o n f s t m hi u s s g t u b i e d ; a u p tc p e ro e v ~· e r d ul b if y t h an o se b sh & a c r a p u l s y a f r r i o s m k o a u c t t c W om !ll e o s n m g· a ru y n b e p c r n o m fit e compensation arrangemenlS and who, in independent risk fu11ction prior to dear only over time. Activities that tbe aggrogate, may'"'~""" the cor-.stJnlmi\tion, or the organization uses cany higher risk typically yield higher organization to material amounts of risk, other processes or methods to limit the short·teml re~·enue, and an employee cveo ifn o individ~l employ~ is likely risk that such t.ransac:tions may present who is given incentives to ioCCMSO to expose the organization to material to the organi"taHon. short·tcnn re~erme or profit, wilhout o c m r r i r e s a i < g ~ te l i ( i n r e t i a . a r g t i l e s . , a l l \ l m o l o . a o o n n u s n o t t f h f o a ic f t e t a h r c s e c w o o h u rg o n a , t n a f i s o z r a a a t g i o ro n u 's p , a c b n r a S i d n ti t k c r i i o a n n l n t g e g t r e o n a r l a n g h l d a e c n e o s i f a z n f f a e t e r t c t i o o y ti l n v a f s e u n . n r d H i c s s t k o o i · w o u m n n a a s v ~ n e a n a r r e e , g : s e s m o( c nt r o t e o r g g A o a a p n r n p d i i o z n t a o r c t t e u i r o n i n s n t i k i t v t , i o e e u s c n · i o t 1 l o l o m n e re a p x t r e p u i n s o r k s a s a . e l l t i l y o h n b e e attrncted irrespective of the quality or 11\ese 81rtng<~mcnt is balanced "hen the 0 H o Y 1 p t i 9 t c i a ' n i i l u W l b , : . t i I C c ! I n o M M ' t 1 h o t p p s f o p t . l l t i t . d ~ e ~ o l U f s l . . d r S i b t r . o o q . ~ p D d ~ t I n o o I l d i d ~ o w l f o l . o . s t r o • h H l ~ ~ l. U U e b . o n O . f S t s B . . . t 0 l.- " .c 1 : f c in u a c n n e c t n t h i t o e iv n m e s s , c c p o l o v m e o p s r l e b y n e d s a a e t s s i i o o g u n n r e a c d m e o o n r r .g m ri e s a m k n e a to n g t e a s d a a (i m p n p c o r l u o u n p d l r i s i n a p g te a c l i o y d m t t o a p a l b i n a i n n e c m to e p 3 ri l ( s o ' k b y s ) e ) u e . n a l s t h w e e l r l i s a k .~ < 1 g I a U> r t k b ~ o • o e l o r l b p p u l t . - o ! t w t d i J « K i I < d o I i a i i V a L o i p o l s \ o l c f t l t l i f : r d h l l n J a e l O l s s f : l w t ' c r s i i O l l h ~ l ! o d : ' f s c . t ) l u l U w . e c , o c . p S . : f o a d . ' o s :l i w S l p n ' e A O e l l ' n r l ) l u s . ' C l i s l ! O b u o N > f p n l r ' a s c w o ! . s M . · . i c 1 " o t 0 s ' r ~ t o l . 1 . t e r 1 w . l r d o i l r ~ ~ t : i t b i n h n a c c a n e e t k n n p in t t r i i o g v v v e e o i s c d r g u t e o a r e n n i m n p iz c e p a r n l t e o s i a o a y s n t e e i . o e t F s n h o s e a t r r r q e r o a x a n n a n g g m i e z m p a l e e t n . i o t: n s 's s e t th h a m r o e e p s f t e l y i o n a y a a c n n e t d e i c \ ' i • s s a i o a t l i c u a b t s n e i v o d ne i n n t f i e t i e s t h s s s e , . a f o A n r r o d s g m a a th n n t e i h e u e i x m a ti . p o m a n p C ! 's I & o , f (orl'W;..rD..~111n6i~IUKlll~ls.lrt sbort·lenn revenues or protils, without under .1 balanced incent.i10e ~ " F t i x N l i S i ! ( : c i I ) 0 n C 1 $ i Q 1 d . ! c U I : r N e e o < : p , t I t o 1 f a f d l ~ i b l l C t : h c w r ~ k b f t c ~ o t ' l s ' ! ~ f f l t J l o l t l ~ c l ! l n ' l t : t i b l : a b h n • e M i l U i m $ l t . p i . S i ~ u o . ! : f W ~ : t o . a b , . s l r s a c u s & s b o a s r c t d a ia n t t o t e i a d th l w . o s i t s t r h h ai o n s r u o t c · n o h r t b h l u o e s o r i g i n s · e k t s c · s n , n c a r n is k p lace c e a m m om p o l p u o e n y n t e s o e a f s t i s w o h n h o o a rt r g · r te e a n n rm g er e a r m e te \ e ·e t n . h n t. e u t s e 1 a " C o m M" e p rofil Fodcnlltesuvo's. ~~i011 0 (•12 O'R management 3nd int&rnal control for an organiz.'ltion should not recet1·e !~~~:~~~~c:r~~. functions of oven wcll·managed the same amount of incenti\·e ~ d: t . D do d s E u. x " ~ G f Gf . m - tv ~ l e . i iY s C s ~i b O t I ' II s ( m $r l . l l r 17 s C o f' a l t organizations. c c o m m p p to a ) n 'O s O a S t i i o n n g i e f n th er e a r ti i n sk g s t O t> O k t c r n e v b e y n ~ u ~ e • o r 229 ..t OZf•Vll..Sa.vinpiSIOriltlor.c~dl•!sc profit differ materially. The employee . m lo. t t. r h<- i ' i rr ) ~,t O 'l T QtI S (n ' iY s e5 r o( u f6i 1 e e e.l o -.s . .ld W int m (I e C r (o " n ¥ .. i • ~ tl ~ dp ~ : i in o c n i~ $ l t - h . > 1 i 1 N r T ~ h i t J m t ~ 2$ q t . b o .r o ~ i l ~ l O & e :u . I ~ • o . " : t " f t b ! e a 'c t r n l . a t l i e G ;: ~ t O r t i o l > l t l S . ll ' I l J l a i w t n d . ~ l ; l , ~ , l l i m r s • . C on r w is h k o s s o fo a r c t t h iv e i o ti c e s s a c n r i e l. a l t t o io m n a sh te o r u ia l l d ly ! e l. t a t r i s v c o r 86 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00090 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.41281717 36408 Federal Register/Vol. 75, t\o. 122/Friday, funo 25, 2010/Notic:os loss lba tbo olhor employee, all ehe well as other risks to tbo riabo1ity « A$ in other risk·-!'""'· boiogoq. .l. opmticn of the oqaniutioa. Soaoe of bonLq oqanizations should r1ly"" The perhmanoe msa.surBS used in an these risb moy bo re;olized in the sMrt informod j\:dgment.s, •upp aned by incentivec:ompensation arrangement term, while otltm may become mil•hle dato,IO estimate risks and risk hove on lmponaJUeffctt on the opparentonly over the long term. For ouloomcs in the ohoenco of reliable inccntlv~ pmvidod employees and, examlllc. futuul re\·e.nueslhat an~ qutmtit•tive risk mca.swas. thus, the potential for thoarrang< ment booked as current income may not l,o'),,. banking orgoniwtions. In to encoura&clmprudent risk-taking. For materialitc, and short-term profit-Md· dMigningond modifying incenti"" Wlt'lple, ir •n employro's incenli\·e loss measures 1na.y not appropriately oompcosation amngement.s, I.BOs compon<ation payme.,llere closely tied renoct dur. ...o os in the risks """'ioted should .,.... in ad1·ance ol i<>sborHemoreveaue«profit of w:ith thrtrenu.ed•i\·ed from diff.-:~1 implcmenution wbc'Jlc< such bouilltSS pent ed by tho Olllp!oyce. ICtiviti. .( e.&.lbt •i&hor end it« ....,._,ll.,.! iblytopro•ido wilhoutanyad;IISIIIIOIIU for the rUb Clllllplia""' risk usociotod with lrolar:r:ad risk-IWI18 incoolivos. . th . e .U po t t o en d ti o w l i f lh or t b tb a o b .o,a..s,in,.m.,!.>.".ltl o 1< n > ted, S od U d I: i p ti r o il n ll , l . i . o .. w ,. r \ is 'G k S s U ( S o p r c ri o m m e b l i o n o a . ti . o ~ n " s o In f S <C im O u lp la e t n i > o o n t i o o n c a a l m ys n is g o e f m i n e r: n e l n l i t s i\ ' o 0 o e woy •llCOUnSt lmprudaot risk~ng may be r~ky SII>I'Ci" and positions) ""Y h>ve of tloi~~&so· Such ar.alysis""' forward· quite strong. Similarly,uaders who a low probobility of beil18 realiud, but looking projection> of iccentive work with positions that tiOSft at year· would have highly adve~St effects on eompemation a\vards and payments end could have an Incentive to take theorsomiza:ion if they were lobo haotd on a11nge of perfornoance Ie ve b. i•~ge rlsl:$tow•rd the end of a year if realitod ('tad toil risl:s"). While risk outoomes. and levels of risks taken. d>ercls no mocmnism for fadoriQS how shnre:holdcrs ntay ha~·c loss incenth·e to Tbl.ltype Clf analysis, o·r other analy~is such posllioru perform over a loBger suard l&'in.ll b>d tail risb OOcallSt of tbat,..uiiSin.......,entsoflikely pericdofUmc. '111eSID1eresultoould tbo infrec;uoncy of tboir realization and tffactivcness, r:an help "'LBO assess IIISUt ift he perfonn1Doe measures the oxlsknce oft he Fodenl safely MI. whether iDcecti\-e Q)mpcma:tiou '"'~ lhomto!WIIiack in!epiiJ or cub e tbote risks womnt spec:W allmtioo for and pa,_,ls1 0 en ompJoree arelilcly I m U p !l l i o p y u o lo e t s o l d flC ia O a ! p v p ln t a O i P c r a io n t t tl i y •. b . y the s th . n f at e tb l o y y • po n re d t · o ~ tb - o g 01 ; p . 1 - iz . lti . o l o' h s t t t o o . th . e r " o ' d & u ' c • o iz d l l a o p o p o ro f p ro r m ial t e b ly o a e s : n tb p o l o ri y s • b '• comperwti<ln. sol•·eru:y ar.d tbo Fodonl safety 11tt adivltits incase. On the olhet lwld, if an employeo's Banking Oll'•izatioos should • An unbal.nced am.ngement can bo incentive comfMin.sation parments ans: consider lhe full11nge of current and moved I<>\¥Ord bail nee by adding or dcicnmincd b..oo on perfonmanoe p<>tMtial risks '""'iated with the modifyi113 fealures that cau,.the m to O th M e e u m ro p s l t o h y a e u a r ' e • o ac n t l i y v d it i i s e t s a { n e tl g y ., I f i o n r k ed a in cU c v l i u i d J i e n :~ g o th f r o .o c v o c s r t o e d n e d m a p m iO o )' u & n e t .s o , f capital o ru m n p o l u o n y l o su o l s t t i o m a a p t p c r ly o p ro ri c a c te iv ly ed r c b l y lo ct risk m pr o o s l t i O t~ , : t m h p e l o p y o e t e e 5 n , t o io rg l a f n o i r z t .a h t e io a n r · m t.,i g d e e m ent a ri n s d k s l , i i ~ n u l d d O lt \ y -. n Ic e p e i d n e g d b a to la s n u c p e p d o i t n t c t o h n o t s h e · e on I d f e r n is k in o c o a t n c \ o iv m e e o s. o mpensalioo t i o m " p " ru " d " l " ll " t e ris th ks e . c . m b p e l h o) a . l . f . o t f o t b W o :e c q o u m ,.t p it a s n ti s \ o 't t i i i o O o I " S '" U "f ! l O & S tl o ll f " r " is ll l . c R an e d lia ri b s l k e a to :n e n x g p e o m rt c t n h t e m ir a b y o e n n k c io o s u o ra r g g e a r t . m iz p a 1 ti o o ) n 'M 10 S orpaiutioo ..y bo ....t. f'or this ..- ("CJIIIIItil>li,. .. ........, impNdeot risks,llot crgmization ....._,,piau that pnmide for owords w!lere an.it.ble, ""Y bo porti<ubrly should modifythc~IS bosod ..t .ty on 0\1!rlll organizltiOI!· ustlul io dmtcping bWoced noecleclto-lhatitisc:oruislent w pr i o d v e i d p e e r e l m of p m lo a y n o e m e a , r o e l h u c n c l t i h h a ly n , t . G n ior . o . o . m .. p .r t n ,. g ,U tho o O o l a < r l t < a n n t g iO <m w e h O i t c s h a nd in n m it t h th s o a d f . e ! t m y o o n ft d o , o . w u e n d d iO n m = a f l o o u o r oXJ~a~liYU and Individuals who have arrangements ue properly baiAAc.d. cnmptn..sation mora sensitive to risk. the obllity to materially affett the However, relrablequantitativt mwuru ThCS<l method> ""' organlutlon's o•·orall risk profile. with r.tlly not be aveilablc for all types of n.k u nlsk Adju$1mtnt ofA •~rds:'rhe s u th h n e o l b n y u a c o l l c a d b n n n o t c i o v e < t d o h o c r o n i o u s l m l y k d · b p t b a e e o k n b i i s l a m a l l g t a p i i n o l n e c n c m e e a d o . e r t i n r i n a v t e n d . d ; e , e , . s m . t t a e h n n . o t s t o u e \ m r s ' e f 1 p o i l ~ n r o a y c a l o a a l e o m a s s < . p s l T . e h b n h ·i s u t u i a o s h l i s i s o n , o • n w n n a c d n l e i a t n h n o e e g f s i e r r a e . m n u li d t a e i b l n i l l t e s y for • a o M w m n < a o m r u t d h w n o f t u o o e r r m f o o a p n s n l e t o h i m y n a c e t p c e l t n o ' a • l y i a b e v c e e i t c i n v ~ o l a m i o t p d i a c e j c n s u . c s m s o t : u a e ~ y n d t i t p b o t o l . n : 1 . . o e 0 o " o r l e h i r \ " ' : t s t t l l P 2 k u r l i p w . o p . o h . a t l - e e J • n n . IU l . t N i f a I . , ! l k I i i p S : o . a > . Y r i . d r r . l U , i w > J u k V b , m . o h o . s u s c p t o t m o c d l o m W e c r: p o . l . i l e : l S r o y i s a $ a a r l b t e l i o o o n r f o s q b W u u a l d o I r '" S i k l t s S i i r U Q b i b n i & o i g b v r O w e O o l f C b l r J 6 I o d ' O C l h S u O iz e U a t a l r c O r a t o O i S n o d , S a . i o s , n f s o f e c b o r e s o r c n i c : i p t e O l i u d r v r u e I i p i . p n o ,. a s , t e < . y I ~ p e h o e o s f t . a s tr u d . > ~ b j q u l j h o U s D e c tm O o t t f 1 q t r o D > r a n a m n t t p i i l W z f p l l o a r l t y o f i i v P o p b a r n o o i , . a y J « S : m e e t t h u e o ~ t n c v s t t ! h i T I ,. S . a o h . i . g f e l . a l . a o r l , c l i . s t . y u . k . a . I l l l)' mot!rlolly '"""' than expecled. compensation ana.n,gement achieves payout olan award to an employoe ~ e a< n : 1 ti p v lO lti )' o e s l $ w h it a h v s e u lt b l$ s $ la i n n t c ia e l n r ti is v k e . t o avoid b q a u l e a n n t c i e ta . t f i ' v o c r m m e m as p u l r e es , w ma h y il e n o re t l e ia x b is la t for d th e e l a p y c t r d f o •i m g ~ n a i n fi c c e :a p n e tl r y io b d e , y a o n n d d t t h h e o end of co • n s B id on t k r l th ng a o~ f g u ~ l ~ l J r o a i o z g a e li o o f n s r~ s l h :$ o uld s m u a c n h y r i b s a k d s · b tt o ll c r o i n sk s s id , e it re is d i g m iv p e o n r t t a h n e t i r th at a ) m .,. o e u s n o ts r o p t a h i e d r ' " a ' s a p d e j c u ts s o te f d p e lo rf r o a r c m tu an al c e a a s s s w oc e i l a l t a e s d t w be it t h im an e e h m or p iz lo o y n e O e in ' \ s 'e a "r c w" ti h" v i" i c ti "h e " s, potential clled on safety and ,.cndness. k tb r. a o t w ar n o o r n e l a y li z d e u d ri l o 1 r 8 b 1 e h c e o d on e a f e b m et l t er < " t ~ h h n I o '1 e l s 1 l S t l o 1 h o 0 e r c 1 i o s r t c w k i t t s a i i v d c b I i e : l t o t l i n m l ) l s l ' i b o a a \' o l t o e o C ! m U o c O l p i e A r i l i t o s l d . p e k y e . d s o :u , e f a u s t r m io a n a y . .• . . . . .. . , . ~ . .. . . . . , . . . . , . . . . u . , . . t _ , . . . . J . . . .. - . I . M. ., . . . t . i. . i - H , . .. : - .M . . . , ~ r . .i . z. P o .~ : . t I . . O : b . M P : J , " " c n , •r · • tu o . .N.p • .- r l i .t d .. . period.'' Defoned payouts may ho ba.WQS organiullon. such as aodit, -~o-.-y.atoybMloIloIlO,. I.I.t..y.o_ :pa,R.Si k~IO o m o a m rb pl l t , a li n q c u e l , d a i n t d y , r e o p pe u r lo o l t i i o o n n a a l l . r l i. ' s l l k a ! l , , a ! C "~ I '· J ' U •' I l ~ "" I ' O ll . y . . . .I di'J:I:W.tNIJUJbeiOIIili!'d 87 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00091 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.51281717 Federal Registcr/Vol. 75, No. 122/l'liday, June 25. 2010/Notices 36409 aJimdiiCCOII!iJl&IOrisl:OIII<Oa>eS miU&~tins ;,_,i..,to IW hard~<> Rnanci.tlwell-bei. .m d afdy ond either lonnulalally or judglneot.lly, .,....,.r isks ($orcb ostho risks of r:cw SG!Uld-. subject to apJ)IopriotooversigltL To be activititsor pn>:!octs. CO'artoio risb • ,.. ....... u.wbaabanliog m05I rf!ectivo.tht dclmal pmod such u repulatlon.IOJ oporational risl organization seeks to tchievo bolanctd should bo sufficlontly lo"8IO allow for "Ih" aPt Kma' y be difficult to mwurtiVilh =~~:n:d:~j:~~~~~:ts the ...u ,.uon of asubslanl~l portion of to p>rticular adiliUC!$), the riskJ from employee activities. and etpec:i•lly ifs uch risks are likely to be differences between employees I he mmu"" of loss should be clc.vly reallud duri"81he defectnl pmod. including tha •ubstantial diffe....,ces explainod to employees and cl...,ly tied According!)'. in srur.e:casa h,·oor men bctww senior execuli\!es and other to thcir ottil'ities <!uri,. tho rete. .., meahods mty be ooeded In """bination employ-. well IS bee,.... bankilll penon..,.. ,.nod. Cot an iADtAliw: co:opu..gtion organWliGnS. , lDn:tt l'tt(OIIIIUIIC1t Periods: 1\a """"""""ttobebolon<r>d. Aclilitl&. and rbb ..y ''UJ time pmod CO\'II'Od by the perf«manco The pul<t the poten!W IDCOCtives .. $ignifocoatly both ocross bonlilq: measuras wed in dctenniniag an omng<mcnl cn:ales for an cmplo)''" to organizations and across employees employoo's aw;ud is extend«! (for lncrouethe ri.lks asoociatod 1<ilh the within a particular banking example, from ono yoar lo two or moro emplo)'et's 2ctiviUM. the stronger the Ol}1ani7.0ltion. For b.lantple.activities, rem).l.ongor J*fonnance periods and effect should be of U1e mtthods applied risl:.s, and incentive compensation deferral of pa)'mllllla. . rel•lod in that toocllievebalanf.S.TIIus, for example, pnldicos may diffcrm.~teriolly among boih methods allow owards or payments riu adjUSIIDents uzed to counteract • banki111 orsani11tlons b>std on, among 10 be Nde oll<r somo or all risl: matorial!y unb.alinctd COIIlpensatioa other thiQC<.lho scope or Q)lllplexity of D: c lla l R a t t< d s u c I r t d t S re t o J l W ize ! d iv o il r y h iO oU S t h r o I: : D ! o - ~ T >' t l m l. a m m at n e g ri a a o l i e tD o p : 3 .b C o l o o a J d t h it e o i l n 't c I a s n i t m iv i e l& rty s lt l. l ' i II v A i C ti i o e s s c p o w nd su u< ed to b d y a t n lt d a t o h r o p b n u iZ s; i n il e io ss n s. l'elfonrt<Jnct:The bonking ocpniulion cornponsotion paid under the '!'Mit diffmnces .... ac th2t methods I« reduces the 1\lto at whlc.b awards arrangem<nL furl,.., improvemenl.l ia achieving bal:mctd cornporuation increase as an employte achievc.s higher ~" qunlitpnd reliability of arra~znenLt; 11 on.o organization m~y l m iR c V a tl s l.$ u o re f ( t s h ). e R ro a J t 0 h \ e 10 r n t h l a p n e r o f f O fs n o M u ! in lC g 8 risk· p ex o ~ rf l o l n p n le a i n m ce p r m ov e i a n s g u t r h e e s t r h e a li m ab s il e i l t . y ., , a f n o d r n to o t e n b g e a e g f e fe i c n t h im ·e p in n t r d e c s n tr t a r in is i k n - g ta i k n i c n e g n a ti t ~ ·es latins incenti\'M associlted wil.h the accuncy of estimates or re\·em.1es and .another orsani1.41io:.. Each organiz.alion use ol shorwm perf0111W1C0 m....,,.., profil.l upon wh.ich pedom>ar.ce is ruponsiblo fotensuring U..t its s lh u i c sm hi e , d .. l . o l d i. . re ., d _ u 'f c 1 e 1 s i I smo M lho ~ ch o lsoc ! on i ,. r . . . p . i . O . " ,. I . t d t e b p d o ~ : o lc f l b a a o ii s i i i p C il O i i c n o r > i ~ s y l · . in .. o . e c o n ti o i' s O is - l p tn o t v n . s il a h t t i h o o a A a ! m tl n y g a e n m d ents i r n el t i l a u b d i e li t l y m o f f i ' p O e ' rf i u ~ r t m he an q c u t o m lil e y a s a u n r d e s in tW ll 1 'l 1 ii 8 n * j - u ' d Ii g '- m es e . n t pl•ys t •lgniRcant ~f=.f:.·r~"'th o l ~ l w o h > f n , h k e r g i i m . c , _ n . l l t g l e i n a i r p n u m b e t t e r G l o l f r s i < i o a t . l a I y r c h k n m c o s a . d o d . n ~ u f s n d l o o n o 6 r n t a o J w c b g m r t o · o \ l c J e t d m h t : n o u l i n s p e u t h y > l r p e o e i o r s r " i o f t r 8 d - u f e t i p e e s b ts r t r p a m o i l u t n a 1 n p l i e l a n o l d c n l& n g o . d " r s i ! C l n n o < t O r c l c o l o D e a o n r I i t . I l g n t i O l l v l V p b t i h c G o n . e l l a c c i o n c d o o o d i m e m o c s e s p i p t x g a u c e n o n o p a s d o s o l . o r 1 s r p i l o l t s i i m o m o p l n n : o e o o o n a p n u m d a t i l " t u ) o o n ' ' l r " r l n g e l i " < a n s o " , m g n l f " n t a o " e s t n : f ' o n n l > , al l e o o f e h r x r x r o c e g i e g m c a o a i u n n o c t t i a t l l z i t i i t v o v a • o o s e t i r i t o s o e i a ) e o n m n s \ f o m o J p a p lt f n l a h l o o o y o i y n n t d h e " r i a o " f - J f r l b f ' ( e O g • a r , . r g n U _ s o . k i P , u s g i o l n p n p o r g i o o a f n i n f c t o n a f n o o n · r t n e l · y i g n 1 . r m d i t o d F m a d e _ d i p a h t o . f r w a e o e s o c \ e n f e a . c - b a f f i r : e o l a t g o . o e e . c c s r h c e C s l " e . o m o m o r u d t c i o j l . i n n s t u l a o t r p s _ v O d i i . l l . s e . n l m ' m e c a s t i o . . t o . o m p l d ' d d . o . l t s t e a f e f y e h . h p . v . r b y r 6 . p m x p l 0 a c M . o v i . m J a n 1 o a b : h a , . . a a r o y y 0 d w . o . e l e r a r l l r , . n m m i r . r b ' r m h t h a I t . r o r O i l o k , e i t i s e t ~ W p o o t ! i o s n k v ! n n n r o l r • v k r : o l : i t o o d d O o i o d c I a " o m i " d m o h j n r a n e U e u d d " . " o e J d d n c m a l i j s j r T ' " n c u i o l c l o r l o e d a a u . o l c l " c d l d t t b b i l f ~ c l . y r i h l s l l " u m u t t l l r t e i O e a i e e e s i i m r \ ' < . m n o d s ' o S m r l < e i x r e : i k n l. v h n · a i " e t n i f s t o i t s s t g h a 8 a a t a . h k l n t . r h t n o a n k l h t a e c r . o b t a d t i . f e a n n r t d . e o h , g g f b O . c h e u . e c s < . l a l u . s r . s b o e a h p p t t i t r i t i J n h m h h n i a e m . u o d n o o a g f k < a a a c 1 d . € o e j r l n w p p t t e t i r w i : t b g k " i c o c r m i l j n t p f m m u o c u i o 8 l i l i n r t r ' a e d e u y c o d l i o r m a g s \ . a a g c e u e b h a · . v t c e a O . n n r e O l n i t p t : t i n l o s s t n c l e i d a J t h p l y . e n v o e d d e a g d e r g r o : i i m 1 t e o r i ' a m s o : ~ n f m e i o g t l m b p o e : p i r ~ l a r a - : w r o t l r p s o e ! n e d i p l i p u o t O " l a e o n a o a h l l p k t d ' t a i l r s o g c e e o e r i t s o t m l a o o n h l > h x t a n r t r n g n t p e i n p v i l a s t l o r t . h r e a i a n e e t n l h o l i o F e o c n o i m o l ~ l l i l : D n a a a i a e o t e i a j b . p m n g w u b s d n s l . . a l l . ' d f y e l • h a o p l t s . l o e t x r g o o p r y o o l u . r c ( r a m n c d i s m e c . e r l o m s w m c s l a e e l . t c k e e e d ' o t t p a . , n t s r · h d o s a n l . h t c i u r o n n l l o a l r i i o , t o d e s l f s i d t k · f h e o · a o o ~ q o a a p o a d e a a ~ 0 l in 1 r q u c s w a i r u = b h 1 t f g c h F . l p u m r , a f a < t a a e . n t . . u i i r l i . . n i r n c t i o n n e c ! l . d l y r u k o u \ m i i r u a t e o · z - u i ~ t l i . e l t m l b l n v s a c t o r a t d i t - p b a e e t u t g p f s v i r e . o i o r s o o e s J a l o n c t t m O e o y d h I r e n n r n o i ~ d s r b o e l o s u o a ~ r . s 1 . m i : d r a i n l T t f s u t b ! l e l n f p o n n . i a U a o c t n . t h i o e c ) a e k r h n l t r a l f d i i k e h g n s i i l e l s r s d k , n c ) e S · w u e u . o e d w ' o r l r e , g ~ m i r i f n c p f i m i ~ l o s o U a t " t y i o t c a l ! k i n e ' d o h W r p ¥ o m t o y o . t n n m a e e e o o n 4 m r . f l : t p d r s i u ! l . - . o n b r l n l r c e l 1 a i ( i j n r e r s o e e t a s S n u d g > i a e e x c s n k w u t l a t W a C q s i l u i o m t s . c v n o h t u i i t h " s f a o . i : . o l i i a & z , . o i d l v t d n a l . l k e y a l e a e . s s . r e t e r t s , h f i i ( . i l s t o e s i , s l y o . k u t o r . n k f r i s · c ) r e l h o o o d r r ' ~ l'f A li d oo t i i O 2 _ IDO , I _, ( .. U . U . . ._. $ . . .. C , . ._ ? U . J _ !, Widl an l d . o p r r p ad ll i o o n e l s i o fo g r O m l) a l k O i I n D g W c i : i o o a n r ~ p M llll e l t ! h io o n d s o st p o t c io l: r ) . 1 s 1 1 1 0 1) I ' C b O e J b U d ir p e t fu ht l o in rp .. o . i u z . a in ti i o r o lg 's t ho ~ sonsitiwetorisl:.n:lildyto"""vo rist-Giilq:IMOIItivaofsmior ... ..p..tb-r;>o*c,tol"diJ.>ocY npidly during the aext few yoors. executiva and Otha' co>Na np loy,.. _qqgii'D_B. d~"n In part byo tthhee re fforts of whose activities m.ay ha,·e a materi.tl •4tu!~LUJIIUD4JM'tt&ll'.&tria.!tlect supervl.,. and stakcholdt<S. effect on lhc overall financial o t . p p ' &. M r d i O. ~ o e o S . ' v C r . a e i ~ . J r O ~ i. e u i ~ . c v i I n , • l N . a t a w ( . I ~ t t . t N . t . l . M h " ~ .e a ~ t A ~ . i l f c ' w .d d f k i t * .t w . i w ' L • . . & O i b. - l r . l .l d k ' b . s ~ W C l . l . t f & I _ t o M u ~ r f ~ * i i l z b . l i ~ i l o s e ¢ (f ~ e . d p "S C t i w - o o s o l a d - • " r i i i y J 1 b S n U i o o l r f Y a f l f w i U L e i - r t t l s « t d m c L In o m B e m c O t p o l h e o r . o r p p < d . o m h s s r o ~ a o e t u t r e i n l d p o i t n < n s a t O s c i o n y t d i l s v i h t t c h e e e e e l m i s y r f t s i m i l e n n t l o a c d e n e t w a n n ll n o o l l i d i r v r l s e e : h a m o l e y u r l g t d o i n g a p H c ~ > c o r o < r m a f w e p 'O i r e e e n l : < m " i n l a ~ n ' e n · l g : c c i r q t c n o h u n o p e i l f m l i y o t n · h a r e r o o y • e l n O n a (p l I o t W h o t t r d ' J b t t n i . d e ' o l- o e a x > f f a s l e l a l e r io o t r f l • e f o y ~ e d - . e c • r t t · l h l a e ·e r \· g i c n e l irnJ)IOI~ lhtorg,r.liD!icn's IIJCitln G~ptimi<w) to tW risb blall!l suc.'l 88 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00092 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.61281717 36410 feder<~l Regisler/Vol. 75, No. 122/Friday, lune 25, 2010/Nolicos employees are unlikely to believe that to affect the risk-takil!J! bch"ior or malus"). those cha"ges could reduce their actions will materially •ffect the empl\)}'e&S while at the mgt~nizaUons. the employee's incentt,·e to remain at organization's stock prioo. Arrangements that provide for .an the organization ilnd, thus, weaken an llanking organiutiOilS should take employee (typi<>lly a senior executive), organization'sability to retain qualified account of these difforcnctS wbe11 upon departure from the organization or talent, which is an important goal or eorutructing bal3nccd oompcnsalton a change in control oftheorg,aniution, compensation, aod create conOicts of arrangeoenls. For most banking to receive latgeadditio11al paymenls or interest Moroo..,cr, actinn.s of the hiring Of&'lnitalions, the use or .a single, the a<tOimted payment of deferred organizalian (which may or mlty not be formulaic approach to making employ. . amounts without regard to risk or risk a supervisod banki~ O!llanization) incentive compensation arrangements outcomes can pro..,ide the employee ultimately may def"t thes. or other a re p s p u r l o l p in ri a a t m el n y g r . ~ e k m -s e c n n t s s i l th i1 a • i e a i r s e l ikely to s o i r g g n a i n fi i c ~ a t n i t o i n n c to x u nt n i d \'c u s o t o N e k x . p P o 'o s r e C th X e 3 mp!e, o ri r s g k a · n b i a u la t n io c n in ' g s a d s e p f o er c r l a s l o ar f r a a b n a g n em ki a n n g t. s. unbalanc.ed at least with respecl to some an ammgc.-nent that pro,•ides an UlO.s should monitor whether golden employees.•• employee with a guaranteed payout handshake a!Til.flgcntcnt.s are materially lotge bonking otgoniztJiions. upan departure fmm an organizatio.n, weakening the organitation·~ efforts to L f a d e e o a t l r u o o . v r n B s e r e \ m r r : e e ~ f b b O a e m d s n n u e n o o c t s l t ~ n u l g t f b a t h i o a t e ~ i i m e i v l r . o - f m v t e y S o e t u t r p e h e e e f i l c l s o e i e a r t m n a l ' x o i r o < b i e - t 1 m i s n r s c y p e a l u m u a l a p l e e f l p y a b r o o m i a e r e l n o \ i t r ~ r r y o o n • f c l t s e , n p a o i d s e b . e v t t c n a r . d h n e i m e : t ~ o t n r i e i i a o f i o b a c a o f o t a c l e n o r n t n i o L t h m p w c e t a 1 n e n E . e o e r · a a p o x r r e y , O r n y a e e p t s d b t i c n i s n . e o n t a u u c i g s a h n n t o b v l a e r p a s i a o o s t r a o t t n e i n n t h l ( t ~ r l a ! v i e J a s e i t o n n n o t e ~ d a h n t t d e i o t " e a l s i i v l f y . e r f c c o c h r n p p s q e a i a o n o r e a r : a B l o r a u u c l t l t e t p e r p t u n e h a t d f t n r a d m n r d u e p l a t e s . k l i l n _ r ' o c S s l i a e g e i < y z d s n r l t • i o S a . g e · n g r i o ~ a l n e a m c n d U . n v o m c n l I e 1 f i r t u e p n e i e n g p n z s i \ a d m 1 a e a a e g c a e p 1 n f p r t t c n p d f a i f i a p o o e m o r r z n o c r i u a n f r a n o t y r c d c m s ' t g s p o h i n u e t s o a a s h r f u t c n u n n i a s n a • h t a c t f s i e { c a n z t e h r s e a e s s m a y i t " r o h s , y e t r ) m k i m b o n a x o a a - a u n g i a n n t n c s l a g l y e a l d d t d s i k i e n m m n h i m t c n h g o c a i g e n u e s o n . n g l r t d t t s o e a c o c a c ~ f t th o f o r o m o n t i T r h e r t • I i a d w m a p c n e i a J w s c l s o 1 B p r d b o t o t a o s r 8 r i e d e a r y \ a k y u e t n d ' n r j e o r e s m n e n c s w e k l e a z s y d d d i i e . i t t s n n s n e n t h i u f c i . o h g o e l o t ~ e u c w 1 s r n s e g e b O m 1 r s m h l t l d i a a a h e s o o i ! n n w c n a a k e : p ! n r \ h k y y s a · g U a 8 r b j t n i n r a e h r e p i a l s i d i n i . f k n . a p s n c g ~ k l s c i v k a e c r l · k n o e s . e a c o s i t i i ~ g e e e n { n n p o g o i n s t g . n d i o r t i t n h n a s l o i w v c o a p n c i a ~ e r l t 1 e i t a i o h e t i ~ e z l 1 m y \ n a e l s a o · a e m s m c t t u p s n u i o i o v c l i l a e o e . o o n h u e d f t n z h e y l s s a t t i o e s n U y o a d e u o f n s s n e d s . a e i y u p p n o e l a e s s t a m i r i i t r d g f m r s o p u n : i r . a e i n m m f ~ t t i l e " t s c e i a h l a a n y l n o t n h t c i r s o e t f t e h o t n c p o h r e e m o f o a i n r v l t f t h u o e i l v o a h m d f e n n e c s b d r s q t o g e e e o u f r a p e v i t o n t e x h t y f n r i e e u · d b i c m n i t a u e n i s s n u t o o t o i . l l : \ n r d l : · o u i e n p d m n s t l i u c i \ c t • s r h n e i e t n s g s f c e a i r m o e u o o r q r r 1 c n p a u p t h s n r h i l i u r a g o d e e d s e y e a m e m e r r m n e i e ~ e ' n t s n n k n c r t g d t l a s l s s e e n d t k t m p d h o j - u a i t a o n a m s r t k o t g t e m u i i t t x b n s r i e t a g & g e t n a o l . n o - t l t e d e n i n o n n c t r a p h c t i d l a o h e l ~ a s u e c p l f r f a e o a t e h s m g t a . e e e e t s n l u , t a i r a e l s e a a t t r p a h J i m m r s k T e o k p a o i y v n l u l a i g o m t s s n S . y i b \ o a t < O e y e o n n e e h o s f r s i e a e a i o n n n v c te ~ r e c e i d o i e e t i n o v d r n w , c e a t t t e i i o w f v t n h f h e u e t e i i l c n c t v l o h t o d e ~ v t e m e m a a o i r r r p n o s y p a e t m i z a c l b n o a t n p a s i ) t d v s e a · i e e n i o t t e t d i n h s i o e ' r a a o n i s s t s t n i . o l k t h h t n · h a e e t the deferral period. banking organiution should ensure that Acterdingly. banking otganiutions co T m h p e e n pO sa J t t i i o o n n o o f f O th l e h c in r o « o n v ti c v r l e .! d t p h a e r a s c tr h u u c t t e u a r r e r a a n ng d e t m er e m n s t e o n f t a e n re y d g o in ld to e n b y s b h y o a u n l d in e c n e s n u t r iv e e th c a o t m e p m en p . l s o a! y lo m n covered c a fo m p n p p n r l o o o p y f n o e a e q t s u e t l i h y ty a t · t > b i k a s e s d e i e d n f t i e o n r a r s e r tr . d c u o o m u r e n p n t a t t i s h d s o i h n o u th ld o 1 o im h th e p e c r r x u f g d e a e a n n tu i t z r r a e t ~ s i o k o n - f t d t a h k o e i n o e o g m t in p e n l l o i c , y q o h e u t e r o ' a s f g t e h e a a ~ r c v~ r c a y o n s u g i n e n t m w in e h n d i t c e a h t r e e r n i i n s n k i f n s o i a r n m r g o e t t d h a k e a e b a n m o i u o n t u t t o h n e t o k f e y l t t h e h v e at e o l t , r h g n e a a e n t m u iz r p a e l t . o i a o y n n e d t . \ a S d n ' d u a r c t a h t t i e i v o e i n t x i e o te s f n c t t h r e t e o a r t i w e s k h fo s ic r h i P '1 r 1 c o e 4 'r n t i g s li i e o v n b e s a c o n th m l: a in p t g r e e n o q s r u a g i l q r io e n n i a w a d r l e i r o a p n n a s g r . t e i m ng e nts. f c in e o a c m s c i m n b t l i u e , n • , e a i c n c a o ~ t r i o o p n c s n n w i S u i J . t i t h i i c o e n n m ' p s p 3 l i o d y . e W es h s e h re o uld those activities may materially affect the employee to rorfeil dcftJrred incentive includeexarnplesofhow incentive: o\•erell performance of the: O!g8ni:zalion compensation paymenU: n1ay weaken compensation payments may be and its stock price. Deferral of a the effccti•·enoss of the deferral adjuSied to reflect pro;octed or actual .substantial portion of an cmplorec's anangemcnt if the departing cmployoe risk outcomes. An organi?.ation's incentive compensation rna)· not 'be is ablo to negotiate a 'golden coromunicalions should be tailored workable for employees at lower pay hand~baktf arrangomenl with tho new appropri>tcly to reflect the scales beotUSt of their more limited employcr.•&This woak.cni11.g cfJod can sophistication of the relevant financial resources. This may Nqll.lire be particular(y significant for senior audience(s). increased reliance on other measures in e L x B e O c s u t w iv h O o $ s o e r s o e t r h v e ic r e s s k a il r l e e d in e h m ig p h lo yees at Pnnciple 2: Compatibility With : t n h r e a i n n g c t e r n n t e i n v t e s c f o o m r t p h e e n se s a c t m ion p loyw to dcm3nd IYithin tho m3rkct. Effi!<6ve Contro~ and Risk·management achteve balance. C.ldcn handshake arr•ngmnents A bankingoos>Oiution's risk· • Banling organiz.>tions should s p u r p es e e r n v t is s o p r e s c . i . F '! ' l o i r s c s x u a e m s p fo le r . L w B h O i s le a a n d c m o a n n t ~ ro g l e s m sh en o l u p ld n x re :e in ss f e cm s a :e n a d n i d n t s e u r p n p al o rt " c g ar o e l f d u e l n ly p o a o ra n c ~ l d m e t r e s th • a e n p d o t t e h n e t i l" a e l . < fo tln r g d ba e n fe k r . r in a g l a o r r r g o a n n g L c z m aii o o n n ts c s o o u t l h d a a t d d j c u p st a i n t i s n g t b h a e la d n e c v e e d l o in p c m en e U nt \ . •e n c d o n m ~ p •i e n n t s e a n ti a o n n c e of ;nmnger.1ents for deferrOO compensation tt:'lployees ,..,;nc ontinue to receive any amngemeols. aCC!'\11\d defeCTed wmpensalion after "for ~lllp1t. ~pr~ift8Jllll}'<lllbolinoect.h._ d•p.1rture (subject to any dawbock or "A auii:SaorqarD~C)l pennilJI!'Al ar.p!o)'e: 1.0 c.on'l~io·l~wa.-dsov«•SWidt.-dtluoeo)~r ptt\"(11:1..-estlQSolall«t»:'loltheDMftiDiola pe:lodl'la)'n3!-w~1~yreflocubtc.itT~ i!ritcrtd !MuCOMiU:I au~fd.MI!I.:$ provisio.'lSltt fntbttwetodtilHboriz.ooolrifkasaoc:ia~edwi:h ••Colda~•re,mr.ptr.Utbll [nYOb::i 1Mr bi«JQ31:1e51.1t WO."'SSIl:.an tbeldit51iesoldi1l't'ftlllpp.sol~od «aptnsalun e.p~ tor$00M oull Gf11M txpec:~Morv•h~ tM~1tooupon 1KbK111.be r.&)•DOlbewffici«.tb)•i:.dttobibi'ICethc ~iBt:ed.~.tdval~of&!tmd!ll(tdi\'t a~.wdt>"Ubt-rum5outl61uii'Cbocr1 ino:md. (l)lr.peutlion.~etltseltt~ployCIII$ ..t ~,..y l'J):I~ior\ll-Aio!'Otlt4bt\'\\t.'l!(ddcdt.:I)CII Lmol.:~rwcalcd<Oe:.~dt.:ot4oli:etlr.p!oyM r C i . ! ' b l . p olll:tliM:o~iQ(toi:I.O~~W~ODI l 0 .rp ) a . :tw 1 e ~ tr !. l . 'IOlhMiplo)'M·spr~ ~';~~~-~1:~-:~~;~?feol 89 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00093 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.71281717 federol Regisler/Vol. 7S, No. 122/frichy, June 2S, 2010/Nolicos 36411 !heir.-., laordwco inaase lhe roloUI of tho ~.busi,... C0\'1nd omploj'OO!; 6il appnrri!os che COCllpenlllion, omployoos "'AY aei to units, and CDOltGI unics authorioool 1o bo ri>k mouiiJtS ued in rishdjus!Menc. endolhe p10eases escablisl\ed by a Involved In lhe dasign, iaopiA:uoentltion, ond perfcmwoce mtaSUn!S, as well as b.Jnkins org.11iution to achieve and monilOriJtS or incentive measures of risk outcomes used in b313rtc00 COll\pens:~lic!l arrangements. compen.<3tlon am~ngomcnts; {iil identify defemd·paycutamngements; and {oiil Simllorly,on e01ploy,. ''"""'by an the •ource of s]$nificanl risk-related onaly;ing risk·laking ._,d risk outcom" lnocnti~·o compensation arraAgcrncnl inputs iAio these p..,...... and 1'\ll~livo to lnct:nlivecompensation m to ~ i y n * c:r k ou t e n l h in e O e u m e p n l r o . y c e . & in " s w p a a y y s , d lh es e i g ri n s e k d e th s e ta d b e li v sh e l a o p p p m ro e p n ri l < an tl d c < a o p n p l r r o O v i o s l g o o f v t o h m es i e n g Jl3{)';~:'f~ncUons withi.n an measi.II'Q or other information or In puiS to help ensurtlheir inleglity; and org.anitation, such as iiS control, huma.n jwlglncncs lhalore ued Co make lhe (iii) identify the indi,idual]s)and ....,......., or fi ..n ce fomclions, also '"'Diovto's pay ...Wti\"Oio risk. <onln>l unit($) ,.hoso appro,.. is pia)' llllmpoll&nl role iD loelping ... ,.... ~oai<lasmay sipiliancly ._,forl heestablis!u:leloo oi that i~lin (X):npusation ...U..llooofloctinr.essolon IICG6\-.octmpas.lioo~IS« .,.,..._LS.,.bolanced. For «pnlutlon's ia'*'ti"' <0o:1pen»tion mcdilicaoion of existi"3amngomllliS. wople, these fwlctions may <onlribotle arnnaeruenos in ralricting imprudcnl Aa LBO also 1hould <onduct r<gular to the dosicn aoul review of performance risk~o1kir-8. Thesa :K:Iions can baw a internal reviews 10 ensure that its maasu."tS used in comptnSation particularly dam'3ing effect on lhe proowe.s for achieving and .Nintaining arrangomonl< or may supply daca u...J sefety end ..u ndncss of lhc ocganizalion ~lanwt incentlve co1npensation as ptot of theso measuras. if ohcy rosuh In the weakening of risk arrangements: are consistently roliO\l.'ed. • Compensation forcmpiGyees in rneasures, in!onnalion, or judgments Such re•·lcws should be <onducted b)' risk·mtnagemeut and tontrol functions that oho orpni!Oiion us.s for o;bor risk· au<llt, coonpliance, or Olher personnel in should bo sulncienlto allract and relaln "'~'"~ iolomal <oniml,or am•nrtOr..,.,.~t. .t llilhth q"'lifi!d ~"!!nnel and should 1\~d . o fi o A. f p u y ~ l t c o h i , .I e . J . b p · a , w l O .n . C . a . I. o , io . . o A ._ s ll . l h n . o . s y « u g . d . i . ! i . c . l o u i s z . o a n s. ~ o lh ' t e s C " ln ' 0 l! t 1 ' . O 0 n p d a li u l ln a t c l u o e d r n o i ' t : s o d 0 n e i \ l - p 1 .. J w 1 ri 1 n n & c b o . o A l o n a le l L s w o B m o O h t " o s (o u r l d c p o o T n rs l f o t o i o d & n s r d o i f io i s n \" i l O A : i h n - - > e s ~ d l. a in : t o h d e a de m s l i n p > . l lncenti" CIOQpensation lmliF'""Is. Slplrltdy corullld """"a au!its ol the ovenia)rt, Uld opontion ol inmoti•~ butalsolhtrisk-~. ioternal organitation's complimce with its compo:wUon anangemencs ohould conlrOI!, and oU>er fundioR$ U..l .,. esoablishod polities and controls ltavo •Pi'fOprule skills and experience • r o i> p k p ·t o a s k e ln d g l . o f a o c r t t I h S is a m se s p o a n ra .l t r e . l c d h il t . c i k on o a n l o re m la tn ti g n e g m to c n in ls O . M Th t o i\ i ' O e c S o u m lls p s e h n o sa u t l i d o n b e T nt h !t o !d s c e d sk to il l c s f f a e n c d t£ e \·e x l p y e f r u i l e f n il " lt " h s o h i o r u ro ld le b s. e risk·rMn3.gcrncmt conlrols alone do not rcpor1od to appropriace le•als of sulnclencto equip che personnel to oliminate che n,.d to idantify 1nan.mcnt and, where appropriate. 1'\llnain o.ffocti\'C inlbe face Of employM.S who may expose the tnt 0'8'Ritalion"s board o( d.iroc!Ori. rhallcnges by c:overtd employcos ~ tb n c l y u ob t v i ia o t n e t 1 b o c m n a e t e e d ri f a o l r r i l > h l e :, i n n o a r m d t o iv o ris • k · A m p a p n r t o e p e r m iao tn c t p p e e r r s s o o n n o n e e l l . , i J u h c o l u u l d d i •ll s c e o e m k p in e g n t s o a t i i n o a n c in as w e a th ys e i t r h in t c a e r n e t h·e CCII"IIpwation amnge:r:aots fa these hnelnpo:l io:o lheo.~ioo's lnconsistanl 10ilh sow:d risk· ..p ~oyoes lobo balooood. Rath.-•• processes for~"' iooenti\"0 .....,....,c,.intemal""'crols. Tloo bonklns....,i:nliao's risk-aoaD~emall oompo=liooa..,.....LSa:od ClnpelllitiOni~':Sfor proccssos and inl«noo Q>nllols sl»old WU$i~ tbeir tfftcti\-eoess ia tmpioywinrisk~cand reinforcuad support the ciemopmO!II rlllniniq imprudeol risk·taki"tg. con110l fwoctioru lb., should he ar.d malnleMnco of balaRA:od i""'nti•e Developi'1 •ncenti\'S compensation sufficient co attr.tctand ®in qualified CO.'l..tperuation arrangements. ornngemeots tlta: pro\ide balanced personnel with experience and expertise • Banking organization.~ should hne ri.sk·taki113 incentives and monitoring in th6SO fields that is appropriate in llpprnpli~tc oontrols to ensure !bat thtlir arnngemenls to ensure they achiove. lighl or lhe si,., a(:livilies.and p~ for achieving balen<od balance over time requires an <omploxicr of lhe orsaoization. compensatioa amtlgements are undcrsanding of tho"'" Oncluding In odoiuon, oo help preserve the followed and to maintain tho integrity or compllonc:e risks) and polenlial risk iodcpcndtn<O of their perspcclivcs,lhc thoir risk·manogo:m. .t and o:her oult.Oine.s associated with lhc aaivities iact:nth·c oompensatioo n:cci'\'*td" b"y" '" functions. of Ih e rtlevanl omplOJ-. Actordingly, n,<. "..".," .''d.. ..,. ..d OClltrol To lotlp pm"OOI duoo:go 1rono l:ankirtCcrpoltalicwsloouldb..-. su« DOl he Nsed substanti>lly "O ic "C s l'C• , O' . di . f . l h i . iC . a . . " • ( ' o M ~ r ~ d l W a e i s S l n " g s ' n • o i O n q s r ; . o o i n l m s m g p o o l i . n o ., m a e n i t n in g g , o p r p o i p l s i r d k o o p · l N . a . n ie . d . r p o . r - l o e • c in e p d l m h ur e o e n o s r o th g c a a l o n ~ i m ~ z a a . w t . io . n .• . l 's h at " b th u " t s ' i p " a o o ' r s f ( o o in r u m a oi n a L n a S c . l l o b p a " e c " r c f " h o ' o r " r y " n m ' a u J i s Q e e w o d r . t i R h n > e t t h lt o e r, and monitorin, inc::enti\'1!1 compms:llion ~for dl$igning incenth-e inctDtift compensation arrangements amtJ18tmoncs. Bankingocgaruzations "''"ponsetion arrangements and for lor these personnel should be based shlluld ctt'te and maintain sufficient W6S.Si.og their effecti\·eness in pr1marily on the achiew~ment oft he documentation co pennltan audi 1o (lhe resualnlng lmprudontrisk·laking." objocll•os or their functions (e.g. . effectivene.s.s or the otganization's Ways lhat ri>k managc:s might ossisl in adheren1>1 to htlemal c:onlrols). piOCOSIIS (or establishing. modifying. trhieving l~lan<od a>mpen.<alion • Banking ocgaoi,.tions should and tDOnitorina inamth·e compensaticm amnger:unts iacluds, but a.re r.ol monitor lho perlonnan1>1 of their """F'IIIt~ Sm~ior bat.l:ic& limiled to, (ilreview~c& thei)"Jl<S of iDtenlinan:tpenSIIion arrangements orplli,.lioru should u.x.ponte n.b IS.10CiaiJcl •rilh lht :K:Ii;ities of ad should mtso thearnogarroncs" miows of dotso (IIOCISSOS into tbeir ....w ifp oymeoiS do DOl 0\'mllhlroowwtloroompliu:oe fOI)dac.ly rdled risk. mon l. i o l r or p i 6 r 0 o~ n ( l ! :i o n c g l l " ld '8 in " g n i ! w nt t < io m n a s l . a L u B d O it s l ~ in \ ctn i ti n ve a (X a ) ~ m ni p : e z n . s a a t ti i o o n n s a s w b a o r u d l s d a m n e d n itor sboold hav.,nd maintain policieuud poyments, n,;, tabn,and actual risk proo:ldurM that [i) idru>tify 111d d!SC!ibe ouloomos 10 delermine whelhar 90 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00094 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.81281717 36412 federal Regisler/Vol. 75, No. 122/Friday, JuM 25, 2010/Notices inc:tntive compensation paymeots to adjuslments on tho bala11oo of the those payn:l!nls to risk outcomes. In employees are reduced to reflect advmo arrangement, the risk-taking incentives addition, if the compensation risk OUt<OJnCS Or high levols ofr isk of the senior executive. and the sa ret~ amngement for a senior executh·e a ta p k p e r n o . p R ri . a , t u e l l l . e s v s e h l o s u o l r d m be an r a e g p e o m rt e e n d t , to an T d h . e ~ b u o n a d r n d e s o s f o di f r t e h c e to o r r s g o a f n • iz • a tion. r i e n v d i u e d w a. s ~ h a o c u l l a d .w in b c a l c u k d p l! r s o u v f i f s i i c o i ! e l, n t t h en the including tho board of direotors where organit.ation also is ultimately inronna1ion to determine if the wamnted and consistent with Principle respcnsible for ensuring lhat tho provision has been triggered and 3 belo". The monitoring mothods and organization's inoontive oo:-npensation excculod as planned. P""""" used by a banking arrangerntnts for all CO\Iered employees The board ord irectors of a bonking organiuliOtl should be commen$Urale are appropriately bolanced ond do n01 orgoni23tion should mk to stay ab,..st o w r i g t a h n t i h za e 1 s io i n u , a a n s d w c e o ll " a p s l e it x s i u ty s c o o ft f l \e t j h o e o p o a rg rd a i n z i a z t a h ti e o s n a . f T et h y e a i n m d · o s h o ·c u - n m d en n l . . o , f o f o oo f r s n ig p n c i n f s ic a a ti n o t n e p m l e an r g m i c n :c g h c 4 b n ; i.' m im ~ s i a n n d iaccntivc compensation. Thus. fo·r the board of dire<tors in ov.,ight or the incentives in the marketplace as well as example, a small, noncomplex organization's ovan1ll intentive developments ina cademic research and org.ani:tation that uses incentive compansation program should be scaled rtgulatory advico regarding incentive r.nmpAnsaticm only to a limited extent appropriately to the scope and compensation policies. However, the may find that it can appropriately preV211!nce of the OLg.tni:zation's board should recogniu that monitor its arrangements lh.rougb incenth•e compensation arrangements. organizatioi\S, adivities, and practices nomtal management processes. Wrge l:cnhllg orgonizot~ttS ond within the lndustry are not identical. A bankingorgani1.ation should lako organizations thai ore significonl u.rets Jncenti..,e compensation ammgeme.1lls et the results of such rn<lnitoring into of inc<nlive compenrolion. The board oi one organization may not be suitable for acwunt in e.stabl•shingor modil'ying directors of an LBO or other banking usc at another organization because of a in n o d e n in ti o v v ; e t. r o se n e •p in ; g n s a a s l s i o o c n i a o< te T d 'In e g o e n m t.m !n ls t . l If, o co rg m a p n e iz n a s t a io ti n o n th l o o ! a us s e ig s n i i n fi c c e a n n t t i e 'e x tent s d t i r f u fe c r t e u n re c , e a s n in d t m he a n ri a s g k e s m , c e o n n t t a r m ol o s n , g over time, incentive co&!lpensaticm paid should actively o,·ersee the organlzalions. Tho board of directors or a b p y p a r o b p an ri k a i t n e g ly o r r : e g f a l n e i c z t a r li i o s 1 k 1 o d u o tc e o s m no es t , the d o e rg v a e n lo iz p a m ti e o n n t 's a i n .n d e < o : p n e ti r v a c t i c o o n m o p f e th n e sa tion e e a n c s h u r o in rs g a t n h i a z i a t ti h o e n i n is c e re n s t p iv o l n ! sible-for rxganizalion should review and revise polici8S, systems, •od n~lated control compensation arrangements for its g s e i a d i G c P b a b t n c t a o r o n e o s r h r o r l c l G v i ~ m s s o a a l a \ n i e . i o u c • r n n n - i n g n c p e · d v m e n t c g c g n i m e t e e e k p e i o e a e a a n \ n < U m i a l l n f n d n ~ n s n e e ~ n t t d a c d e d a a h g s a h c 3 t o i n J n t e · e t i e e r ~ : e l o o t t f e d t d f S a $ k f o n h c f c e l t O t o a i d e o a t r c t m h o p ) c o n o k a m t i ' e . r t r n o d m i r p i s z n a l v p o v g p . a l c e i o r e m e e l m t t C e e e n t m i o i c c n g l o s p o p v o o e e a a s t • r r r n e r n p s n t u o t u p s s i r , t o t ~ o r v d s t e o s e i e n r i n n e i e h n d r d g a s o n a d i o t , t h o e o s t o t n u a u t e r , u e r r d t b l a i e r m n d s i y o s n k d p b l l ; : s g s l a h o . t v ~ o y e e es s s s a a a o c o o m r p b p . t u o o p { n n o r o u r e e a g o T c m m p a r d d u t t p n h a f c h r h r i n s o p d a p n i e p o n e e s a o n g d e s a i e o v s a n z l s c b n e n r n n h r e k a e e o m o s g s a m O J . o t s t a n a . a i n e a h t J . , e u o a t t o s r . . T c n g e i i n d k n l ~ i . o o e a i s M d t h e o t 1 n n o c i t m 1 a 1 n e e t v 0 p l c i f t S s e n s e b i r e s d t ~ y e ( o o s t r J o a o t t i ' s a t n l \ h r s " s w i a a t n l e l s t h e i u a ' o l b r h e d ' c u i m s t d o r n g l t t a t n e r i a h o ! i u o s s t e - o s n t e c r h h s l a l t i > f c l a d h n l h a e o ~ e h n a d n f i s e o u c e a n a a i e a d c r ~ n f a l r t d t i t n l e d n i d y a s r t s u t d v d c a e c h u s w i a r d e i t l r e e c e c t o n h p ' i g t i o n h v n a a o g r l u d e d t s l i r g t o n a r a i e r h t o i v p n a n , i w s o a e e ( o f l t - ' n s t h d . s i a . e s e e t n o s d a o e e e c a a a o o i t m n h . J f s m m p r u r x f f g m s c e a / g p e i t . e e p p L a n n . c o o r c o u s n n l l B n a o a r r n t s o o a t i g g i g t p O m i n v l i z ) ) . e z a e . · · s r o . a e e e l n n , m i o h e h b e t d e a l r l i o i n y r o i · s 7 t c o t m t u e e t o b , t n m o . n l l r b l a y o t o l k d r i m e h t y s n d o p i i r o g t n o e r I m p e o p a e a t m e h g n r h k u e r f r c p n a s o ' r d o e n e a t s e e o e ~ l o n l r s r i a r i q o a g n n r g a a t v i o b o a s u s e s n t r g o e r s n i i k l e n o t e e o l g n l i a o n i s r \ . r l m n U i o t s n . , i t f w r y o o t i t n o d i h e t g t b u t s n o t h l n i e n f o i a k r i u r . ! t e a t o a i o s e ' · , h t f r m a g n i n v i i p h s w s e o o r a s i t a r , i e o e o g h n a i a n a . t w n a c s o b n b h a n . l t t i e g , o i f u d u o c y e t a s c s e o n r e a e s d n r n a s d s o t n r e ta x k e i c n u g t i a v c e li s \ • i i n t ie m s a o n r a a g n in o g r g th a e n i o z v a e ti r o a n ll , r t i h s e k · d w a i s l i l g .a n c e h d ie a v n e d b o al p a e n r c a e te . d in a manner that e o f p f e e r < a t t i io v n en o . f ., t o he f t o h r e g a d n ., i i z g a n ti o an n d 's incenth·e o bo rg ar a d n i o u f t d io ir n ec s t h o o rs u l o d f d • i h re a c n t k ly in a g p prove mo • n T it h o e r t b h o e a p rd e r o fo f r d m ire a c n i c O e I , S a s n h d o r u e l g d u lart)' c ta o k m in p g e n in s c a e ti n o t n iv s e y s s ! t h em at a io re p c ro o \ n • s id is i t n e g n r t i sk· a d T th r o 'n r e c a e i t n n b u g c o n e e a m t n n rd t e t i a n v a n t l e s s y c o f o o m s m r h a s o p t e e u e n r l n i i d a o s l a a r e t p e i x o x p c e n r e c o p ut ' t ' i i ' o v a n e n s s d . o ~& r b i r n e o t v T . a e i o r O . d n \ a t v s i l v h l t o h e o w e O u d l f O d e o : s r r t i t e g i p n c n e e f n o i a s v n n a e t n d i d o e f a n d u t a a n r r e c a r v t a n i i n o e d g n \ \ a ' e , 5 n m o , a f t e l h y n e s t s is . . i w h s n O o i c u I t V l h n u d i t d n n h e B c e c a S o n n S rg t . e h T a • v B n h a e i l c 7 u s . o . e a a m t t r i i e p o o p c n n m o ' s o r s s t f a a s ' J Y l . 4 i s o h : h t n o y e u p t a h l r n d c a d r c o ti r c es adjustments to the incentive ftom management or other soW"'8S that may intrea~e the potential for f c c o a o r r m e s f e p u n e l i n ! c ) s ' r a c c t o x io e n : o s . . i a d ~ r t e r i a r v e n a . g n s e d a m n m d e o n s n h ts i o t e o u s r l t d t a h b e li shed a a p s r c s e r o f s s o u s n f w n fi a c h n i < e c n l c h t e o t r o f t t a h h l o o l o o o w r ,. g . , t a . h n . e n i z b d a o e t a i > o r i d n g ' n l s o a nd a im ls T o p h r • u e h d b o e o u n a l t d r d r r i o e ~ c k f : - s e t u i a v c k a h i n p a g e . n r i o o r d g i o c n r i e 2 p 3 o ti r o ts n thai effects of any approved exceptio1-s or incc.nlive corr.pen~Lion arrangements review incentive compe:n~tion awards are consistent with the OJS3nization's alld pa)'ments relative to risk outcomes dit 1 G ~A d $ .c U W $0 t 1 "i S s b u l s l cd l e i o sg t u t i ! d « an k c l e t . h t t h r 4 n 1 ~ ct m ~ b C c I « I c " d bo l t . r b d e o l a sa n f d e t r y e a p n o d n s s o sh . o u u n l d d n b ~ o . a T p h p e r s o e p r r e i v at ie e w ly s o d n el • c n b n a i c n h o • a \\ r 'h d c ·l t o h o c k r i t n h g e o b r a g s a ~ n i to z ation ·s 1»ud of dilecku ~·ho lti\'t! pritu.-y rupomibUity scoped to refloct the~" and incentive compensalion ammgements !Of OTmeein& \he i~K~MCi\"$CD;pe.'ISollia:l; Sysklll. complexity ofthe banking may be promoting imprudent risk o d D « i p : t r a $ : p o C ~ c o i l o O t u d b I d S : e , . r ~ l a C o } e O a i o t t t C ~ ? n u l . p m : e n a » ~ l ~ i . : U a ' J t f M ! M r e : ( o n ! 4 l c n t : o h J w m . 4 h b 1 k o a t . u : t u \ d ( c t t l b e b ' l o e t l l b b : ll c . t l D i o : r i . p b t d i o ~ i i w i l £ d W d ¢ . ) ( ' o c p o r r g e m v :; p a m l e e i n u n s l c a i e o ti n a o n · n s d a a r s c r c l a i o ~ n · p g i e t e i o m es f e a it n n .s t d s i . n t h c e e ntive o t p a r e k g r i i a n o n g d i . i z c B a a t o i l o l a y n rd s o s a b o l t s a f o i d n s i i r h n e o g c u t a o l n d r d s c o o re f n v t s h i i e d " w e " r i ' n g r e t o .! ~ p r o .~ :a f s ) i ' b S it i i t ;y i b :: to " . L \· I m ~l .t l t : ic e g et th H~ e o iu i' c ~ ft ' l t ti i v O e s. UM!ttrn org T a ~ n e i z b a o t a io rd n s o h f o d u ir l e d < c lo lo rs s e o l f y a m b o a n n i k to in r g s a i m fo u n l • a a t r i d o · n lo a o n k a i l n y g s i b .l a o s f i s < X ba > s m e p d t n o s n at a io " n " o 8 n < l U~ e ' f ia < p n !f 1 o o ll ~ . ~ k t im . . m c. d . o on l~ As ~ ! 1 Ml ! ~l 6 h : e~ i l l iO M '' i . l tJ i \ m 'e ' ti s U incentive compensation pa;1nents 10 of per!omtance !e~o·els, risk outcomes, rorpoA~cii0013ar.agt~ttdatNmtl'l\; oonior cxfJtulii'IIS and tho S8~iti1•ity of and UlC amount of ri~kz taken. 91 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00095 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.91281717 Federal Regisltr/Vol. 7$, No. 1:12/Friday, june 25, 2010/NOI.ices 36413 • The o:pnization, compositio-n. and iueentiY& c:nmpensation sy$lems. 1'hs expose lhemganiuticn 10 NIOI1al resou:n:es olthe boanl of directors compenAtion connnitt• shCM:IId work. risks. ThSS~emplo)·eesohould iocludo should ptrmilefleclivo oversight of <l..,.ly •<ilh any boanl·lovol risk and (i)seniorexeatlivcsand others "'ho 1ro incenlive compensalion. audil commiUOC5 where thc3ubslanoo ""J))nsiblc for ovcrsi&hlcf lho Thob oanl of directors of a ban king or their acllons ···etlap. organization•s firm-wide acllvllil$ or organization should bave, or hava t A banking orgllniz(ltion's disclosure malcrial bu.slnesslinO!; (iii indl,ldual access to, a level or expertise and pra<lico.,hould '"PPM safo and sound employeas. including non-oxccutivo ex.perien<:e in ri!k·management and incentive compensation arrangements. employees, whose acliYilies mf.y cxposo compen.saUon practices in the fin~mclal If a bankin, o~niution's inctn\i\'8 lhe organiution to material amnunts of .servioos induscry that is appropriate for compensalion arnnc<mcnu provide risl:; and (iii) groups ol employ,..•liro the nature, .scope, and comp!cxily of the employoes incentives 10 lake risks that ""subjoct 10 lhe samo or •lmilar erpnizotioo's octivitics. This IC\'CI of "" be)·ond tho tol....,ce ollho inamti\'t compensatio.1 atTaft&eMtnLS ' u M po i r l t l ls lh e c " " ,. > .. 'b ,b e aJ'IsO o '" l t l l h t a O b ll o le a e n t l i , v m el a y y o or r e g a li n l: i t u ly ti o 10 rl a 'u ls h o m p b N o M ld t e l r r s U .t k h 1 t! 0 l l h ri a s ks l o h n c d o « c h p o i , n io ti lh o o n ' 8 to 8 ' I '1 I'. 1 > ' I 1 I 0 N . I " II " I > IO ' a W xp II o S s o o f """"!tom r.m.llrainioa"' froo> ..r ..ymd...,.._oflha nu: .......... Hdra<siag lMse issues. Olpitllioor." To ho!p proDIOie sallly o ldcotily lhtlypes aile! tiroc l i i o u < m lud e i d ~ ~ th &a ro s t a : d g i ll r a e d c v l i o c r :o , o .. t . ~ , ~ .; a . y . b .t e &om s m lrC d M . I . I . d , . " d " n " t '' o d $ e . 1 • D b o u p rk p i r n o s p o ri c ll g o u a i m za c li " o " n '' f h r o o r i i ! z l o th o e s a c d l i r • i! i l l : i s e l s o o l l h l a lr o a s r o p e :r m itl p li l o o n y • CMIUide counsel, Oll!l$ulwus, or olber of information c:onC*nin& its iactntive 0 A.ssessllltpole:rliallo<l!ra t):perts with txpertise in incentiV't compansatioa ""'"'""""" for pu!ormaaoe rueasURS included in lha T co h m e p b t o n a l r l d ~ o O f O d a in n c d l o ri r s s k o ·m f a a n n agemenl e an x d e n n> li l v at e o c a l n r d is l n : O ·w tH n X q t e e m \IU a \ n '1 l , e o m o p n l l o r y o e l, e s rionc. e l r h . e li s ~r e ·e e c m om p pc lo n. y s « ; s l t t i o o t n n < am OU n J g a e S m O e th .n o ts e C x MS te ~ n D s i i u v t e i i o n n c w en it t h iv l e e c s o s m co p n e r n p! s e a x ti o ao n d s a h n a d r g eh o o v l < d r e n r a s n lO e. t p l r l o o c w tS t ! h O e ! m IO to mnnitor cm n p l I o n y c . l . u ., d to e b ll a k la t n i c m in p g n e rd le e n n r l e r n i t ! s k . l s ; u ch o tu r r l . lp ~ p ng r e o m p e d n a t t s e m to a ) r ' e n q o u t i r f e in 5 d p e it c n ia e l c b e o ss a a r r d y a re n s d tr , a w in h e th re o a p p o p te ro n p li r a i l a f te o , r t s a u k c e h a ctions to . \\ , 'i t r h is i k n a th d e ju i s n t c m e e n n ti t v s a o c r o d m .r p e e r r n u l a p ti e o r n io <ls. e e x x p p e o r r t t i s s e in o t r h t t o s a ra re ta a i . n a.nd u.se outside a on m <: l c l > lg u e 11 m go c n e l m s a p n lo d y o pr e o s t l c o .< l S a 0 k $ e 1 i 0 m prudcol a at m e t n w p O e n n a i b S l) • f d o e rt s h ig . n .. e , d e m 10 p " lo " y " e ' e " s t h Ih a a i l In .seloctinx and using outside parties, risks. Such disc:losucos &hould include tho arnr.g""'cnt will be balanced in tho board ol direcWs should giv• duo information re.lt\'allt to t:nployee:s other light of the sizo.lypo, ond limo horiUIII lllcnlion 10 potential conflicts of than senior txtculh'OI. Tho scopund ol lhe inbennl ri!b ol lha cmployeos' " " i l o 0 i t e i b s n n h n 1 o M " o r : " A l 1 a c u a o C ' o 1 . U t " U c n p ~ u r - S n . e o ' d c ! I ! i u a t d s . I i 1 n n h : n I a l l . t 1 C d s a a · g t . u p t 1 b s t i I e . ! a l a . s • h l c : . s i . r e W p O " o n . l i t n a i a a . m i i I e r h l . g l u t o t s 1 h p i ~ • i l a l 1 e < l 1 o l e e t i m i 0 s I n l h t m l e C D o h m s i m • b l a o b l I s o l t " o \ t t & u a o " i . y e ' a o & f o i t - a e r b r o n h i d e n t d u ' a e y D a > l i a r t u l h r o a p ! i c b n t f l u o e i o h d o o n n d l ~ t o o u n i p s s s o i l ' e h o a f s i i a c n b d c m n le > g i g O , d l • e u s i t . f t h n l u . y o d l f e t s s u f s l e o r o : f t " l o n f h d a n e o A . ' e a u c m v l l A • s v o ' l r m e p f n o u b t t l l t L l w l ~ l n l a b o > o r u u l l e a p m l a . a . c t t a t n n i n i h ~ i o s n l l k o d o l l e t i ) c a a l b r l ' n n o o s S t o a o o r g c o a . i ! • i n c s l c : l O m h a t l r ~ l k o n D J o m d ~ · I m g c I a p I o n O i e t a N a I l p l k a n k U C a n d a l l a t r a i i n h I n i b l u o n I l · g p s y e e c I l n e a i p e o t u c o p n l l d m l l o l l i l n o t l l t l l - m s i p h o u : s s c 1 l ' l t a r p " J : . . r o i l e ) o . e o i n y 1 d s l n o s e o t h e s s e e t d a o s s m ~ t ! b l i r h o l y o b n o u l a h l t d e a • - o b a o s m p ' e c p w 3 d u e a o n o t ~ l ) y i e a i a c d v - s \ m d : " n r s i i i o t i d C f M i t ; t i s e r y : i . i . v o l o e n : e , o \ o l e e . m s s ' t p h r l n s t s ; ' . t a I b e i m < i d r m O t J ) . o : o r ' i u r c l l . a e O r o i l h n h s d ' l t i e k h e i . t n . e r C : v h . . e r t o c . a a f : l a e s U . s r e r n l a i a w e , p e r n d e r t t i c o n m i e l n t r o s t . i o i m i c k l n s u . l p h l : h k . s a e t l " . c . t C o i r n p o r " P o o a y i m " i t p u k J r m i c " " v t l r U p l l o . c ; o e t e e . p s \ o m p n n , . o ! a m r . . a i c " l $ n i d S n l a r e 3 d u h ) r d s . i ' e t o . e . i f l r o a . y i i n r J l m h : a ~ O o 1 o c . t p O I h . n l : f u f f . . l a ' t ' L o 8 i i , t p > i L m t i m . h 0 . 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M U I . ~ . ' W I . a - m c . b - o w . l . . .: - s d . l . l t .. l l - . a a ' . t - t m ~ e i . i , d 1 U ~ 1 U y M i w . i . o . n & M s : O a p n r !& o d m " i " m o iz l p a e l t e f i u o m r n t e s h a e i t n l r n a t g h d i v b s a a a n la r c e n . a c , e a ln d n d l d n e w c s e i l n l a l l c l i v n o g board should lab other $lops lo ensure .11.01. r c....nt, coull.cH w'lll$.1fdly81'1d compensation aw«ngcmlllnt:i. Wllt>m Ih al non. .x oeutive directors of the boon! appropriale, dro Agencies wllltako aructivoly in.ol.-td in lheoversighl of r l . t r " q i A ' l 1 b l 11 f t r r n t M h t t ~ l ~ C r O . t a t U r ~ o :l l l l t l r ' b M f e C I O F I G t M I d ~t t & l u t It l l r o _ d d . l ! 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(I 3 )C 4 b - rotd s p o ro u m nd p n l e ly s s a d o d f r t e h s e s o o r d g . a T n h iz e a A tio g n a n a c ro ie ul10 92 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00096 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.02281717 36414 Fedenl R!lister/Vol. 75. 1\'o. 122/Friday, June 25, 2010/Nolices will opd.tte this guid>nce zs appn>priale Dlltcl:Jv.nt!&.2.010. lollowing Wtb site: hnp:ll to incorporate boot pr.~cti"" as tb.ey lkdyRhodtr, '"'"-~eollh.pl/heohhypeople. dmlop over time. Amcf<lroAdmlnOttGIQ{, O{{KeofTro ..t , The PHS M>ngly encoura,c:as ollllJllnt Thu concludes the toxt of the Ttonsponorlon.cttd M$tl MonoJtmtnl. and contract recipients In provide 1 C C u o l m da p n tn c s o a o ti n o S n o P u o n li d c i l e n s c . onti" t 8 f 1 l 1 O .lf c l c G .1 t G o l c 0 t: . c .1 t2 S 0 W -t W FI W ...l 4•1l\t;.4S to] s n a m d o d o n i k · t u e io - , f . n r . o o P f c a u " l b o l l r t i k o c p b L a l a a c w c c o o I o 0 p n 3 ro d - d 2 p u 2 ro c 7 t m , s th . o t o n to P t t h o o - U.ted:fune 17,2010. 0\ildren tlct of 1994. prohibits smoking j O a.l > m m C p . ir O ol u ll 1 . . o . n {t , l MOmoncy. DEPARTMENT OF HEALTH AND i a n n y c e p r o ta r i t n io f n a c o i f li t t h ie o s f ( a o c r il i it n y s ) o i m n w e ~ h s ic e h s , Dy onlorolt~o Boardof(lm:mOtS oltho HUMAN SERVICES reguwor routine cdu~Jlion,library, l F o od b or t a r l l i d l < <l v on . ~ r $ n p . . . tn :1, J'"e 21.2010. 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O O i a l o O f i i ( 0 C . 1 4 . or 1 1 . S 1 o4 ~ 3 W $f U iW t 6 W -* U tO: U ~a t . u 'l l l - . ' l & 1» Ke A y p O p a li t < es o ti<tt IA:odliiiC:)uly 23,2010. < l in 5 Jp S d p u m ro ra x . t l i i m 8 o 6 a n t . e a T l n y h d o S a t '2 h , 5 e . 2 ~ a ,4 v r 6 d e 2 r i a . s g A f e o w a r n w 1 rd 2 a . r s m d u o h n n d t e h r s ncview Date: July 29.2010. this announcement ara subiect to the l:iorlksf Atllicipoted Sto~ Date: availability of funds. In the abs<ncc of Sepltruber 1, 2010. funding, the agtncy is under no GENERAL SERVICES I. Fund ins Opportunity Oeocription obligation to make 01v.ards hmded under ADUINISTRATION this announcement. Tltelndian HOI!th Smoice OHS) is Anti<ipoted Number of A11nnU: An 1-2011).@;~31 accepting compelitit·e graot applicetions estimaled tt<O av.·ards ..; ll be •""• f« llle Americon lodions into under the p«lSRm.lf lundi.'13 ~ F C D ~ e o i d r o e e c c o r ! t a H i l o T : n I s n a r n s lo s e r A l R R O a e : l e o f p g J r o C u n r i l m o t t i t l n i c T o g ld r n O a o v t ( t i F e h o l T e n r R s T ) l ; o h a r n • c P l • S . t s h ) • ' . t - o i c ~ l c o r . i l l z C 1 c e C 6 t< d l Y l p l u l ( r ' n a . A d - > e d d r p ) , t " h P a ,l e u . n a b T d . l h l l i b c . i a s o l o . p r a i H t w < y e C o 9 o £ 4 h p " l - l 2 ' l 3 C i 5 s 7 u , e m ll' a l P A i d l r w a e o b . t j m e le a i . A P a t d m r d i o o it d u i : o n 4 n o t la : . ~ .. , n d . s , p . o . < , , b .. e . ... P AG o E ll N ey C , Y C : O eo f o fi e c r. e il o S f e C rv o ic . e .. s . . A ,. d . m tw in tc is l t e r. ltion a P s u blic Law b l\ y t- P 1 u 4 b 8 l: . c Law tOz-573 &Dd ! 1 H . E . E lig li i g b i l b e i A la p y p I l n io fo o r n m ts a tion (CSA~ PutpOSl .. ACTIOK: 1\otico of GSA Bulletin fiR ID The purpose of tho Indians inlo ~:~~:1u:':~~~t;·~:.~~i~es O.S. PsycholOGY Propm is lo dovtlop and clinical prognms accredited by the S A u d w n .t 1 A in R i Y n : r · a n li . o e n C ( . G n S e A ra } l , S in e r r v .o i n ce ju s n c:lion m r& a r i . n nJ ta it i m n e I n n l d p ia r n n g J» r ) o 'f ~ hO •~ IO a S m )' e Q t~ l n$ ~ n f A ll' m ill e b ri o c a e n li g P i s b y le ch to ol a o p g p ic l a y l f A o ! r S o O g C ra ia n li t o n O w Tr f i v f th i v c e e t J h : ( e C l n A G r O e o m v ) e r o r e l n p C m o o r e t n n , t t P r A o re l c W m co i e u u a m n k t n c a e r b s ~ i s l s i e t s s y e d b n o o c h s o a a u l v b r i a e o g d tl i l n I h g I e 9 ln a 3 d l . t 9 i h l: 7 m f 0 i s e i l n t d o . t h e T o n h C t ~ e a r t p t o h r l o s o g g ra o m f Is o f u u n n n l d y d e e o r d n t h e to i g s • r a a c n n o u t o l l , u e ~ n g l c e J t o b ~ e m r o u • n • n t ·a h . r · l d m t e o i d w ty e a v n p c d e r r , C B ( Ab o u C v l u A l t l r m l ~ n i ~ n m 1 P U e - M T 1 se 2 I w I 6 o I 8 i G d f ) h , e - e 4 h L 0 m a e . s d i T u i s t h o m s i u s l m e O b d p u a C r l s l o s S t p t T i A e J l - I o t o t' n tl d b F a 8 p e e u p d d d l e e i $ c r te t t a l l r b C m D l i e o i r n c O m u e f o d l f a x i c r I t $ n i o e . 1 o T M 0 f ! h 0 M ~ e 0 a t P r ~ a d u ~ n a b ~ c n l & e c ic e . t m ~ H C - M e o i t t a s h l : l s t n h w d i!l f z u . 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I o m C fl C o i y c O i b o ID o ll l m r o l u • o - n d .1 a c . l t l a C o t o S h s A l la t B r 0 p u 0 1 l 1 l h e p t . l i o n - y o P - o T . s I p I o ~ n I p I H l I 5 a 2 p M 0 ri 1 o o 0 o r , i u 1 t u y f' : a K c r m S e . a e le s n d . t ' l ! s a \ i r d s e i p l • a < i t t e y o d p f e t m o r t s b o o ll i p o r & io rity a do p R c p ! u li q m ca u e n i n r t l m o e t d i u o A s a f t s f i u i n b d l i m i ~ a J it t t o i i n f o a t ~ i a c 1 i T 1 ll r 1 i t b p e' t s ftdero/t,...~ln:gulation. artt ofEduati~l4nd Community· cooperation with and support oltbo OATtS: The provisions in lhis Bnltatin based p!Oj;ram~ Potential applicants program within the schools on its ore •lfocti•·• Juno 9. 2010. may obtain acopyofH,.Ithy People reservation and its willingne.~s to haVIO F P~ O t i r l i f\ c ! k R O TH 'G U ra I d I y ~O , oRImIAT.I,O I o I f C Off!ACT: Mr. N 20 o 1 . 0 O , t .u 1- m () r ( n )H ar lO y S m 4 p ? o - < 8 l , i n o r p v r i i a n t C , S ll- t R oc 0 k :- .4, : p a r T o r g ib n a m l r a e d p v re is s o en ry ta b .t o i\ a ·e rd ~ . i D " oc S u m on e n tl t 1 a e ti on Covernmon111;de Policy (M), Omce ol SlnckNo. tO?-()Qt-()QS49-S, through must be in d•e fonn plllSCribed by the Tr.ll'el. 1'11nsportatlon, and Assot tho Superintendent of Documents. Tr;be'sgovemingbody. i.e. . lenerof .l fanagemont (MT), Genet31 Services Govenunent Printing Office~ P.O. Box support or Tribal resolution . Adntlni!lntion at (202) 208-1493 or vi.1 371954, Pittsburgh, PA IS2S0-7945, Documentation musl be subImVit't"e' d from e.o10il at potrick~dJ~go<'-Pleose (202)5tt-11!00. Youmayai>Ooocess •V<IJ' Tribe in.·olvcd in the cite GSA Bull~tin PTIIID-«>. this fnfont~allon viltho Internet a!lho program. llapplicaliOll budgcls ClCOCd 93 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00097 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.12281717 ..... ..... BOARD OF GOVERNORS OF THE FEDERAL RESERYE SYSTEM 94 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00098 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.22281717 ...... Incentive Compensation Practices: A Report on the Horizontal Review of Practices at Large Banking Organizations October 2011 BOARD OF GOVERNORS OF THE FEDERAL RESERYE SYSTEM 95 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00099 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.32281717 To order additional copies of this or other Fooeral Reser\'e Board public.tion& ront act: Publications Fulfillment Mail Stop N-127 llo:trd of Go\'ernors of the Federal Resmc S)~tcm Washington. DC lOiS I (ph) 202-452-3145 (f") 201-71S-SSS6 (e-mail) Publications-BOG@'rb.gol' This and other federal Reserve Board reports are also a"ailable onlint at IIIIW.ftlicraltNn~go,iboarddocslrptcooyt>~defaull.h!m. 96 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00100 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.42281717 iii Executive Summary ................................................................................................................. 1 Steps Taken by Firms .................................................................................................................. I Scope and Status of Reform Effort ... .. .... .... .............. .... .................. ..... .. .... ............ ... 3 Introduction ............................................................................................................................... s Pre-Crisis Conditions and Response ............................................................................................ 5 Risk· Based Adjustments to Compensation ................................................................................ 5 Principles of the Interagency Guidance and Supervisory Expectations .............................................................................................................................. 9 Affected Bank Persomnel: Executive and Non-Executive Employees ............................................. 9 Four Methods for Linking Compensation and Risk ..................................................................... 9 Avoiding "One.Size·F~s-AII" Lim~s 0< Formulas ............................................ ... ............... 10 Well-Designed Manageme11tandControl Functions .................................................................... 10 Timelines fO< Adoption .............................................................................................................. 10 Incentive Compensation Horizontal Review ..... _ ............................... 11 Scope of the Horizontal Review and feedback Provided ........ ... ......................... II Balancing Incentives at Large Banking Organizations .............................................. 13 Topic 1: Risk Adjustment and Pertormance Measures.................................... ... ..................... 13 Topic 2: Deferred Incentive CO<npensation .... ..................... .. ... 15 Topic 3: Other Methods that Promote Balanced Risk-Taking Incentives .......... .. ...................... 17 Topic 4: Covered Employees ..................................................................................................... IS Risk Management, Controls. and Corporate Governance ......... .. ... 21 Topic 5: Risk-Managemeflt and Control Personnel and the Design of lncenlive Arrangements .......... ....... .... .......... ... ... 21 Topic 6: lnce11tive Compensation Anangernents for Staff in Risk-Management and Control Roles ... .......... ........................... ... .. 22 Topic 7: Practices Promoting Reliability ......... 23 Topic 8: Strong Corpcrate Governance ... 23 international Context ............................................... . .. .. 25 ConfO<manCe with Interagency Guidance . ... .................... ..... 25 European Union Ajlproach to Deferred Incentive Compensation ................................................ 25 Conclusion ................................................................................................................................ 21 97 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00101 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.52281717 Risk-taking inccntir~ pro,idt-d by inccnti1~ rompen· sors, will be the basis for funher progress and sation arrangements in the-financial services industl)' e''aluation. "''"'a contributing factor to the financial cri~s that began in 2007. To addr..s such prae1i<es, the Federal As explained in more detail in this repon. every finn Reser~~ first proposed guidance on incen1i1~ rom· in the re1iew has made pi'O"JCSS during the reviC\v in pensation in 2009that "~'adopted by all of the fed· dc1tloping practi~ and procedures that will inter· eral banking agenci~ in J. .n e 2010. naliu the principles in tht interagency $uidance into the management S)~tems in each finn. Many of these To fost<r implementation of improved practi~ in changes are already Cl;dent in the actual rompcnsa· late 2009 the Federal ReserYe initiated a multi· tion arrangements of finns. For example. senior disciplinary. horizontal review of inctnti\'erompen executires now hlll~ more than 60 pcn:cnt of their sation praeli«s at 2) large. romp i~' banking organi· inccnthuompensation deferred on M·erage, higher lation~1 One goal of this hori!ontal revie-v "~s to than illustratirc intemational guid<lin01 agrt'Cd by help fill out our understanding of the range of iru.~n­ the Financial Stability Board. and some of the most ti\'e compensation practires across !inns and catego· senior exocutil'es ha1·e more than SO pen:ent defenred riesof employees within firm< The second. more 11ith additional stoc.k retention requirements after imponant goal"~' to guide each fimo in implement· defem.-d stock 1-csts. Mo"-owr. fim>S are now atten· ingt he interagency guidan«. tire to risk-tal<ing inccnth-cs for large numbers of employoos below the cxecutil< le\'el-at many firms Giwn tilt varie~y of activiti~at these complex firml. thousands or tens of thousands of employees and tilt number and range of employees "no are in a which "-as not the case before the beginning of the position to asswnc significant risl<, our approach has horizontal reriew. 111lcn most firms paid little ancn· been to require each firm I<> dC\·clop. under our tion to risk·taking incxntires. or were anc.nti\'C on~' superYision. itso wn practices and gO\-emance mecha for the top employees. nisms to ensure ris~-appro-priate inctnlht compensa tion that aorords "ith the interagency guidancc Yet '"''Y firma lso needs to do more. As Ol'crsight of throughout the organilation. Supenisors assess<'<l inctntil'erompensation mov01 into the regular super· areas of weakness at the finns.. in response to "hkh l'isory process. the Froeral Reser~~ willc ontinue to the firms ha1~ de1~lopod c()mprehensi'~ plans out lin· 11urk to ensure progress rontinu01 both in the imple ing ho11' those weaknesses "ill be addressed. These mentation of the firms' plans and in the risk· plans as modified bas..'<! on comments froms upervi· appropriate charae1er of ae1nalc ompensation praCiices. 1 ~lifKll).ialillSlilu!i<msiD lOC lnm'lli\'e Compms;uioo Hori. tonta! R.c\i-..'3rt 1\lly Fi~nciallnc.: A~ri"ln E.'pn-ssCom- 1\'11\)~ Bank of Anm"3 Corpor.uior.: The Blnk of Nt'fo' York Steps Taken by Firms M..tlon Corpora1ion; Capiro.! Qn.: F"m;mciatCOfJX!ration; ali grooplnc-.: Di.{('O'o'tffitUncial SM~TbcGoedm3nSlcbs; Group. 1,._-.:JPMorp.n Chast &: Co.: Mo.pnS1anl')~ NonJl. With the oversight of the Federal Reseman<l other t ln ro c. T :S r .a w le C S o u rp ct o t r C .n o io r n p : o T r. h n e io P o: S S C ~ F m " l IJ n ll N llc B ia l l n St l - : 1 s ' . \i l : o \ c .~ , : C U r . o S o . p B . .:ln· banking a~><nci~ the firms in the horilontal rel'iew oorp; :md Wclls fa~'O& ComJ"'n)~ and lhc U.S.op:ralionsof haw implemented new practictS to make employcts' &srdl)'$ pk. B~P Parib.t,(. Credit Sui~ Group A(i.!A'tl~~ inccnth·e compensation sensiti\'e 10 risk. The fol1ow· ll3nk AG.IISOC Holdings pi<. RO)III Blot of CaiD<b. Th: ing is a brief progr..s repon on four key areas of the RO)>ItbnkofSro<JandG""'pplc.S..'i.1C~3nd UBSAG. reviC\1'. More details can be found in the report: 98 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00102 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.62281717 lnctntire Com~n~tion PractittS • Effe<lirelocenli•·e Compens:uioo Design. All firms important only for a small number of senior or in Ih e horizonlal wiell" ha•·e implcmemoo new highly paid employees and no fim1S )'Sien>aticall)• prn<tires 10 balaoo: risk and financial resulls in a identifl«< the rele•~nt employees who could. either manner that does not enooumgeemployees lo indi\'idually orasa group. influence risk. All firms expose their organizations to imprudem risk& The in I he horizontal re•iew h:ll'e made progress in most widely used methods for doing so are risk identifying the emp!Oyet$ for vohom incentirc com· adjustment of a.mrds aod defertal of paymen1~ pensation arrangements may, if not properly strue· tured. pose a threat to the organization's safet)' and - Risk atljusrmems make the amoun1 of an in«n· ti\'ecompensalion all"ard for ane mployee lake soundness. All firms in I he horizontal re\'iew now recognize the importanre of establishing sound in1o accoumthe risk the employee's acti\'itics may pose 10 I he organization. At the beginning e in n c c e o n u t r i a • g ~ e c i o m mp p e r n u s d a e t n i t o r n is p k r o ta g k r i a n m g s f t o h r a t t h d o o se n w o h t o can of the horizolllal re\'iew. no firm had a "<II· de•·eloped s1r.negy to use risk adjus1mems and indi•idually afl'octthe risk profile of I he firm. In many had nocm:cti\'e risk adjustment~ E•<ry a id d c d n i t t i i f o l« n < . s g li r g o h u l p ly s o m f o s r i e m I i h la a r n l ) h •c a o lf m o p f e I n h s e a f te ir d m e s m h p a l • o ·e y firm has made progress in de\'cloping appropri· ees whose combined actions may expose the orga· ate risk adjuslments. but most h.r.e more work 10 do to ensure the full range of risks are appro ni:zation 10 m:ut!ria\ amouniSo r risk. HOW'C\'Cr. some finns are still working to identili' a complete priately balan<td. An e.ample of a leading·edge practice thai is now u;OO by a few fim>s is includ· set of mid-and km~r·IC\ el employees and to fully assess the risks associated 11ith lheiractil'ities ing in int('rnal profit measures used in in~nti\'e compensation a.••ards~ charge for liquidity risk • Changing Risk-~laoagement Processes and COil that takes into account stressed condition• This trois-Because finns did not consider risk in the reduces incentil·es to take imprudent liquidity design of inrenth-e compensation arrangements risk. 1\n example of a challenge for many firms before the erisi~ fim1s rarely in•·oh·ed risk· is da<lopmcnt of pol[cics and pro<tdures to man;wment and control personnel when consider· guide judgmental adju.stments of in«nti•~ com· inga ndc anying out inttnti'-e compensation pensation a•>rd< Such internal guidelines help arrangemont~ All fim1s in the horizontal n.'liew promote consistency and cft'ectho-eness in inetn ha1~ changed risk-managcm.,\1 processes and ti\'t compensation decisionmaking. internal controls to reinforce and support the de~~l­ opment and maintenanre of balan<td ioo:ntire - Deforriug payout of a portion of incenti\'t com pensation ""~rds can help promote prudent compensation arrnngemen1s. Risk-management and control personnel are engaged in the design ioo:nti\'es if done in a •~Y that takes into and operation of inrenti,·e compensation arrange account risk taking. especially bad outcomes Deferring payouiS ·~• fairly common before the ments or olhercmployces to ensure that risk is properlyconsidcn.'\1. Some firms ha•·e further work crisi& especially for senior e.,.eutil~ and highly to do 10 prol'ide suflicicntly acti,·e and robust paid employm Howe:.·er. pre-<risis deferral engagctnent by risk management and control statT. arrangements typically "~re not Slruttun.'\llo fully take account of risk or aciUal outcomes • Prog..ss in Altrring CorporJie Gorrrnaoce Fr•mr Almost all finnsnow01sewhicles for some works. At the outset of the horizontal rel'il:\v. the emplo)~ Ih at adjust <lm•n•ard the amount of boards of dirtttors of most finns had begun to deferred ioo:mh·ecompensation that is paid if considtrt he relationship be:nretn incenti\'C C'Om· losses are large. Hou-e-~r. most firms still hOlt pcnsation and risk, though many ~~~refocused work to do to implement such arrnngemcms for exclush-ely on I he inccnti\'e compensation or their a larger set of emplo)= and to more closely ~nn·s most seniore.xetuti\"es. Since then. all firms link such reductions to indi•·iduale mployees' in the horizontal re•iew hOI~ made proo.ress in action~ particularly for cmplo}ees below the altering their corporate gowroance frameworks to seniore xecuti\'t levd. be auentil·e to risk·taking inccntiws cn."atoo by the • Prog..ss in ldcnlif)·ing K()' Employees. At most inrenti•·ecompensation process foremployees large banking organi<:ation& thousands or tens of throughout the firm. The role of boards of direc thousands of employees ha>~ a hand in risk taking. tors in ioo:nti•<compensation has ''panded. as Yet. before the cri~& tbe con•~ntional wisdoma t has the amount of risk information prorided to most lim1s was that risk-based incenti\'es were boards "'Ia too to ioo:ntil·e compensation. The 99 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00103 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.72281717 October 2011 appropriateness of the degJtt of engagement of Federal RcseM intends to impkment the Basel l'"'" the boarrls will bee\'aluated aOer a few of Committee's recent "l~llar J di><:losurt rt'(Juirements experience. for remuneration.'' iS>ued in July 2011.1 which will provide mort romplctc infonnationa bout risk Scope and Status of Reform Effort related ekmcnts of ineentil~ rompen~1tion practices of indhidual institutions. Supel\isors in the horizonlal rc·view gathcrt-d wnfi. In pan spurred by the horiiontal m i¢'1•. ineenti,·c dential supel\·isory infomtation from all firms and rompensation practictS at b.10king organizations are lound important diiTereoces in practices a<ross bU>i· rontinuing to Clohe and <klelop. We ''pect this evo ness lines and banking organizations. Additionally. lution torontinue. The F«..cral Rc,ci\C •·ill rontinue practices are changing rapidly in r<>ponse to the Fa!· to"ork •ith these firms through the supel\iSOI) era! ResenT's e!Tons and industry de,·elopments. proct» to el\lurt imp101emcnt and progrt'SS are Thmrore. a moment-in-time. romparatiw anal)>is of sU>tainoo. indi1idual firms from the horizontal revi<IA is not possibk and rould he misleadiog. That said. the Fed· m1 Rcsene is wonting to foster market dilcipfult in = S.<t•Pll:ttJcb.iowA:rtqGI~\tll~nr:T'hlll~"'J~ lbrbd('-t«."Wfw/--~t•n the area of inttntil~ rompensation. On this front. the ~'pl~"'l-~ 100 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00104 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.82281717 Risk-taking inccntir~ pro,idt-d by inccnti'~ rompen· operating their inccnli\"e compensation systems. and sation arrangements in 1he-financial services industl)' some employees"~"' pro>ided incenti\ts to take "''"'a contributing factor to the financial cri~s that imprudent risks. For example, an emplo)~ who began in 2007. To addr..s such prae1i<es, the Federal made a high-risk loan may have generated more rev Reser~~ first proposed guidance on incenti'~ rom· '''"' in the short run than one 1rho made a low-risk pensation in 2009that "~'adopted by all of the fed· loan. lnccnti,·erompensation arrangements bast-d eral banking agenci~ in J. .n e 2010. In 2009. the Fed· sokly on the Je,~l of shon-term m-enue paid more to eral Reserve announced a horizontal review of inccn· theemplO)\'t laking more risk.thtreby inctnti\iting ti,·e compcnsalion practices at a group of larg~ emptoyees to take more. sometimes imprudent. risk. complex banking organization..\ (See "Principles of Led by supeovisors in the horizontal rel'iew, O\~r the the lntera.,otnC) Guidance and Supef\isory past two years banking organizations ha\'c impro\'ed E>pectations"" on pagc9 and ··lnccntht Compcnsa· theiri nccnti,·e compensation arrangements to take tion Horizontal Review" on page II.) appropriate acrount of risk. Thet\\O most common "~)'S to do so-risk adjustments and deferral- make Pre-Crisis Conditions and Response use of risk infom~ation that becomes a-~ilable at dif ferent points in time. As discussed in the intera~cy guidance, the aclivi· Risk-Based Adjustments to ties of employe.s may cmue a wide range of risks for a banking organization. such ascn..'dit. market. Compensation liquidit)'. operational. kgal, romplianct, and reputa· ""U tiona! risk~ as as oth~r risks to the \'iability or Information about risks taken that is known before operation of the organization. Some of these risks inctnlil'erompensation is 3\\~rded can be used to may be realized in the short term. while others may make risk adjustments to those 3\\~rds. For example. become apparent only owr the long term. For if an cmpiO)~'e in a lending unit makes many high· example. future n..·wnues that are booked as current risk loans during a )~ar. the estimated profit fromt he income may not matcriali~ and shon-tcrmp rofit· loans can be adjusted when designing theemployre's and-loss measures may not appropriately reflect dif· inctnth-e compensation package. using either quanti· ferences in the risks associated "ith the m·enue tath·e or qualitatire information. In all cases. risk derived from difl'erent acti,ities. In addition. some adjuStments should consider likely losses under risks-¢r combinations of risky strategies and posi stressed conditions. and not merely bu~ness-as-usual, tions-may hare a low probability of being realized so that larger, butlower-probability.loss outcomes but would ha-'C highly ad,'Crsc efl'ects on the organi· can be taken into account. zation if they were to be realized ("bad tail risks"). While shareholders may hare less inccntire to guard Both quantitati\~ a11d qualitati\'e risk information against bad 1ail risks beeaose of the infrequency of can be used in makingsoch adjust men" They can be their realiza1ion and the existence of 1he federal applied either lhrough use of a formula or through safety net.lhese risks warrant special auention for the exercise of judgment and may pia)' a role in set· safety-and-soundness reasons giwn the threat 1hey ting amountS of inccnti\~ compensation pools pose to the orgaoization·ssolrencyand thefederal (bonus pools). in allocating pools to indi\iduals' safely net. incenli,·e compensation. or both. The ell'ecti,~ness of the difl'ercnt types of adju~ments \~ries with the Before the crisis. large banking organizations did not situation of the employee and the banking organiza pay adequalcaucmion 10 ri>k \\'hen designing and tion, as "ttl as the thoroughness of 1hcir implcmcn· 101 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00105 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.92281717 lnctntire Com~n~tion PractittS tat ion. Banking organizations in the horizontal made progress in identifying coren.'<l emplo)\'CS but review hal"e maddgnificant progress in improving some still ha1~ 111>tk to do. The founh lopic in "Bal· their risk adjustment~ but most still ha~'e work to do. ancing lncentiles at Large Banking Organi1.ations" The first topic in "Balancing lncenti1e, at Large on page IS discusses co1~red employees and progress Banking Organizations" on page 13 descri~ the in identifying them. main types of risk adjustments and some areas in which funher work is needed.' As described in the interagency guidance. establish· ment of prudcm risk-laking incentives should be Ddcm:d incentil"tCOmpcnsation can contribute 10 critically supported by risk-management and control pmdent ioomtil'eS becauso risk taking and risk out· personnel. In addition. practices to promo1e comes often become dC'3rer O\'er time. If pa)'OUI of a impro1~11lell!S in the reliability aud effectiveness of ~nion of inoonti'-e compensation a'"'-ards is deferred inrentiw: compensation S)'Stems 0\"'Cr time can use for a period or time after the a11~rd date.late·arril"ing fully suppon dc,<lopment of prudent risk-taking information about risk taking and outcomes of such incenth·cs on a sustained basis. These elements are risk taking can be used to alter the payouts in "'l~ described in ··Risk ~lanagement. Control>. and Cor· that will impnwe the balaru:e of risk ·taking im"tn· porat< GowmanC\l·· on pagc21. 111lieh notes prog· th-es. Banking o~-ranizations in the horizontal re\'iew ress in most areas.. ha1·e made progress in improving deferral practices. but many still hal"e work to do on pcrformaoce con· Some obserwrs ha1~ been panicularly interested in ditions for \\'Sting. Deferral practices aredescribc<l in comparing progress of incenth~ compensation ptac. the second topic in ··Balancing lnccnti\\~ at La~~! ticesof firms hcadquanen.'<i in dincrent jurisdictions. Banking Organizations" on page 15. Approximately one-lhird of the large banking orga· ni1.ations included in the horizontal re~·iew are h<ad· Risk adjustments and deferral are not the only 1111)~ quanered out~de the United States (foreign banking of improYing the balance of risk-taking incentil"c& organization~ or FBOs). In general. progres> in con· Some altematires. such as the use of longer pcrfor· forming to the interagency guidance is similar at the manee periods whene mluating employees· pcrfor· U.S. banking organi1.ations and at the FBOs in the mance and awards and reducing the S<nsitilityof horizontal review. and progn"SS in conforming to the a11~rds to measures of sho.rt·tcrm perfom1ance are Financial Stability Board"s (FSB) Prilrciples for brieOy dcscribc<l in the third topic in ··Balancing Sound COmJ!f1151JiiOn Practim(Principles) and the lnC~:nti1t> at U.rgc B.1nking Organil.1tions" on related fmplemRnUtti{)lr Srmulords.4 which are some page 17. what less demanding than the interagency guidance. is also similar. asdescribc<l in "International Atlhc beginning of 1he horizontal review. the con· Context" on page 25. \'CntionaJ \'isdom at most firms was that risk-taking incenth·es were important <mly for a small number of As the horizontal revie-w of incenti\'t compensation senior or highl)' paid emplo)= Though the deci· practices draws to a close. further \\.'OTk on incenli\·e sions and incentires or seniorexceuti1·es are indeed compensation will continue through the normal 1·cry imponant. the combined risk taking by a group supcrviSO'J' process. Much supervisory work is of similarly compensated employees can also be already focuS<d on risk managt~ncnt and control S)'S· material to the fim1"s risk profile. Thu.~ identif)ing tems. Risk-laking ineentil'eSare a complementary the set of employ«~. who may individually or collcc· focus for supervisors. Howe\'er, incenth-e compensa.· tirely expose the firm lo material amounts of risk. is tion practices are likdy to CYolve rapidly 01~r the a key dement of practice. The interagency guidance next sewral years. so both firms and supcrYisors notes that such ""coven.'<! employees"" should include must continue to adapt and improre. The Federal not only those who can indi1•idually aft"ec1the risk R~rw also intends to implement the Basel Commit· profile of the firm. but also groups of ~milarlycom· tee·s n.'eent '"Pillar 3 diS<Iosure requirement:. for pcnsated employees 111lose actions when taken remuneration." issued in July 2011. lncrcaS<d public together can affect the risk profile. Examples of such diselosure about risk-related incentil~ compensation groups rna)' include many types of traders and loan pmctim at major fim1s may improre market disci· originators. Most finns in the horizomal re1•iew have • Th¢ F$8 i§Ued !he ftit:<ipks i11 Aprill009 3JKI the Imp/~ 1 Emplo)'l.\".i: SOtJ')Clinxs: lak ri~ io pul)U:il or~ Olhtt lb311 Mi<m St.aWrJJinStp~crY~bff 2009. Tbtsr FSBdocutn.."'''blrt' ~11-tcrm finJorial rcrfonml'lX.Ia suchc a._~ ri5k adj®· :r.<tibbkaa"'",...r~atH1it1boaAJ. •t .if~_ ments lllJ~ oJoo oontribtltc to blblll\'d rilt-IJl:ingi oo.'llti\\'~ publ>;liiO«l>tdJl.\"lll<l.~ hun. 102 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00106 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.03281717 Oc1ober 2QII plinc of such prncti«i. Finally, Ih e Fedcrnl RcscrYC is compcnsa1ion pracliCl'l. as mandmed by 1he Oodd· working ~ilh Olhcr oonking and financial regulaiOI)' Frank Wall Sure! Reform and Consumer Pro1ec1ion agencies to de\•elopan intc-raget'IC)' rule on incenti\'C Acl (Dodd-Frnnk Acl). 103 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00107 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.13281717 -·--·· Principles of the Interagency Guidance and + Supervisory Expectations _L 1 ' I The intcrageney guidan<-.: is anchored by thn.-.: prin tured. Aocordingly. the interagency guidance applies cip~: to senior cxecutill'S as ·~II as other employ«S who. either individually or as pan of a group of similarly I. Balance betlll'tn risks and r.sults. lncenti1~ com compensated employees. hare the ability to e'pose pensation arrangements should balance risk and the banking organization to material amounts of financial results in a manner that does not risk. In identifying employees ro1~red by the inter encourage cmplo)"C\'S to expose their organiza agency guidance, banking orsanizations are directed tions to imprudent risks; to consider the full range of inherent risks associated 2. PrO<t'SSI'S and controls lhalrrinforcc balan<c. A with an employee's work acti~·ities.. rather than just bankingo rganization's risk-management pro the Jerel or t)1JC of risk that may remain after appli cesses and internal con1rols should reinforce and cation of the organization"s internal eontrols for suppon the dmlopmeill and maintenance or managing risk ('"residual risk'} balanC\'d in<:tntil'ecompensation arrange ments: and Four Methods for Linking 3. Effecti,·ccorporatc go,~nance. Banking organiza Compensation and Risk tions should ha1~ strong and cO"cctil~ corporate gown1ance to help ensure sound incenti\"e com· The interagency guidance discusses four methO<Is pensation practices. including acti1·e and effect ire that banking organizations often use to make in<en owrsight by the board of director.;_ til~ compensation more sensitire to risk: (I) risk· adjusting incenti\'Cc ompensation awards basz.."d on The interagcney guidance iseonsistent 11ith both the measurements of risk: (2) deferring payment of FSB Principii'S and lmpltmentarian Sromlards adopted in 2009.1 a p • a ~ y r o d u s ts u 1 s 0 in b g e m ad e j c u h s a t n ed is m as s r t i h sk a s t a al r l c o w re a fo li r z e a d c t o u r a l b ' e " co ~ m rd e better known: (3) using long.:r performance periods Afi"ected Bank Personnel: Executive (for e.>ample. more than one year) when emluating and Non-Executive Employees employees' performance and granting a•~rds; and (4) reducing the sensitivity of a•~rds to measun-s of shon-tcrm pcrfom~a•>ce.• Each method has ad,~n­ lncenti\'"C compensation arrmngemems fort .\:t'Cuth'l! tages and disadvantages. and non-cxecutil'e<mployces able to control or influ enre risk taking at a banking orsanization may pose A key premise of the interagency guidance is that the safety-and-soundness risks if not properly struc- methods used to achie~-eappropriately risk-sensiti1·c incenth·eeompensation arrangements likely will dif ' O C F u o n m l < A . r · p . n l r l c i R y l . t " t 4 h ' . e ) o ) F ~ l r l o . ~ . a ." s '' n 3l u I • X o i p d l o h 3 o ! ; t . i « i i l < l I b O B y S f U l l" h r « .l < O o O l D t : i > C o : o d C r d o p · r o f n i r ' p a W t < io r A o n l . « i t < . h I r e h o r < l o ll r > < f th er e a r c is r k o s s a s s a s n o d c i w at i e th d i n 11 i f t i h r m th ~ o E se m a p c lo ti y li e t e i s e " s a v c a t r i y vi ~ ti g e n s a if n i­ d mcr Ol'fK"C" of Thrift ~J:'""fu.lbl: Natiooal C~t Unioo eantly across banking organizations and potentially Admini){nl!ioo.. tl\;: Slxuritks.and b.ilang.! Commi$$.ion.. 3nd across employees 11·ithin a panicular banking organi p 1 r ~ op F o t s d O c O r a N l H k o o W o i n ~\ s - F n i 1 n i . l tr t ~ r Ct o A m ~' p \ a 'f ~ lC ~ ' i ). o l o 'S r uc r d a fo c r t oo ~ c T nm he cn p 1 r o a zation. DiOerenees across firms may be baS<.'<! on p>5«1 ruk build~ otT lbc inL~'Q.SCflj,)' guidan«. Th~ rc~ their principal chosen Jines of business and the char- l"«us:cson the: obsmatiorLS from1bcl\orizootal mkv.. \\ftirb 11.35 ('(K'll.h.l•.'t«l iB lhc( WI(t\L o( t)): inlcQgo.-ncy p.~id3..r!lx :.J"'.. doo.."$tl()ldi$CUS$1htpt'()fl05tdlll~~~ru~isao.'3il· • AsDMcdintl'le'inl~f'agl.'tX')'ttJidaOO:.Ibislislofm.eth~istiOl abkaLn'll~,(..by;.,,;~fR·2011-M-IJ~fr.OII·~31 intto<kdlobenha.US1h-e -otbcrmethods~r.Us.lorbc p.lf. d..c>!oped. 104 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00108 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.23281717 10 lncenti,·c Compensation Practices actcristics of the m1rkets in •·hich they operat~ existing control~ For example. unbalanced inctntil'e among othtr factors, lfll'Cting both the ty pcs of risk compensation arrangements can place substantial faced by the firma nd the time horizon of thoseris.h strain on the risk-management and inlernaJ control E\t:n within fim1S.. employees' acthities and the funaions of C\'en well-managed organizations. attendant risks can depend on mauydiR'erent vari· Therefore. risk-manng.:ment and internal control abies. including the specifiC sales targe1s or business functions should be inl'oi,·oo in designing. imple· strategies and the natu"' and deg"" of control or mc:n1ing. and evalua1ing irte"emivt compe-nsation influence that diRe"''" employees may hal'e 01-.r risk arrJngemcnts to ensure that the arrang?~nents prop. taking. These diOerences naturnllycrcate diR'erent erly take risk into account. opportunities and diO'erent potential incentii'C.S. broadly speaking. for cmp!oyees to take or influence The interagency guidance l'wl gnizes that large bank· risk. Thu~ the use of any single. formulak approach ing organizations tend to be signir.rant users of to incentil~ compensation by banking organizations incenti\'eoompensation arrangements,. and Ih at or superl'isors is unlikely to be elfectil'e at addressing ft311W approaches to incen1i1t compensation at these all incentives to take imprudent rish institutions are more likely to haveadwrseeR'ects on the broader financial St~tem. Accordingly. the inter· agency guidance elaborates with gn.-ater sp."Cificity Avoiding "One-Size-Fits-All" Limits cenain supervisorye.tpectations for large banking or Formulas organizations. 7 The interagency guidan<-e ltelps to al'oid the potential Timelines for Adoption hazards or unintended conS<.'quences that would be associat«l with rigid, one-size-fits-all superl'isory limits or formula< Subject to supervisol)' 01~rsight. a In .o e a n d c o ie p s t i r n e g co t g h u e i z in « t l e t r h a a g t e n a ~ c y h g ie u 1 id in a g n c c o e. n f lh o e n n b a a n n c k e in 1 g 1it h each organization is respon~ble for ensuring that its its terms and principles would likely require signifi. incenti\'C compensation arrangements arc consisaent cant changes and enhancements 10 lirmp ractices and 11ith its safety and soundness. Methods for 1chic-•ing that fully implcm<nting such changes would requi"' b.-'llanc.\~ inctrllirecompcnsation arrangementsa t some tim<. For the large banking organizations in the oneo rganization may not be eiTe'c:th-e at another o in ~ t 0 e a g n r i a z l a in ti g o i n n . c i e n n p ti a ,· r e t c b o e m ca p u e s n e s o at f i o th n e a i r m nm po g r c t r a n n e c n e 1 o s f h th o a r t i z e o <~ n c t h a f l i r r e m 'i s e w ho . u \\ l t d c d o e m m m on u s n t i r C a i' t U e e s d i g o n u i r fi e c x a p n c t c p la ro li g o · n ress loward consistency wilh Ih e interagency guid· wi1h 1he firm's own risk-management systemsa nd business model. Similarly, the cfi'ccti•·cncss of mcth· ance in 2010. should achie1~ substantial conformanco 11ith the interagency guidance by the end of lOll ods is likei)' to diftcr across business lines and units (aR'ecting the award of incentirecompensation 11ithin a large banking organization. In general. large banking organizations a"' likely to need multiple a•~rds for the 2011 performance ym). and should fully conformt be.,afier. me1hods 1oensure that inocnli\'ecompensation arrangements do not encourage imprudent risk ' Fore.'tampk. t~in1cra~·p!idaoo·S13!estbat b~ b3nklng taking. org.anil<Uion:s~ba\'(aS)'S!ttnalirc~Pf>CC3Chtoitlcttlti'c (OO)pt:ns:;lionsuPJ)Ort<db)•formalilcdaOOt~o'ci!-<lc\Tk>propoti· ~ pr\\.'\'durc\ and ~)')t<m$ to oo~rc 1M. i~'\'tlti\..:<omJ'(a.(;J· Well-Designed Management and lionarrani~-111C!liS.att'~tct)•lxllar..'\'daodC'OilSislrnt \\ilhsafct)'and SO\Irxi!XSi s~.~~.t insl~ution:s~uklalso b.:J'I.'C Control Functions rot..bt (lrl).'l."dun."$ foe colk\.'ti~ infoti'!Ulion aboutlbc dTC\'U of t"'-iriM'fllh-ccomp.'ltSJtion programs.on«n(llo)~ri:!l; laking. 3$ \\\il 3:S *'Siems 3nd prlX'.'&.""'"S for u.;ing this inf001)3tiofl to The intmgenoy guidance ruso places grrat emphasis adjust COI'Ilp.."0..'31ioo arr3ns~'TIX'lns tocfimiMtr or !\"duct unirl· on the role of risk-managem<nt and internal control tm.kdi/K\-nml$ ror risk taking. SimiL1~.d~e iat~1· JUidanct lll\,'\':1 b~~ banting OJl3n!atioM 10 3(11\~· monitOr functions in pr01iding for balanced risk-taking inctn· indll$lr). ac:tdnnk. .and regul:norydndopmrnl5 in int..'\-ntht tii'CS. Poorly designed or implemented incentilt com ('(lmp."ll5oltionpr.tcti~:J.nd t~·3nd~prcpal\"dtoiocofJ»' pensation arrangcmcn1scan thcmsel\'l'S be a source r m .u c e t h in o t d o s l . h tl c u i t r ~ i r ~K e " l m i t l: i d \' y ( t ( o '( ) i Q mp 't n ( l !M 'l. s ~ .t ! li b o : a : O S~' t ) p l n .a il n a s l o io .. c '\ ' \' J O 's f l o ~ og n -ttr g m of risk to banking organirutions and undermine (lll3ncial-.'dl-00in,g.and ..::Jfety 1nd ~ndot$. 105 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00109 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.33281717 II In late 2009. in conjunction 11ith its initial proposal ducting the horizontal reriew and communicating of principles-baS<(! guidance on inC~:ntil~ compensa with the firms. tion,the Federal R<S<rw launched a spocial simulta neous. horizonlalw·iew of incenth·ecompensation To perform the superrisory aS>CS>ments of confor prncti<es and related risk management. internal con· mance with the interag<ncy guidance, 1r~ gathered trol~ and corporate gorcmance practices at a group extensi"e information from the fim1son their incen of larst complex banking Of!"nizations. These firms til'e compensation arransements and associated pro· rmcchosen b«ause n:~rwtl appro.1Ches 10 inC~:ntir~ cesscs. policies. and proo.'dures We rer·iewed internal compensation attht:SC instilutions are more likely 10 documents go,eming existing ino:-nth-e compensa· har~ adrerse etTerts on the broader financial S)~tem tion practices as wdl as sclf-assessmtms of incenth'C and b«ause of their C.\tensiw use of incentirtcom· compensation prJctiCl'S relatir~ to the interagency pensation pmctict$. The si)-'Cial work associated with guidance. We rondu<ted many face-to-face -tings the horizontal review i,s now nearing completion, but rrith senior e,,C(utire ofiicers and members of bo.uds supervisory work on inceMirecompensation rrill of din.'<:tors' rompen~11ion ronutti11ces. To supple continue through the ong<>ing supef\·isory process. ment this information and 10 er~luate spocifically how inrenti\'e rompcns:uion programs were imple The Federal Resem has communicated to the firms mented at the line-of-business kvel. the Federal our assessment of their practices and ourexpocta· Reserve conducted focused examination~ of incenth-e tions forr emediation in areas "'here impro\'cmtnts compe'nsation practices in trading and mortgagt are needed. The fin11~ with the or~rsight and input origination business lines at a number of the organi of the Federal Resef\'C. have each dcr~lop<-d remedia zations inroh\"<< in the horizontal rc\iew. tion plans. These remediation plaos. along with updates and discuS>ion around them, h:~r·e betn a key The Federal Res<"~ has continued to pror;de indi mt(hanismf or bringing clarity about needed vidualized feedback to each of the firms as addi changes. tional information and updates of remediation plans hm been rmhoo. All of the firms har~ made prog· Scope of the Horizontal Review and ress toward achieving consistencyw ith the inter agency guidanre. Titc natur< and extent of rrmaining Feedback Provided work \'aries across organizations and sometimes rrithin organization~ Achie~•ing confomtancc with To carry out this majorsupervisory initiatir\\ the the interagenty guidance depends on the snce<:ssful Federnl Reser\~ made a substantial commitment of build-out of >)'stems and prOC\'lSCS. achiewment or stan· resources and seniorm anagement attention. intermediate implementation milestonL"S. and success· Mor< than 150 indiriduals from the Federal Resent ful completion of rrrnediation plan• Er·en then. in and the other b.1nking age11cies h:~r·e betn inrolwd in many cast$. it 1rill be important fort he fimlSto keep the horizontal review. In addition to senior superri in mind that new systems and practires ha,·e not been sory stan~ these included a multidisciplinary group of fully tested by experience. so ongoing monitoring of professional~ includingsupef\isor.< economists and these new S)~tcms and prae1ire; 11ill be important. la"~-ers. st~·eraJ spociallyoonstituted inecntir~ rom· p¢nsation on-site rt\'iew teams. and the permanent With regard 10 FBOs with activities in the United supe"iso!)•tcams aS>igneclto each of the invohoo States,~~~ h:~r~ acknowledgt-d the particular chal banking organization& Federal Resef\·e stan· has lenges that ariseasthey seek to conform their US coordinated with other banking r<gulators in con· opcrotions 11·ith the details of their home-country 106 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00110 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.43281717 12 lncenti,·c Compensation Practices. consolidated regulalor'sc.<p<(lalions and 1hoscof menial)' principles of cO'eclil~ consolidated supervi· 1hc in1eragency guidanre As no1ed.1he imcragcncy siona nd nalionalU\'almenl of banking organi1,;11ions guidance is consistent with intemational regulatory opcraling in lhe Uniled S1a1es.s efforts on iocentirecompensation practices. including lhe FSB PriJ1riplrsand lmplem<"llation Stamkmls. 1 forobstr•arion~ regardislg i~~nthTromprnslliorl prlll.'tim 31 We ha1~indieued our imen11o lollo11·1hecomplc- FOOi. Sl.~-lnltm..,LlO!IJIC'oo!"C-"( on pa~ 2). 107 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00111 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.53281717 13 This section describe> met~ods firms u:;c to pro1ide based de<:isions. Risk adjustments may play a role in employto.'S "ith prudent risk-taking in<enth-cs, as"'" setting amounts of bonus pool~ in allocating pools as idcntifll'S the rele1ant set of employ"" It is mostly to indi,;duals' in<enti1-ecompensation, or both. In all related to the forst of the three principles in the inter cases. risk adjustments should consider likely losses agency guidance. under stressed conditions. and not merely bu~ness· as-u>ual. so that larger. but lower-probability loss lncenth·e compensation arrangements achie\-e bal· outcomes can innuen~ inO!nti\'es 10 take risk. an<e bel wren risk and financial ""'~rd \\ilen the amount of money ultimately n.>ttiwd by an employee E1~1)' fim1 has made progress in dmloping and depends not only on the employee's performance. but implementing appropriate risk adjustments. butt he also on the risks taken in achie\ing this performanre. progress is une~-en, not only across firms. but 11ithin Firms ofien dctennine the dollar amount of inren finns. Substantial work remains: to be done to ti,·e compensation "''•rds for a pcrfonnance year achieve consistency and eO'ccti1·eness of such adjust· immediately afier the end of the year. Pan of the ments in prol'iding balanced risk-taking ineentire& a\\ard may be paid immediately and pan may be lkcausc most inctnti,·ecompensation de<:isions defem'<l. Risk adjustments (S<O Topic I below) are im·oh-e some judgment, a key element of that work is features of incenti\'e compensation arrangements impro1w written policies and procedures and that incorporate information about risks taken into impro,·ed monitoring pmctices. decisions about the total amount of '"~rds. Deferred payouts can also be adjusted for risk using informa Disciplined, Judgment-Based tion that becomes a1ailable during the deferml Decisionmaking period. as dcscrib-'<1 under Topic 2. Topic 3 focuses on other balancing method& and Topic 4 on identifi Judgment is an ekment of decisionmaking at CI'CT)' cation of co1~red employees (those employ~ for firm and at nearly cwry step in the design and opera· whom prudent risk-taking ineenti1~ are panicularly tion of inrenti\'C: compensation arrangements. 9 This imponam). poses tll<l challenges: (I) ensuring that deci~ons based on judgment are made consistently can be dif· ficult and (2) risk adjustments may be only one of Topic I: Risk Adjustment and many inputs into decisionmaking about inctnti'-e Performance Measures compr!>sation a11-ards. Without appropriate restmint. judgments about other aspects of an employe''' per At the beginning of the hc>rizontal review. no firm formance. soch as achiel'inga certainlel'el of market had a \\tll-<leveloped strutegy to use risk adjustments share. could be made in a ""Yt hat ""uld undermine and many had noefl'cctive risk adjustment~ Cur the desired inecntii'C efl'ccts of the risk adjustments. rently. all finns in the horizontal review employ some To promote consistency and eflil<th·eness of the son of risk adjustment for at least some subset of impact of judgment on balan<~.'<l risk-taking i""'n· employees. but the role of risk adjustments in the ti1~ the interagency guidan<e notes that firms are 01~rall mix of balancing st mt~~es 1-aries across fim1s expected to hal'e robust policies and procedures to and across businesses within fon\\~ Some adjust· guide the consistent usc of judgment. and that deci· mcnts ~I)' on quantitati\'C mea.sui\'S of risk, while sionsshould be documented so that flrmsean re1i<w others are based on pcrce~tions of risks taken by employees or business units. Quantitatire measures ~ An e;.;~i® is fonnlllak I;OOI~'TIS:.Utoo pbn~ such as rom!Jlis. of risk may be applied mechanically(although this is ~<3l.",$~~1,1ihith$00)Z1~sp..'\i(~·lml)tJDISofir'k.\'fltr.~ coolp."tl53tion:k\wdiagtoa sp."\"ir~eformubS~:tllt thebe-gin· rdathtl)' unusual) or as ane lemtnt in judgm~nt· niogoftht'~\"Jr. 108 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00112 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.63281717 I~ lnctnti\e Compensation l'raelict:. ~ htlhn poli<i<> and prottdurts ,,. bring folio\\«< liquidit) risk that takes onto account >tressed rondi· and C3n ,,.,.,. the etfe<ti\<ntSS of th~ poli<i<> •nd lions and 10 u.c th~ ad)U>t<d profit m<3SIIre in dettr· pr'OC(dures O\~r time.10 mining ineentiw compensation awards. At the bq;inning of the horizontal I'C\'kw. most firms Most firms in the horizont:Jl re' iew also used quanti· lacked ~rittcn policies and prooxlur<S to guide m>n· tati\'e risk measur<S as an input 10 judgmtnt·based agm in making risk adjustments. and policks and inttnti\tcompensation d«i~ionrnaking. For prottdur<S for inctntne compensation ckcisionmak· eumple. boanh of dirte~Or> usual~· take into ins often did not deally identify the~~ to b< aCODIIIII3\aibbl< ri,J: ~when mal:ingckci· P'tn 10 rbl;s tal:m duri"! the ptrfonnanct )tar. ~about """"spool> for the firm or about..-.~nh Sudl policies and prooxlum. a!on' -ith uaimng for for senior et«utno. Some ri<l measures ean bt dif. man~er> and t.tf i'JSI ,..;.,. of d<ci,ion' arr impor· fteult to con-.n into quantitati\e risk cha~ but tan! to achie\ ing con~•ten 1 applk>tion of risk ne.~nhelesscon"l' n.cful information. HO\\t\'Cr. as adjustllll'nts. Some firms h: n·e mack progress in noted p~<'·iously. achie>ing a consistent balancing dmloping" riucn policies and prooxlure,and impact throughjud~mental d<cisionmaking is a chal· rrlatcd p=b ut others,,. still in the process of !eng~ Firms with more •dl.<fC\~Iopcd policies and completing this work. 11 proc:cdur<S to guide dcci,ionmakers in judgment:lll)' usingqll3ntitathe risk information scnned mol< Quantitative and Qualitative Risk likely to achine a roosistmt babocing impatt. This Measures is an arta in •llicll ntafl) firms a1< ~orting to imprO\ceiT«th~ In 1.':1\<'S \\Mre ri>k adju;untntS are applied based on a formula. i!K'tnlirc compensation dt"('bions ;u'l! Almost all firn1> in the horizontru rc\·iew use non· made u~ing measures of li11ancial perrormancc Ih at quantitati,·e pcn:cptions of ri>k taking as a basis for are net of a risk charge based on a quantitnth·e meas· some risk adju>tmcnt~ Such adjustments hare the ure of ri<k. Such adjustments balanct inc:cnthos to potential to addi\'>S harli·to-mcasure risks and limi· take ri,k 10 the extent that such charges oiTsct tationsof exbting data and risk·measurementmeth· incttalC> in financial ptrformanct(or reductions in nd< For =mplt. the mana£<r of a lending business C'OSI!) that a~< associated \\ith inmased rill. l4kt11J. might be..-.~,. !hot $0111( nnployl'tl of the business T "'h h t t n U s S u ( o ita f b m lt c q d u o a a n n t ic i a t l a r t i n > ~ t r a il d l. j t m b t u a n >U m ~< b ~ i , ; , J1 . 0 :1 »1 \> b1 il c · m th a o ke o ~ ri s th k e it q r l I< l3 » n D t > i t a a n t d n ~ o n th ,l t m rs s ru af u tt r e lo s a ;n ~ - . a , il . o . b , k to the abk. ond the etfttth'tii<SS of this t)'J'C of ri>k adjust· manager do not >hO\\ it. Based on th~ information. mcnt depends on the qualityo f the ri>k mc:bure. One the manager could risk adjU>t by giving lower ine<n· leading edge practice. obserwd at .ome firm, is to th~ compensation ""rd> per unit of ,..·enue to the a>SCSS a charge against internal profit mca;un:, for employees making the ri>kier loan< As in other cases whtre inc.:nti\'e contpcnsationa~,~rds are based on 1• d h.' " ll' " ('\ t l N f!lr I k " ,1 " 11 " o 'b rp c ~ _ ~ " i ." w . i '.- o .a o . , l ; . b t. o ". o ", k! .' . h _. l . \ oS t l th " o 't t" . ." ~ . u ".." d .J f . i U R , X .d, 'O ,s ' · j t u o d b g e m c e o n n t s · i b s a t s m c t d ~ d · e e i c T i~ tt o ti n '< ma " k h i e ng re . f t i h r e m y s a h r : e n m ~ o cl r e e a l r i kely o 8JC'Q ( 11 t 0Jd k p(o. _ 't bD . l . r ix, iDdadiiiJ I cJNrifUOI., ti •1fQ.C'I;tc4, policies and prottdur<S 10 !"ide application. 0..<1· oping sadl policks and prooxlures i; particula~ " ll " m ' l " \ " .W " p " o ' b - .- " . " . ' - 1 ,. 0 U 0 l : d - ~I i ( i \ U ' . \J . . , . I .• I oh I ~a o f"' n "C'' o t"\ r "'tl . '"! l i':'·' ~ challmgjns b«aw.e the information about risk is wl)><>tobcfoiloo<dio«-~-., qualitati\t and the natul< of the information tend>t o ftftl'\ ~141ould f'CO'idcmo&.lfa st.~1 mK id llhtnlr.'tiOrlllul changeorertimc. d<\WOMQnt-:ji.OOfiC'd:aOO~t~'\Jona<'k-u~con­ ..;,,<111 b3~h ;m.J lho.'I'Cb) aJJOVo (« t'C poM 11)0fUioritiJ. II ~firm~h;r."tid«llift.."dinlflrit,.olri.."\ilndrc"OI.'NU~'f'C" Risk Adjustment and Bonus Pools dr.. · r~~IOI)~tclot~ liDrotbusiM\):tndnnplo)l'( rolc• •o rliJdtngl\'fcrt1).~poiAh.,lObc«WW....J,."fC'db)maM$<'· lnc.:nthe compensation practkcs or firmsdiiTer in d _ " M .. < . " r . n " . ' l " . " v . "" . " . " - "" . t " .. " . " n s " . " ." " n , -" . I . " W N . :' . . . - "o . d" i ._ j"o : n ;' . t! . m " ' ~ O "< ' " ~ a ; t"< . r " a i i . " s n m l o d " .l J" ll i ( l" j a \ . N " < t 'd . . . M "t m• d t " , n i.d t o . ' " , ~ • . , . f " . ~ - . i . " ~ . ' r d " - m o ' . - ' ~ W " · a t t h h ls e e . a p In l r l o o a c m t a o t s i . o o . n . f , o . d , t f .. ~ i . n t ~ r c m e i n n th in c g c s t o h m m e i t p o o e r t n a m s l a a t b t t i o o a n n g u < 1 s 0 m p < i o n ~ o d ~ l n u s n i a d d n u d """"'"IOb.,., .. ~ ... . -.ro~o-""* 111< board of di~<e~or> dttnmine the size of an 0\er· ""''~' ......" "". ........... ~"' Tbc)lolt all amount of fundinJ for the firm a; a ~itote near h ~ n o < o l t l l . . u r " J i . " . ,, J ' .d . " : < . " \ J 'N ' j~ Q " W " . o m < " ( . " a l " ) ' ~A t "O o ft - . o ~A a tl . i l r m nti ; f l N o .i ) al t t n o( l u b li o m~ u 1o t n i t s h t e h e e n n d s o p f li t t h in e t p o c > r u fo b r - m po a o nc h . : f o ) e r a r r n . c a h n d bu t s h i i n s e b ss u . n P u o s o p ls o ol 109 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00113 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.73281717 <Xtober 2011 15 are allocated to indit idual otmployccs in a manntr uesand to evaluate best practices in this area as they related to their indi,idual pcrformaoce. In a C\'OIW. bottom-up proces~ the finn assesses pcrfomtance of each employee and assigns him or her an inctnti\'e Topic 2: Deferred Incentive compensation a11~rd. with the total amount of inctn· tire compensation for the year for the fim1a s a whole Compensation simply being the sumo f il>di,idual incentit~ compen S.1tion awards. Most firms' processes are a mixture or Another method for balaocing inccnti,·eoompensa top-do1rn and bottom-up. but the<rnphasiscandif tion arrangements is to defer the actual pa)lllll of a fer markedly. 12 portion of an 3\t~rd to an employee significantly beyond thcend of the perfomtanc. period. adjusting Risk adjustments balance inccntire compensation the payout for actual losses or other aspects of the arrang<ments to the extent they affect the incenti1•.:s employec·s performanec that are realized or become provided to indit•idual~ The impact on incentires better known on~· during the deferral perind. Such may be limited in cases wh<re a finn mak<:s risk deferral arrangements make it possible for the adjustments onl)•whcn deciding amounts of pools amouut ultimately paid to the employee to reflect because the a11~rd to each~ mployce under the pool infomtatio~ about riJkstaken that arrit~\luring the ,;n rective the same adjustment. This is appropriate deferral perind. when the nature and extent of risk taking of all employc.:s under the pool is the same, such as cases The interagency guidance does not require that defer where a pool applies to a business unit in 111tioh all ral be used for all employees: does not suggest any risk dceisionsareinfluell<\.'<l in the same "~l' by all specific formula for deferral arrangements: and does employees. Where inditidual employe.s in a single not mandate the usc of anys pecific rchicle for pay pool can hare 1~ricd let~ls of impact on the amount ment, such as stock. Ho11~w.the intcrageocy guid of risk, the difleren<>.>s 11ill not be fully address..'(! by ance does ha\"e some speciticsuggestions relating to risk adjustments to the pool alon~ In such cases. deferral arrangements for senior executives. A sub additional adjustments inoorporatcd into decisions stantial fraction of incentireoompensation a11~rds about individual incentire compensation awards should be deferred for seniorexecutives of the firm would be netdcd to make the risk adjuStment fully because other methods of balancing risk-taking etT«ti\"e. incentil'f.S are less likely to be effecti1~ by themselt'f.S for such indi,idual& Next Steps Elements of Deferral Practices Most of the firms in the horizontal retiew h31·e made significant change-s to thci• risk adjustment practices The proportion of incenth"C compensation a1,-ards to for a11~rds for the 2011 perfomtanc. year. Still. most be defemd "~'substantial at the fimts in the hori continue 10 have work to d.o, including de\'dopment zontal reriew. For example. senior executi\'es now of appropriate policies and procedures to guide judg h31~ more than 60 perrent of their inccntil'ecompen mental adjustments of inrentitt compensation sation defem>d on 3\~rage. higher than illustrJti1·e a11~rds. Most finns should continue to ct~luate the intemational guidelines agreed by the FSB. and some cffecti~tnessof the quantilatiw: and qualilati,·e ris.k of the most senior executit-es h31·e more than SO per· adjustments theya re u~ng and whether risks are cent deferred 11ith additional stock retention require· appropri31ely balaneed. Additionally. in lll12 fonns mcnts after defemd Stock rest& Most firms assign should evaluate ho11· eft~i re the risk adjustments deferral rates to employec-s using a ft<ed schedule or used forthc 2011 3\t~rds were. and makeimpro,~­ "cash/stock table" under ll'hich employ"" m:ei1ing ments as nettSsary. The Fodera! Reserve will continue higher incenti1~ compensation .,,~rds generally are to work with Ih e fin11sl o make sure progn""SS com in- subject to higher deferral rates. thoush deferral r.ues for the most seniore>ecutit·.:s are often set separate!)' and are higherthan those for other employees •: E\m a~lirms \liltt a bouom·uptm~ b...Js--1 roRSttairm: Deferral periods g<nerally range from three to fit·e pb~\' ap n..'"'li.:a! limit on lhc iii~ of the 3~1\);iltt booliS for 1~ yea!$. with three year> the most common. Most orga t l o i p r o m d a o s ' : l\ a n " f ' ir O m Ok s , l S : O lh ~ - I s o o p m -d : ® : ' K f \ t .' l O ' u L n . t - o m f t n JI t C i C ) 'I. , 'e p i\ t 'C t 'd S p t : rl r . ! L o $ r im m i a b ~ t o !) C : nizations in the horizontal Miew use the same defer l:ey indilidlllls in felt ins poole. r.tl period for all employees in ag iltn inetntiltCOnt· 110 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00114 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.83281717 16 lncenti,·c Compensation Practices pensation plan and often for all empiO)'l'tS. So~ Firms in the horizontal "'''it'll' ha1-e made progress in firms tmnsfcrowmrship of the entire deferred award impkmenting performance-bas..'\! deferral armnge· to the emplo)\'0 at theend of the \'OSting period menls Ih at promote balanced ris}Haking inccnti\'es., f'clilr l"esting"). while others adopted a schedule E>ch firm's setup is some111tat different. but thm: under which a portion of the award l"estS at giren broad styles of armngement were ob;erved-formu· intervals. laic.judgment·bascd. and a hybrid of the two. In a formulaic approach, the perrentage of theaword that The most common 1~hiclts for conl'eying deferred rests is din.'<tly related to a measure of performance incenti,·c compensation to employees are shares of during the deferral period. In a jud~nt-based the firm's stock. stock optionund perfomtance arrangement. the circumstances under 111tieh less units (an instrument wilh a payout \'alue that than full 1-esting 11ill octur are decided judgmentally depends on a measure of perfomtance during the ruther than being linked to fixed 1'alues of perfor· deferml period. often an accounting measure like mance mctrics.. and the amount of inctnti\'e compen earnings or retum.on.((!uit)'). Some firms usc sation paid out under those tircumstaneos is also dcfem.'<l cash or debt·likc i nstrumenl<. decided through a jud~nt·based proces.<. In a hybrid setup. a specific trigger ~~lue of performance Performance-Based Deferral is set at the beginning of the deferral period. and if perfonnance falls below that trigger valu~ a At the beginning of the horizontal review. few•f irms judgment-based process determines how much of the adjusted payouts of deferr<'d awards for risk out· defem.'d incenti,·eoompensation 11ill not rest." To comes or other infom1ation about risks taken thai the extent that judgment pia)~ a role in the \'<Sting boca~ a1•ailable during th.c deferral period. Without decision. firms aree.xpeetcd to ha1'\l robust policies such performance conditions. deferral arrangemen1s and proce<lures to guide the consistent usc of judg· are unlikely to contribute to balancing risk·taking ment, and decisions should be appropriately docu incentil'es (for ease of reference, deferral with perfor· mented so that firms can monitor ~ehether their poli· man~ conditions is refcm.-d 10 as ·-perfonnanre cies and procedures are being follo1red." Policios and based deferral")." procedun.-s noed to be clear to employ~ or they will not ha~~ a dear understand in~ when risk·taking deci· n Tiloc:ommon tssucs 'llith pcr!ori'CI3o<\"-b.lio.-d 6.-ferQJ bo.'""JITIC sions are made of which outc~mes willl""d to forfei· Mrduritlgt~ ~tal rt\'i.-..: 'flit fitS!. is: fl.-bled to~·· ture. in \\1lich case deferral arrangements are not mcnt ol dcfcrtc\J ina.'flti\·c«~mp.-mation in sh3~·ro'Std inst.N· likely to have a significant impact on risk-taking i I l T \ I l< Cn lt L d .; c . d \\ . ~ r - i t s t . \\ k . · ' t b a i k c i l n c g $ a . c a t n i : o $ ~ h d l u ~ r ·b i a n - g < t i. ~ - ~ d r . f ~ o 1 t h m r a l l i ) l . l ' X " ' t ~ ) r\ ~ ' t Sa m re ig l'll beh:ll·ior. Many fimrs still hlllt work to do on their ha'l'<' cil~r ups)& Of 00<;\·llOOc<'ffMs oo 1~ ~tot.-t prilx in Lhc policies and procedun.-s in this area. rururc.sot~nctcll"mooim.,ti\tsis001d..w.Mor«<\t-r. IJK'IS.I<'1TI~'l\'S:bcio'a'thc:scniort.\<\'\lti\~le\\'iarenotlil:d)•to tdico.'tlhatth..;roYonml:-Wint:&xi.~"U.l!lb'ta~cri:d Most firms in the horizontal rt~iew haredawback irn.pad on the: lirm'sMock pria. forCMm(.kifthc lc'adrl'of a arrangements for at least some employees that are t b i u U s t i n ar o . m : 1 u .14 n ," i '< t ' k fr ii o C m * 'S th I e ~ I )t 3 a ! O Xl O l p 1 o it io ,:u t l o at ( s 1 t ~ r U at ll ~ il , r t n h a c ) ' k k - - a J d d « t m o at ~ triggered by malfeasance-violations of the firm's bdico.'t any s~il ~ wookl be 100~ t113.n oll's..'l by pro(Jts policies. and material restatement of financial rrom Olhcr busi().""S t.1niL.t Thu-~ the ~'f would 001 (',,f\'\1 the result~" Such dawbaek pro,·isionsean contribute to ~ to31l"IX'Iti'K-ultimatt ,'3Jueot d.:fcmd M' rl.'t\'i\\.\1. and dcl'tml woold h.:J\'t lillie' ir:npa. .1 on his or"'-" risk-W.i~~g ln..\'11· o t I i n ( \t p ' $ b ! . r a f I ~ O n t I o o T n b n l k a la r O o f « r o e t r h . 3 a ' d ~ t . a , ' : r S f e t c i t r i n r g n d L l : r ; « i£ u < S n l o t u - o - ~ r t s T b s ! : b c K o r ' n u n J p t d i t Q b o . ) : r w n tla c ·$ s a c r tJ : i d s if k o lg - n t f a u m k l c l i a ) Q • s C t . 'O J ~ Q n: s c l . '' ~ " p " J " ai " n " c ' d '· b to c e l.« m < ~ l d ~ <f < C m 'O\ l ' m " " " d f b lt )• " th 'l o " st ' a > rm ! n s ~ o ' $ t' 1 I 1 ' o IC o D ~ L- b .. o •'l">ri) a...'1i\i~ t"Spp.'i.lay t00sc Iilia bcfol'l: the iM."'''Ii\'t.{'l()tJIJ).."T\S3· 1~ In al"Q!!llf1011\'3ri3nlof\JI(-~'bridp~on;.'\:tlw.:-tri,~r~ tlonav.·:mL mct fora particulirt:f\XIp(e.g.. abusitlffiul'lit).tbe~iofl. " T l d ( o t ' c h b n r fc - l ' i n a r 9 s r l : . t g f 1 d h l c . . - 3 e . r o . f n , s \ i f d ~ ) r . l a r ~ l . o ' l ' ' l r r f i ! n d . l t m a ' m b S ! o o : N y f t n l t f i b t r i r o N i m I ~ b I 1 · ; C a ; h r . t $ c S a t r r l o d . l l l u 3 \ m l w . 1 t . ' - e b . \ . 1 ' « r \ ( l u O a ~ la m . f t r . : r r 1 s x h p b - h ' d . . . r t : o ~ ~ a ~ p r O p r o d c ." o f r u ' O f f i o n r l 'O n J i d n I n n a ~ n i - n ' li c \ g i l i . X 1 ~ '\ i . . p ' b - t ; o b I o i ) a O ' n r O . ' i . A . U s : ' c · I d u ( : I r C \ ' O C ( 1 o l S ) l m J J e ) p I - O p . s r s : n ~ o n t . m h < ( $ s l a . 3 i a t n ~ * l b i Q o f ( o u o R c u l r t J t t ( b h ' \ m ' t C a . b l t S i t n \ ~ I[ 6 ( u n ' S 1 : g o s . _ - t r D \ o ~ r O b O u r l u a f d 0 l i t i m 0 S J J ) I ~ l p . l - o b r r t u t a b \ t \ i d 9 c o i . e l n ' p d i n : d i t r n 0 l t r 0 c \ k t ' k , m 'U l 1 p : ( o 1 c l t t l 1 a . o r 3 . r ) k i ~ . \ l i l l o n ~ c a ; - g t m r ) . T i . r J 3 . I 4 ] J ( ' o l 'I ) I ~ " . : ' ' \ I ' l f S \" ( n L i : \ S ( I 1 ' ~ ' : A n ' ' t C 1 s C C r C i \ s ' k tr , d t u h r < i - n sc ~ a t r b f r: 3 d ~' c t f l m l) ;t r l ' p lt :r l i ) o ' d C . I . ' i I n C o OU n r i l : S r : t C o l T m I a M . l \" \ i . m ' U 1t .c O t t t a . k : : \ l ,.J . I " .I m C o ct a ri l s l: k 's l i d m jl i . b b t l t m O c ( - '( n I t I . X as \V di l 9 lS :u 3 s b s o c o d t L th U e 'I d W cr t r o o f ~ di s I a o \1 f i t o h n is i t n tp t, O TW rt ltt of)tt..ilt~£\3ndthli$Tni!)nolbili111.-.:-ri$1-tak.ingii'K\"ffti\c;;, 1• TI-t: \\orJ Mtb.lb3d: ..i $ !oQr:r'lctimcs u.W ton:(~r tOaD'I·d.-fcrnl On.:: wmpk of 1 tRuer thlt may~ appropriate-is oo: that of'.pa)'rrl(ntmbod. The term '"~iTANc-k. . alsoma)'t~.frr sp... . rtduo.utbc:amol.llltofdcf\'fl\'d(;om~'fl~iootltalis,~cdif ('ifiCJ.!~· toa.n:am.n~"tf"-.'nl ucd«-.,r,hXfl:tncmplo)«m~ tb:firm(or bu.)il'lt$$ til\:' or unit, dtp.."'''diBgon thtlC\~ of tbt fttl1M il'ktnli\'t<'QnlpM.-.11iotJ ~)'m('B\$ pll"'.'iou.~• fl'tl.'i1.\.\i b~ tmplo).x)c-.\p.'limc6 ~Lh-e nct incom: in :.n) fiS~.-al )ttr tho: crnf'll~cte il" certain ffl); outoom:so:\.'Ut. ~tion 304 of lhi: during till cJortrrnJ J>IOOO. l'b.l n.ol.,lllt tri_~~ f<lr afl)' SJrb.l~-O>k)· Al1 of 1001(1l U.S.C. mJ; •hictt•Jlllli..• 10 111 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00115 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.93281717 <X1ober lOll 17 balan<~.'<i risk-laking inccntirtS bydiS<Ouraging spe· for achiering balanced inccnth'CS for taking risk. The cific I)'JX'S of b<ha1•ior. While po1cn1ially cfl'ecli1~. intemg<tlcy guidanre also idcn!ifies the use of longer 1hey do no! affect most risk-related decisions and are perfonnance periods (for example, more !han one nottriBgered b)' most risk ()utoomes-the narro" year) and reduced sensitivily of a•ords to short-term focus of these arrangements mean !hat tile)' are performanre as mel hods for achicl'ing balance Our· unlikely 10 <"Ontribute meaningfully 10 balance ing the horizontal review. we obserwd the use of bo1h me~hods. I hough neither ·~s uni1~rsalty used. Progress on performanre-based deferrol for !he 2010 performance )~r ~~~s mos1c ommon for senior Evaluating Performance: Emphasis on exccuti\'CS. Many lirms arc now in the process of Long-Term over Short-Term re1;sing armngements to be used for the lOll perfor· mancc year and are extending performance-ba.st'<l Firms used longer performanre periods (thai i< a deferml C01~rage 10 more employees as a mechanism backllard-looking muhiycar assessmcn1 horizon). for 10 provide prudent risk-taking inren1i1~ Some flrms example. for senior c~oc:utiw~ in some cases, and in ha~~ implememed, or are implememing. others for non-oxecuti1~ employees. Measuring and perfom>ance-based deferral for all emplo)""' receil'· Cl'alua!ing performance or a11~rds on a multiyear ing deferred ill00lti1-ecomp<nsa1ion. while o!hers are ~is illlo"~ for ag J(;lt~r portion of risks and ris~ doingS<> mainly forempiO)'ffi whose au1hori1ics and outcomes to be obse"~'<i 11;thin the performance influence over risk laking 3re such !hat risk adjus!· assessment horizon. thus gamering many of !he b<n· ments might h3'eonly limi!ed efl'ecti1~ness in balan<· efils of a defcrml arrangement wilh performance ing risk-taking incentiws~ such as senior managers sensitive fe:uures. One simple variation involves using within business lines and other employees engaged in risk ou1comes from prior-year ac1ions as a consider activities that in\'OI\'e ris~s orera long duration. ation in reducing current.yea.r incrnti,·crompcnsa· lion award doci~on~ To be e!Tccti1~ muhi)~at Next Steps assessmems should be b.1sed on policies and proce dures that gh·e appropria!e weight to poor ou!comcs Most of !he firms in the horizon!al te\iew h:n-e made due 10 pas! docisions. O!herwise. ad1wse ou1comcs signiflcant changes lo !heir deferml arrangemen!s. may be cfl'ec1iwly ignored due 10 an emphasis on Many firmsi n the horizontal O:\iew have increased current~year perfom1ance. the fraction of ina?nth·t! compensation that is dcfcm.'<l for both seniorex«:utive$and other employ Damping the sen~!iril)' of incentii'CS 10 measures of ees. All firms haw more work to do 10 impro1-e !heir short·!crm performanre ~~~sa d•oice made by some performance-based deferr.tl arr.mgcmenl< firms institutions to reini n inctmhts when. for example. . may aiS<> flne·tune !he role of defcrrol rda1i1~ 10 risk concerns arose abou1 !he signiflcance of the incen adjus1mems as they gain c>pcricnce 11ith how the ti\'CS or risks ilwol\'td. Fore.xarnple. increasing bonus 1wo 11~rk 10gc1hor. As flnns dcwlop and fine-!Une pools or indiriduAI 1111~rd amounls a1 a lo11~r rate deferrol armngemenl< firms should 0\'aluate how when financial perfonnance is 11tll above targe1 iti'CIS ~~~lllhese deferral arrangemenls h:n~ 11t>rke<land canl imit inctnti\'~':S 10 lake large risks 10 achie\'C make impro,·cmems as n=l)'. Tile Fedeml exucmc lc\-els or performance. A cap on incenth·c Resen·c will monitor and eocourage progress and compensa1ion a11~rds b<)ond a rertain le~~l of per· work 10 ensure I hat pmctices are eflfctive. formance is another example. However. in the hori· zontal rericw. there were few instanres where such Topic 3: Other Methods that Promote caps and reduced sen~1iri1y 11trc sunicien! by them· seh~ to balance risk-laking incemii'<S. Balanced Risk-Taking Incentives Next Steps Risk adjustments and deferral wi1h performance sensilive rcalUres represent importanl mechanisms The interagency guidance urges large banking orga nizations to acli,~ely monitor industl)~ ar.adcmic, and cll.icf t:<l\."\111\~ oiTk\'fS.and clli.i. finanri.al offll."tfSo( rublic regula!ory de1~lopmems in illOOltirecompensalion b.:tnki~ol);anization..\ ii an~ pk ollhls mort ((\"'i\fw: 1~-p.: prae!ietSand !hcol)' 10 iden!ify new or emerging o ho f r - i d z 3 o - n a t ' a b l a m cl. ~ W tcq .· L a J r if e 'l ." p l' u D b «< iW I. i. ) N · ' t .. r -J a .r d ly N a . l l a U nd .S t . l · ' l lc » P $ . c o d fo f r i t r s m ub s j i .'\1 n t 10 ~ me! hods that arc likely 10 impro1e !he organization's 1bisprtl\~. long-tenn financial 11tll-being and safely and sound- 112 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00116 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.04281717 18 IIX'<'nti\e Compensation l'raelict:. """' Th< F<d<ral Rtstn~ ,.;11 do the same and ~ill Th< S«<lnd approach ck:,ignat<:> a '"tl) Ia~ set of encoumge firms to ust methods that are ntO>I appro nnpiO)<e> as CO\tl\'d, such as all rn>plO)'«S reOO\ing prime for their circumstanres. any in<ttlli,~romptn<ation. or all nnplo)~ subject to a subset of the firm's iiX'<'nti\'e compensation Topic 4: Covered Employees plan~ Although this reduces the ell'on requir<d to identify a>ver<d tmpiO)= firms still n.OO to iden· tify the rele-~nlt)-p:s and S<\erities of risks that are ldennf)ing the full Stt of emplo)<es •ho rna) indi· inctnti\iud through iiK'ellt~ea>mpensation ,iduaJ~ or a~U«ti\'d) «post tilt fttm to matcriol amngcmmb to b< sure iottntnes to take such risk> amounts of risk inc rucial step to. .r d mallaJii!J arebolancN. rill., associaud •ith incenl~~a>mpeosotion. 1\lth· out identif)ing the rek\~nt empiO)ees. a finn c;~nnot Man) firms appropriately id<ntif) at least some be >Ure it has proper~ designed its inc:l!ntire a>mpen· groups of similarly a>mpensated employ«:< "no may >at ion arrangements to prmide appropriate ri>k· coll«ti\'cly expose the firm to material risk. taking inetnti\"eS. Examples include originators or mongagtS, com mer· cia! lending officer>. or groups of tr.ders subject to Three Categories of Covered Employees similar incenti\~ a>mpcnsation amngement~ Th< intmgm<J' ~idanct describe;. three catttories Establishing Robust Processes Going of ;ud! nnplo)ttS. •flicb t~htr are rd'tmd to a. Forward 'CO\ffld nnplo)~-= SC\~ral firms h;n-e )<Ito establish robust proc= for identif)ing co,ef<d Clllp!O)a'l that are a>nsistent • other indh idual employees able to take or influence with the intmgenC)' guidanco. e.pe.:ially for identify. material risks: and ing groups of covered employe--s. Some firms rely ' giOUJ)> Of similar~· compensated indi\ iduaJS 1\hO, he3\·ily on me.:hani(ll) materiality thl\'lholds in their in aggrepte. can take or influence material rill<~ identift<ation prottJS. Formmple. on~· empiO)ces able to make deci.ions that a>mmitatltast Sl billion lnctnt~e a>mpensation aml\gtlllC!ItSf or all eo~er<d of tb< fim's<ronomic:capilal might be eligible for tmplo)ces5hould b< appropriatd) lxdanced. ~~~~­ consid<mtion as CO\fflO ClllpiO)-..s. or~ cmpJO) · k» of • lk"lher the ""~red <mplo)ce ;, a .mior cesalxnea gnen 1<\tl of totala>mpensation. Such c.e.:uti,e. an indh·iduaJ. or pan of a group of ~mi· materialit)thrtSholds as opplied b)' mOSt firms to Jar~· compensated indhidual~ Though the Fedml exclude nnpiO)e>:s from being a>nsi<lel\'d cowl\'<! Rcsef\t has no taf!!cl number or quota of cowl\'<! empiO)'CCS ha\·e three common weaknesses: (I) they emp!O)·c.:s for any firm, many of the lafj\<">t firms often fail to capture the full extent to "1lich an ha\e detennined they haw thousands or tens of empiO)'e\! maye<po>e the finn torisk.(2) they tend thoU>ilndJ of CO\~r<d empiO)·ees. to exclude potential 00\~1\'<l emplo)<es who may sig· nir~<antly influence risk taking but do not make final Standald Approaches to Covered risk dtci>ion$. and (3) the) often ignore groups of Employee Identification similarly«>mpcn>3tednnpiO)ces In mie-&ingtll< firms ust of threshold\ "e ~und that Ullder some Finns foliO\\ oneoftwogenmlapproaehe> toid<n circumstancel. a suitablyc hOStn materiality thrtSh· tif) CO\Cr<d nnploy= O~te approach im oh e. dC\d· old a>uld appropriate~ play a a>mplementary role in oping and follo•ing a s)>tematic p= that idcnti· idcntif)ing CO\~r<d empJO)CCS if used to include fi1S types or risk that each employee (or group of employees as corer<d ClllpiO)'CI'l. empiO)«S) takes or influeno.'! and thataSASCS the materiality of the risk< Such a p=s hould 'cast a FBOs \lith U.S. operations that "~re pan of the wide net' and should consider the fullmnge or t)pes horizontal mit\\ face special challenges in dC\dop andle\eritiesofrisk.~finnsbtin\esledin ing procedures for idtntif)ing CO\er<d cmpiO)«S for enhanced information syst(I!IS to faatitlt< th11 pro purposes of tht inttratmt) guidantt. Gtnerall). ee». Man) firms in the horizontal It\i '" folio\\ thi> home-country supen i>OO np.'<tthcir staodards to appfll3ch. be met by the a>n>Oii<lated organization. and so in its 113 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00117 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.14281717 <Xtober 2011 19 U.S. o~rations. an FBO mustmett both home· sation programs that do not t1tcour..ge imprudent count!)• and U.S. regulatorye<pe<:tation~ Ma11yof risk taking for those cmployct<~ who can indi1idually these lirms ha\'e home-roun try supervisors whose aftect the risk profile of the firm. In addition, many regulations focus on a more limited set of employees finns have identified groups of similarl)'COm~n· than dC$Cribed in the in1eragency gutdaoce.17A s a sated emplo)~ whose combined actions may expose result. these fimts n«d to develop proc:esses to iden· the organiu.tion to material amounts of risk. Some tify both COI~rcd employees in their U.S. o~rntions finns h3\'e put in place a robuSt r= for idcntif)'· lor 'Jlplication of the interngency guidanre and those i11g rele~~111 i11di,;duals and groups of employoes. employees subject to home-count!)' regulation. The uith the na,ibility to adapt to the changing business number of eo1~rcd emplorees for purposes of the em·ironment o\·er time. Howerer. some finns are still interagency guidanre in U.S. o~rntions of an FBO working to idemify a complete set of mid· and lower· mar mred the number of employees subj«t to level entplO)'<'OS. and others arc working to ensure home-oounuy regulation. their pi'OC\'SS is sufficiently robust. The Federal Rese/'\~ will II'Orlt 11ith the firms to ensure that prog Next Steps ress continues. All firms in the horizontaii'C\icw now 1\'<ognize the importaoce of establishing sound incentil'eeom~n- 1' Sup:t\i~rs in trUII)' otlx'r juLi:5d.ictions r..-quire tt..."ir finm 10 identify on~· lhcif cqukal-nl o( indi'iidual 00\WC'd rolpky)\\~ ofiC'I'Ill$ing N~crilfitySI3:1'1d3rds Ih al r~0.1 ancntioa 103 rrla li\o:f)'NinurnbcrofindhiduaJs. 114 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00118 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.24281717 21 Establi~hment of balaoccd risk-taking in«:ntives role tr.tditionally inl'oh~ liule or no focus on inecn· should be support«! by the engagement of risk· tii'<S to take risk or the risk associat<d 11ith the manag<mcnt and oontrol personnel in the design and cmplorec's aetil'ities. Risk·management personnel implementation of incenti~-ecompensalion arrange traditionally had relati~tly little in1·oh~ment in incen· ment~ in«:nti1·eoompen~tion for such personnel til'c compensation design. and their itll'olvement in that is independent of the financial performan«: of decisionmaking 11~1 often limit«!. for ~'ample-to the businesses they ovci$Ce (in order 10 limit oonfliets only suppiJing information abou1 breaches of inter· of intere;t). pr.tcticts to promote improvements in nal policy and proc<durc by indi1idual emplorees or the reliability and eOOCtireness of incenti,-ecompcn units.. Howt\'er, a few finns did incorporate risk sation systems o'-er time-. and impro"emenlS in cor measures produc<d by risk-man(l$ment personnel porate governan«:. These features are discussed in into financial performance measures used in inctn· topics 5 through S below. til'e oompensation dcdsionmaking b¢fore the crisis. Increased Involvement of TopicS: Risk-Management and Risk-Management Personnel in Design Control Personnel and the Design of and Decisionmaking Incentive Arrangements Risk·management perronne-1 are now im·oh'ed in Properly identifying risks attendant to emplorces· incenti\·ecompensation system design and decision· acti\'ities and setting suitab!t balancing mochanisms making at virtually all firms in the horizontal n:1iew. an: critic;!! elements of pro1iding balanc<d risk· How-cwr. the intensity and nature of im·oh·cmcnt taking incentives. The inte,.gcncy guidance notes \"Jries. Fore xample. risk·managrmtnt functions 1\0\'' that risk·man(l$ment proo:sses and internal controls pro1ide significant risk-related input to the board should reinforce and support the devtlopment and le~~l deci~onmaking process for indi1·idual senior maintenance of balanced incenti\'erompensation executil'e ill('Cntil~oompensation at all firms and for arrangements. Risk-management and comrol person bonus pool size decisions at firms at wbic.h pools play nel (including Internal Audit) should be involv<d in a role. Mostlirms consider some quantitati,·e risk the design. operation. and monitoring of incenti1·e mea)ures in making atleaSI. some incenth·e oompen oompen~11ion arrangements because theirskills and ~tion decision~ and these an: usually pro1ided by expertise pro1ide essential jperspeetil~ and support. the riskand finance functions. Nonetheless. at some Risk-managementstan: in particular. should partici· finn~ risk c.xpertS primarilr play a peripheral or pate in the firm's anal)~is and deci~onmaking informal role regarding the identification of oorored employ~ the seleetion of any risk-sensiti1·c performan«: mclrie& Comrol.linance. and risk-management stall mem the dCI·elopmcnt of risk-adjustment metltodologi~ bers provide some input to indi1·idual employee per· and 1~1ing triggers, and the orcrall cO'ecti~tness of formall('C ~ie11' at many firm< For example. they the finn's balancinge!Torts report breaches of policy and proc<durt or rate the ··risk awartncss') or adherence to the linn's risk At all firms in the hori=zon•!al=l'l. ~icw, eertain lime appetite of indi1•idual emploreesor business unit& At lions. such as human and finance. tr.tdi !inns that usc committee structures in their incenti\'C tionally were ill\'OI\·ed in incenti\'erompensation compensationd eci~onmaking process. oontrol. decisions and in the desigru and implementation of r.nanec. or risk-management personnel usual!)' are incenti,·t compensation arrangtments. Howe\'er, this among the members of commiuees. AI most firms in 115 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00119 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.34281717 21 lncenti,·c Compensation Practices. the horizontal n"iew. risk· management and control embedded 11irhin indi1iduallincs of business within functions are also involved in identification of COV· the firm. ered employees. Maintaining the Independence of At firms where risk-management personnel are Risk-Management and Control Personnel intensely involl·ed in basic-design decisions for the incenth'C compensation system. as well as in deter The firms in the horizontal review ha~~ completed mining details of the risk·n~ated elements of the much of the necessary work in this area. Pcrfor inctnti,·e compensation process o1~roll. progress on manc. measures applied to staff in risk-management risk-taking inrentii'CS has tended to be faster. At and control roles are usually oriented to the perfor fim1s where risk e.\perts play a peripheral, informal mance of their Ol'trsight duties and not the perfor· role. progre>S has tended to be slo11~r. primarily mance of the line of business the)' owrsce. Their because other personnel to nd to have less e,,perienee incenth·e compensation may be indirectly related to and e<pertise in designing risk identification and financial performance. if. for exampl~ the bonus pool mcasul\'mcnt fratun.'S. Sc\'cral firms remain in the is dro1111 from the firm11idc pool. which is related to Iauer category. finnwide performantt. In most cases. linkage to finnwide performanre is likely to be too 11<akly Next Steps linked to control and risk-management decisions to pose a significan! connict of interest. The main challenge going lb"mll ~to ensure that risk-management and control personnel are actively Where more din.'<! or substantial potential conOicts engaged ~ith incenti\'e compensation and that of interest have arisen, some finns achi"'Cd indepen· impi'O\·ement) in risk management and in recognition dence by moving risk-management and control func of risks the firm takes are incorpomted into ineentil~ tion personnel out of linc-<lf·business incentive com· compensation decisionmaking. The Federal Rese,-e pensation plans or line-<lf-business bonus pools. will continue 10 work \\ilh firms to ensure that such establishing separate plans or pools for them. Other personnel have an appropriate rok fimlS established separate bonus pools for stan· in risk-management aod control roles. the sizes of which do not depend din.-ctlyon the financial perfor· Topic 6: Incentive Compensation mance of a particular line of business or business Arrangements for Stan· in actility. Risk-Management and Control Roles At some firm.~ low<r·l"~l risk-management or con· trol stan· members who are embedded in business Improper incemirccompcnsation arrangements can lines receire their incentive compensation awards compromise the independence of stan· in risk· from the bu~ness line bonus pool. Such practices can managoment and control roles. Fore.<ampl~ a con beaeeeptable if the rele1~nt stan· members perform mot of interest is created if the performance meas· funotions that are unrelated to risk-taking decisions uresapplicd to them. or tl>e bonus pool from 111\ich and if the product of their work is unrelated to their awards are drown. depend substantially on the incenth·e compensation decisionmaking. financial n.'sultsof the lines of business or business activities that such stan· Ol..,r;ee, Such dependence Some finns include comments from cross-function can gh'e stan· an incenth·eto allow or foster risk lak re\iews (such as 360 degree re\'iews) in inctnth·e com ing that is inconsiS!cnt 11·ith the firm's risk pensation decisionmaking for all stan· memberi This managoment policies and control fromt~~ork or the m~ the possibility that business line revi011~ could safety and soundness of the firm. Thu~ risk· influence incentil~ compensation deci~ons for risk managomcnt and control personn<l should be com manag.emcm and comrol stair members e''Cn if no pensated in a way that makes their incentives inde formal link to financial performance exi<IR In addi pendent of the lines of business whose risk taking tion. some firms ha,'e incenti\·e compensation and ineentirecompensation they monitor and con arrnngements for staff in risk-management and con trol. Soch staff includes not only employees a;,'igncd trol functions that are subject to adjustments based to finnwide risk-management or control fuoction' on management judgn>ent. Clear guidance from poli but also employees 111!0 perform similar roles while cies and proo.'durcs. clear documentation of indi- 116 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00120 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.44281717 <Xtober 2011 23 "idual judgmcm-based adj ustmems (and deci~ons incenti\'c compensation 3\l~rds. measnrt"S of risk and made under such policies and proo.'dures). and risk outcomes, amounts of ultimate payments of review by internal audil he~p to ensure the incenti\'e defemxl incenti\'C compensation. and other factors compensationa wards are not swayed by business line relerantlo incenth·e compensation decisions. Such results monitoring bears some resemblance to the "backtest· ing" that is often done for risk-management models Next Steps and S)~tcms To be eRocth-., such monitoring should include somequantitatil~ anal)~is. but because all As part of its nonnal supenision of the indcpen· incenti\'e compensation sys.tems in,·oh'C some exercise dence of risk and control funCtion~ the Federal of human judgn1ent in decisiomnaking. efl'«:~i"e Rcscn:e will continue to be attenti\t: 101 he risk· monitoring is not likely to be purt~yquantitati\'e or related incentii<S pnwided by the incentil~ compen· mechanical. Lmgo banking organizations are morc sation arrangements for their personnel. likely to require some usc of automated s)'>tems to adequately monitor the effecti,~ness of inrentive compemation arrangements in balancing risk-taking Topic 7: Practices Promoting incentir<>. especially systems that suppon capturc of Reliability rclmnt data in databases that support monitoring and anal)'Sis. Firms should regularly reviewwhetherthedesign and implementation of their inremhoe compensation Next Steps S)~tcms deliver appropriate risk-taking incentil\-s and should corroct dcfooiencies and make impro1·cments All organizations in the horizontaJn..,iew ha~~con­ that are suggested by the finding.~ The interagency siderablc work remaining to fully implement prac· guidanct mentions sereral practices that canc ontrib titts promoting balan<Xd risk incenti,·es in their ute to theeOocti\'eness of such aeti,•ity. including iocenth·c compensation arrangements. Few organiza intemaln.'l'iell~ and audits of compliance with poli tions perfonned extcn~re rcl'iell~ and analyses cies and proo.'du~ monitoring of results relati1~ to related to risk-taking incenti1~ before the crisis In expectation& and simulation of the operation of some cases internal audit TC\'iewed other aspctts of inctnti\'t compensation arrangements before inctntirecom.pensation activities. such as inctnth't implementation. compensation a11~rd disbursement pmctittsor adherentt to \'<Sting policies related to Importance of Internal Reviews and Audits time-of-ser.·ire. Internal re\'iews and auditS of complian<X 11ith poli 0\'er tim~ as incentil~ compensation is 311~rded and cic:s and pi'OC\."'<Iuresare imponant to ensure that the paid out and risk outcomes become better knoll'n, incenti\'Cc ompensation system is implemented as finnsand their superYisors 11illlearn more about the intended by those employees iu,•oh'td in incenti\'e reliability of methods for balancing risk-taking inren compen~1tion deci~onmaking. For example. if pro· til'es and the eRC<ti\'enessof different methods of Cl.'dures r>.'Juirc that spcciltcquantitatil~ measures of assessing rcliability. In the mcantim~ the Federal risk are to be included in financial performanre Resen~ will ~·ork 11ith finns as they dC\'clop thence measures us..'d in decisionmaking. but they are not, essary systems and cap.,bilities and ~·ill promote the scnsiti1ity of decisions to risk taking probably experimentation and inno"ation. would not be as intended. Though the internal audit function should play a key role in this aeti\'ity, other Topic 8: Strong Corporate functions such as risk management. finance, and human resourctS also should be in\'OI\'ed, Governance An incenti\'ecompcnsation S)~tcm may be imple Actil~ and eO'ecti,·c owrsight of in<Xntil~ compensa· mented as intended. but it may still fail toachie1~ the tion practices by the board of din.-ctors is a key cle desin.'<l relationship bet~~• risk and re~~rd be<ause ment of the interagency guidance. The board of features of its design and operation do not work out din.'Ctors of a larte banking organilJition. or its del as expected. Oetcetingsucll problems requires that a egated committee. should actil~ly orersee the derei fim1m onitor relationships among measures of short· OJ>ment and operation of the organiJ.ation's incenti\'e a!MIIong·runf inancial pcrt'ormano:.a mounts or com~nsation policies. S)Will~ and related control 117 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00121 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.54281717 2-1 lncenti,·c Compensation Practices. processes. The board of dimtors or the dekgatcd The board of directors or its delegated commiuce committees of such organi !lttions should also moni should revi011• and appro1~ policies and procedures tor the cffecti\'eness of incenti\'e compensation that appropriately address corporate standards and arrangements in balancing the risk-taking inctnti\'CS processes go1·erniug the design. appro1'al. administra· of co'·ered employees. tion. and monitoring of inctnti\'e compensation arrangelll(nts for covered employees. At some firms Most of the firms in the horizontal,.,;"''' already in the horizontal w;ew, the rel01ont body is not yet had in place a board-l01·<1 <Qmpcnsation committee consistently re1•iewingand approl'ing these standard.< composed of independent dill.'ctors. While histori cally these committees hare been acth·ely engaged in The board of dill.'<lors should n.'gularly revi01v the decisions relating to the inctnti\·e compensation results of monitoring of inecnti\'c comprnsation arrangements for rertain seniorc .:<ecutives,their arrJngcments described in the Pl't\'ious section and ill\'ol\'tlllcnt in oYcrstcing Ih e incenti\'tcompensation results of other actil1ties undertaken to promote reli· prnctieesand arrangement.s relating to other covered ability of the iocentil't compen~1tion S)~tem. For employees (in<:luding non..,~ecutircs) has inrn:ased example. boards should recti'~ periodic wports that considerably during the horizontal reriew. All firms review incenti\'C.COmpcnsation a\\ards and payments in the horizontal re1icw h3'1unhanc..'<l the role of the relati1~ to risk outcolll(S on a backllord-looking board in orcrseeing the incentirc compensation basis to determine "'hether the organization·s incen system for all covered employees and are now paying til'ecompensation arrangements may be promoting iucwased attention to risk-wlated aspects of iocen imprudent risk taking. As noted pre,·iously, at most tire compensation. Some r.mts hare established man· finns such wports are at a relatircly earl)' stage of agement committees that inclnde wpresentatii'CS of dmlopment. While some boards undertake an risk.management and control functions 10 support annual re'iew of the cff~.'tti\-eness of incenti\'e com· their cllort& Not11ithstanding progress made to date, pensation in al'oiding inappropriate inccnti1·cs to fimtS indicated that they ,,;n continue to implelll(nt incur risk. many currently wly on periodic pn.-stnta· enhanced corporate gowmance practices and that tions by the cllicf risk officer or other risk· these practi('<'S will continue to e~·oh~. management stall' to the board of diroctorsor its compensation committee. the content of which \-aries Progress in Facilitating Effective Internal considerably from firm tO fimt. Communications Next Steps Most firms ha1~ establishoo mechani~ns to facilitate communication lxtwetn the compensation oommit· Though firms ha~~ implemented impro1~ corporate tee and the risk and audit ccmmittec& Many finns gowntancc practice& the efl'cctil'tnCSS of such ptJc ha\'\~ members of the compensation committee that tices 11il1 not be known until S0111( years of experi· are also members of the risk and audit commiuees. enre hare been accumulated. Errectil~ness will Other fimtS wly on regular m..'ttings between the depend on the allentil·eness of lll(ntbers of compen compensation and risk comntiu~ whik others ha~·e sation commilln'StO risk-taking inrentil'cs. The Fed· not yrt enhanc.."d their communications S)'Stcrns and era! Rescrl'e will continue to work to promote efl"cc. rely on oommunicalions that are more ad hoc in tive go,-crnanre of i!K'enti\'ccompen&1tion practices nature. at banking organization• 118 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00122 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.64281717 25 Some obscrwrs hare betn in1eres1ed in comparing the rate of innoration are diffcr<nt betii\'"Cn the progress of fimrs h<adquar1ered in diffcr<nl jurisdic groups. For risk adjustment~ some for<ign supet~i· tions in improving their illQ."llli\'eoompensation prac.· sors ha~umphas~ed risk adjustments mainly at the licts, for example-in progress relalire 10 lhe FSB le~·el of firm11ide or business line bonus pool& Thu~ Principles and lmplemmuuion Stmrdiml< some FBOs have made progress risk adjusting such pools but ha,·c made les. progn.'SS implementing risk About one·lhird of 1he la'¥e banking Of¥l'ni7.alions adjustments down to the ield of the indiridual included in 1hr horizonl:!l rericw are h<adquancred employoo. ouiSidelhe Uniled Slate$. Almosl all of 1he FBOs in the horizontal Te\'iew are lu:.adquartcred in Europe Some obscr~·ers ha~t betn panicularly interested in (including 1he Uniled Kingdom). We obscfl'ed prog· the details of deferral praeliecs. focusing on the share ress in implemenling I he inleragrncy guidance. which of inetntire compensation a11~rds that isdeftrred is consis1cn1 11i1h 1he FSB< locument!, a1 bo1h U.S. and the use of equity as a '•hide fordefertt-d incen banking organiza1ionsand FBOs. Howe1~r. 1he inler til< compensation_ Numerical examples of deferr.!l agency guidance. whilcconsisl<m 11;1h Ih e FSB Prin· fraclionsscl out in the FSB Princip!ts and lmpftmetr· <iples and lmplemematimr Stant/artis. is more de/ailed lllfio11 S1mulmrls are some!imes used as a benchmark and demanding in many respeel~ Thu' sa1isfying 1he (60 percent or more for senior mcutil·<$. 40 percent expee1a1ions implied by 1he FSB documenls is nol or more for other individual "material risk takers," n=trily enough 10 salisf)' 1he exp<e~alions in 1he which are not the same as CO\'Ctt-d employees). Defer. interagency guidance. r.!l fraelions are at or abo1•e these benchmarks at both the U.S. banking organizalions and the FBOs in the horizontal review. Conformance with Interagency Guidance In somcea"' substantial defem!l fractions are achicred in dinerent 11ays. As noted pn.~·iously. most In geneml. progress on conforming to the interagency U.S. firms and some FBOs usc a cash-stock table that guidance is ~milar at the U.S. banking organiza1ions increases the deferral rate as the amount of incentii'C and at the FBOs in the horizontal re';"'"· Firms that compensation increase. As a proclieal matter. this are more and less far along rnn be found in both sets resuhs in substantial deferral rates for scnion<ecu of finn• Wilh resp<CI to P"rlicular aspeeiS of the tives and for some employees. In contrast. as noted guidance. the FBOs hill~ ~ad more diOioulty in iden· pre1•iously. some European Union (EU) supefl'isors tifying cormd employees in their U.S. oper.uions (as prescribe some elenltnts of pay structure for some noted pn.~·iousl)'. fc1r foreign super~;sors employ 1hc employres at EU banking organization~ This also concept of groups of co1~red employees. instead resuhs in substantial deferral rates for 1hose focu~ng their attention on r<lati1~ly small numbers employoes. of senior and highly paid employees). l'rogress on confonning to 1he clements of the interagency guid· European Union Approach to anee 1hat focus on corporate go,~mance and the role of risk-management and control personnel is ~milar Deferred Jncentive Compensation a1 FBOs and U.S. banking organization~ In many eases the pay structure under the EU regula· Progress on achie1•ing bala net-d incentiw eompensa· tion issomrn·hat differ<nt th3n that seen at U.S. tion arrangcmems is similitr on1 he "holt across the banking organizalions. Undersome national imple two groups. butt IN: balancing methods employed and menlalions within the EU. the dcfcm'd ponion of an 119 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00123 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.74281717 26 lncenti,·c Compensation Practices inctnti\'t compensalion aw3rd isr t"Quired to be the EU n:gulation than under the ~mpl<r structures grnmed half in an equity-linked instrurntnt and half oficn seen at U.S. firms. For exampl~ if 6() pcn.'tllt of in cash or a cash·l ike -.hick The upfront portion of an inctnti\'erompensation a\\-ard is deferred for three the incenti\'e oompens:uion award is required to be years. half in stock and half in cash that I'<Sts unless paid half in cash and half in stock subj(ct to a reten· the firm fails. then only 30 pero:nt of the incentire tion requirement of sc< months 10 one year. Though compensation a11~rd is c'poS<'d to poor performance the owall fmctioll of the incentil~ compe11sation short of failure. In contrast. suppose all deferrnl a"md granted in stock is substantial ill such imple """rds are in stock defem'd for thn.-e )'"'"'as is mentation& the upfront stock subj<ct to a retention common in the United States. If the same 6() pen."nt requirement is likely to han: a limited balancing of the incenti1~compensation award isdeferrnl. the impact on risk-laking inrcn1h·csdue 10 1he-shon whole 6() pcrttnt is exposed to the ~~nation in the retention period. The impact of the defcrrnl ponion ~~ue of the stock. If the stock is also subject to eff<Co depends on perfonnance conditions: in the absence til~ performance condition& the whole 6() pen:ent is of performance condition& dcferrnl cash will ha~·e exposed to the condition& The details of resting and only a modest balanci11g impact ~nee the amonm other performance conditions arc particularly impor· ultimately n>cti1·ed by the employee is rnlueed only in rant to the o1·ernll balancing impact. thecwntof the fim•'s failure. 01·ernll. the net e.<posure of an employee to a finn's perfomtance OI'Cr time is not necessarily larger under 120 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00124 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.84281717 27 Rcinfom:d by the supervioory acti1itics undenaken men1ing in<tnthre compensation practk:es thai are through the horizon1al n.~ iew. the large banking consistent with prudent risk management and safety organizations in the re\'ie\\' ha\'c made significant and soundness. Continued supervisor)' attention 11ill progress t011~rd enhancing their incentil·ecompensa be IOO.sed on fu nher refinement and implemtntation tion arrangcmtnts in 1111)~ that pro1idc appropriate~· and on making appropriatechan!" as business con balanced incenti,-es to take risks(as outlined in the ditions change and business strategies erolre. interagency ~uidance) and promote safety and soundness. As described in this report. ho•t~~r. most fimts still haresignific:mt •mrk to do to achie~t full conformance with the interagency guidance. The Federal Re><"~ remains committed to helping lllOI'C the industf)' forn~rd in d"'tloping and implc- 121 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00125 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.94281717 m~w.federalresel\~gov lOll 122 Q.8. Many economists, including President Trump’s Chair of the Council of Economic Advisers, have long advocated for less restric- tive immigration policies to help grow the U.S. labor force, espe- cially in light of an aging population and low birth rate. According to the Pew Research Center, without a steady stream of a total of 18 million immigrants between now and 2035, the share of the U.S. working-age population could decrease to 166 million.5 What repercussions would restrictive immigration policies have on our workforce and economy? A.8. Immigration is an important contributor to the rise in the U.S. population, accounting for roughly one-half of population growth annually. And population growth, in turn, affects the growth rate of the labor force as well as the growth of the overall economy. Thus, from an economic growth standpoint, reduced immigration would result in lower population growth and thus, all else equal, slower trend economic growth. However, immigration policy is not the purview of the Federal Reserve but rather is the responsibility of the Congress and the Administration. RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER FROM JEROME H. POWELL Q.1. Alternative Reference Rate: Some underappreciated work that you have guided at the Federal Reserve is that of the Alternative Reference Rate Committee. Global regulators have acknowledged that at the end of 2021, banks will no longer be required to submit to the panel that determines LIBOR, meaning that the rate could stop publication at that time. LIBOR is currently critical to the smooth functioning of our financial system, as it underlies $200 trillion in notional value, or ten times U.S. GDP, including a sig- nificant amount of floating-rate mortgages. As the FSOC’s annual report highlighted, if LIBOR disappears without a liquid market in the replacement rate, the effects could be catastrophic. Yet a switch to an alternative rate, the secured overnight financing rate, re- quires tremendous collaboration by the private sector and the offi- cial sector and the creation of financial markets that would facili- tate the arbitrage between LIBOR and the secured rate, and the creation of new products in the new secured rate. Do you believe end users will demand products in the new se- cured rate sufficient to build a deep and liquid market in the se- cured rate before the end of 2021, even though first movers in this space are likely to pay a premium for the product before the mar- ket is fully developed? Why? A.1. As you note, the Financial Stability Oversight Council (FSOC) has highlighted the potential risks to U.S. financial stability from the London Interbank Offered Rate (LIBOR) since 2014. These con- cerns led the Federal Reserve to convene the Alternative Reference Rates Committee (or ARRC) at that time. The ARRC is a diverse group of private sector firms and institutions that has widespread support from the U.S. official sector. In addition to the Federal Re- serve Board, the Consumer Financial Protection Bureau, the Com- 5http://www.pewresearch.org/fact-tank/2017/03/08/immigration-projected-to-drive-growth- in-us-working-age-population-through-at-least-2035/ VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00126 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 123 modity Futures Trading Commission (CFTC), the Federal Deposit Insurance Commission (FDIC), the Federal Housing Finance Au- thority, the Federal Reserve Bank of New York, the Office of the Comptroller of the Currency (OCC), the Office of Financial Re- search, the Securities and Exchange Commission (SEC), and the U.S. Treasury Department (U.S. Treasury) all act as ex officio members of the ARRC. The ARRC’s work in identifying the secured overnight financing rate (SOFR) as a recommended alternative to U.S. dollar LIBOR and developing a plan to promote use of SOFR on a voluntary basis has unquestionably been necessary in helping to make sure that the financial stability risks identified by the FSOC do not materialize. I have been greatly encouraged by the response of the private sector since SOFR began publication in April of this year. Even in this short period of time, we have already seen evidence that SOFR can and will be used by a wide range of market participants. The Chicago Mercantile Exchange is offering futures contracts on SOFR, and trading activity has already risen to above 5,000 con- tracts (or about $15 billion) per day with a total open interest of $75 billion. SOFR futures already have far more daily transactions underlying them than LIBOR. In addition, the London Clearing House group has begun offering clearing of SOFR swaps. And im- portantly, we have already seen two recent issuances of debt tied to SOFR. Both of these issuances were met with high demand and were oversubscribed, indicating that there is a robust pmt of the market that recognizes that SOFR instruments have value to them. There are several reasons that I believe we will see liquidity in SOFR instruments continue to grow. First, as a fully transactions- based, International Organization of Securities Commissions com- pliant benchmark based on the overnight U.S. Treasury repo mar- ket—the largest rates market in the world—SOFR really does rep- resent a robust alternative to U.S. dollar LIBOR. Because so many firms are active in the Treasury repo market, they naturally have incentives to trade SOFR instruments. Second, many market par- ticipants have come to realize that the risks the FSOC has pointed to in LIBOR are quite likely to materialize, and I believe they see that it is in their own interest to move away from LIBOR and to- ward SOFR. The ARRC and the official sector will ’need to continue to educate market participants about the risks to LIBOR, and work to make sure that this transition is a smooth one. Q.2. Foreign banks and prudential rules: I noticed that in the sin- gle-counterparty credit limit (SCCL) final rule, the Fed applied lim- itations on domestic bank holding companies that have $250 billion or more in total assets and the intermediate holding companies of foreign banks with at least $50 billion in total assets. And in the recent CCAR results, the Fed exempted three U.S. banks with as- sets between $50 billion and $100 billion, but continued to apply CCAR to the intermediate holding company of one foreign bank that has nearly $900 billion in total assets but only $86 billion in the U.S. Can you describe the philosophy guiding the Fed’s decisions to keep foreign banks’ U.S. holding companies covered by these impor- tant prudential rules? VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00127 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 124 A.2. In 2014, recognizing that the U.S. operations of foreign bank- ing organizations (FBOs) had become more complex, inter- connected, and concentrated, the Board adopted a final rule that established enhanced prudential standards for large U.S. bank holding companies (BHCs) and FBOs to help increase the resiliency of their operations. These standards include liquidity, risk manage- ment and capital, and require a FBO with a significant U.S. pres- ence to establish an intermediate holding company (IHC) over its U.S. subsidiaries to facilitate consistent supervision and regulation of the U.S. operations of the foreign bank. The standards applied to the U.S. operations of FBOs are broadly consistent with the standards applicable to U.S. bank holding companies. However, the standards can also take into account the combined footprint of FBOs’ U.S. operations, including their branches and agencies. Accordingly, the 2018 final rule to implement single-counterparty credit limits (SCCL) for large U.S. bank holding companies tailors the application of SCCL to U.S. IHCs such that U.S. IHCs of simi- lar size to U.S. BHCs covered under the rule are subject to the same SCCL, but the final rule also takes into account the IHC’s role as one portion of a significantly larger banking organization. Similarly, the Board’s annual Comprehensive Capital Analysis and Review (CCAR) applies more stringent standards to an IHC based on whether it is large and complex, meaning it (1) has aver- age total consolidated assets over $250 billion or (2) has average total nonbank assets of $75 billion or more, and (3) is not a U.S. global systemically important firm. The Board monitors the impact of its regulations after implemen- tation to assess whether the regulations continue to function as in- tended. In implementing enhanced prudential standards for FBOs with a large U.S. presence, the Board sought to ensure that FBOs hold capital and liquidity in the United States and have a risk management infrastructure commensurate with the risks in their U.S. operations. In general, FBOs with $50 billion in U.S. sub- sidiary assets are among the largest and most interconnected for- eign banks operating in the United States. As a result of the IHC requirement, these films have become less fragmented, hold capital and liquidity buffers in the United States that align with their U.S. footprint, and operate on more equal regulatory footing with their domestic counterparts. I believe our current IHC framework with the current threshold is working well. Q.3. Volcker Rule: The policy behind the Volcker Rule is to reduce risky activities in banks, in particular high risk proprietary trad- ing. I’ve long been a supporter of the Volcker Rule, and I think this is a worthy goal, as we never want banks to go back to that type of risky trading. The rule aims to achieve this in part by prohib- iting banks from investing in hedge funds and private equity funds. I’ve heard, however, that the current definition has captured in- vestments that seem far removed from the statute’s original con- cern—such as an incubator for women-run businesses—and pro- hibits bank investments in funds where banks are permitted to make the investment directly. The proposed rulemaking seems fo- cused on easing compliance burdens that have been associated with the subjective intent test under the current rule, but it provides lit- tle clarity on the agencies’ thinking on the covered fund side. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00128 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 125 Can you describe how the Federal Reserve is thinking about changes to the covered fund rules? A.3. The Board, along with the OCC, FDIC, CFTC, and SEC (the agencies) adopted regulations to implement section 13 of the BHC Act, the ‘‘Volcker Rule’’, in 2013. These regulations included a defi- nition of ‘‘covered fund’’ that, in the agencies’ view, was consistent with the statutory purpose of the Volcker Rule to limit certain in- vestment activities of banking entities. Subsequently, and based on experience with the Volcker Rule regulations, the agencies identi- fied opportunities for improvement and proposed amendments to the Volcker Rule regulations in June 2018. The proposal requests comment on how to tailor the regulations governing a banking entity’s covered fund activities. For example, the proposal asks whether a different definition of ‘‘covered fund’’ would be appropriate. In addition, the proposal requests comment on potential exemptions for particular types of funds, or funds with particular characteristics. Since proposing the amendments in June, the agencies have held meetings with and received comments from interested patties re- garding the treatment of covered funds. The agencies expect to meet with and receive comments from interested parties through- out the comment period, and will carefully consider each comment to determine whether any changes to the covered fund regulations would be appropriate. RESPONSES TO WRITTEN QUESTIONS OF SENATOR CORTEZ MASTO FROM JEROME H. POWELL Q.1. Home Mortgage Disclosure Act. I remain concerned about dis- crimination in mortgage lending, especially as we no longer have publicly available data on loan quality for 85 percent of the banks and credit unions. This means we need to rely on the staff of regu- lators to ensure banks comply with the Equal Credit Opportunity Act and the Fair Housing Act. How will you make sure that your bank examiners are looking at credit scores, loan-to-value ratios, interest rates, and other indi- cators of loan quality to ensure African Americans, Latinos, and single women are not getting lower quality mortgage loans? A.1. The Federal Reserve’s fair lending supervisory program re- flects our commitment to promoting financial inclusion and ensur- ing that the financial institutions under our jurisdiction fully com- ply with applicable Federal consumer protection laws and regula- tions. For all State member banks, we enforce the Fair Housing Act, which means we can review all Federal Reserve-regulated in- stitutions for potential discrimination in mortgages, including po- tential redlining, pricing, and underwriting discrimination. For State member banks of $10 billion dollars or less in assets, we also enforce the Equal Credit Opportunity Act, which means we can re- view these State member banks for potential discrimination in any credit product. Together, these laws prohibit discrimination on the basis of race, color, national origin, sex, religion, marital status, fa- milial status, age, handicap/disability, receipt of public assistance, and the good faith exercise of rights under the Consumer Credit Protection Act (collectively, the ‘‘prohibited basis’’). VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00129 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 126 We evaluate fair lending risk at every consumer compliance exam based on the risk factors set forth in the interagency fair lending examination procedures. Relevant to an evaluation of loan quality, those procedures include risk factors related to potential discrimination in pricing, underwriting, and steering. With respect to potential discrimination in the pricing or underwriting of mort- gages, if warranted by risk factors, the Federal Reserve will re- quest data beyond the public Home Mortgage Disclosure Act (HMDA) data, including any data related to relevant pricing or un- derwriting criteria, such as applicant interest rates and credit scores. This data can be requested from any Board-supervised insti- tution, including the institutions that were exempted from report- ing additional HMDA data by the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA).1 The analysis then incorporates the additional data to determine whether appli- cants with similar characteristics received different pricing or un- derwriting outcomes on a prohibited basis (for example, on the basis of race), or whether legitimate pricing or underwriting cri- teria can explain the differences. At every examination, the Federal Reserve evaluates whether a lender might be discriminatorily steering consumers towards cer- tain loans. An institution that offers a variety of lending products or product features, either through one channel or through multiple channels, may benefit consumers by offering greater choices and meeting the diverse needs of applicants. Greater product offerings and multiple channels, however, may also create a fair lending risk that applicants will be illegally steered to certain choices based on prohibited characteristics. The distinction between guiding con- sumers toward a specific product or feature and illegal steering centers on whether the institution did so on a prohibited basis, rather than based on an applicant’s needs or other legitimate fac- tors. If warranted by risk factors, the Federal Reserve will request additional data, such as consumers’ credit scores and loan-to-value ratios, to determine that consumers would not have qualified for conventional loans. Q.2. Is it your expectation that the Fed will have the time and re- sources to proactively monitor these banks, without the required reporting in place? A.2. Provisions in the recently enacted bill, EGRRCPA, related to HMDA data collection requirements for certain institutions will not impact the Federal Reserve’s ability to fully evaluate the risk of mortgage pricing or underwriting discrimination. Although not in- cluded in the public HMDA data, if warranted by risk factors, the Federal Reserve will request any data related to relevant pricing and underwriting criteria, such as the interest rate and credit score. The Federal Reserve’s practice of requesting data relevant to pricing and underwriting criteria where warranted by risk factors predates EGRRCPA’s enactment, and the practice will continue. 1See ‘‘Economic Growth, Regulatory Relief, and Consumer Protection Act’’, Public Law 115- 174, S. 2155 §104(a) (May 24, 2018). VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00130 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 127 Q.3. How many additional staff will it take to proactively monitor the more than 5,000 banks now exempted from reporting require- ments? A.3. With respect to HMDA, the Federal Reserve supervises ap- proximately 800 State member banks. Recently enacted EGRRCPA exempts certain institutions from reporting the additional HMDA data fields required by the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act). However, institutions exempted by EGRRCPA that meet HMDA’s data reporting thresh- old2 must continue to report the HMDA data fields that are not the additional fields required by the Dodd–Frank Act. As noted above in response subpart (b), the Federal Reserve’s practice of re- questing data relevant to pricing and underwriting criteria, where warranted by risk factors, predates EGRRCPA’s enactment, and the practice will continue. The Federal Reserve continually evalu- ates its workload and staffing needs to ensure that we are fulfilling our supervisory responsibilities. Q.4. Volcker—Postpone the Deadline for Comment. Congress passed the Volcker Rule to prevent taxpayer backed banks from gambling with insured deposits, destabilizing the financial system and failing or requiring bailouts. Recently, the SEC, CFTC, Federal Reserve, the OCC, and the FDIC have issued a new Volcker Rule proposal. However, I am concerned that regulators have only allowed for a 60-day comment period to respond to a 689 page rule. That rule in- cludes 342 enumerated questions, dozens of additional questions on the costs or benefits of aspects of the proposal, and invitations to comment on numerous technical concepts and provisions. A limited 2 month comment period may not allow for outside groups, aca- demics and researchers the full time needed to analyze the pro- posal. Will you extend the comment period by an additional 90 days? A.4. In early June 2018, the Board of Governors of the Federal Re- serve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Ex- change Commission, and the Commodity Futures Trading Commis- sion (together, the ‘‘agencies’’) proposed revisions to the rules im- plementing section 13 of the Bartle Holding Company Act (12 U.S.C. §1851), also known as the Volcker Rule. The proposal’s com- ment period was for 60 days after publication in the Federal Reg- ister on July 17, 2018. On September 4, 2018, in response to re- quests from commenters, the agencies announced an extension of the comment period for an additional 30 days, until October 17, 2018. The extension will allow interested persons additional time to analyze the proposal and prepare their comments. The agencies will carefully consider all comments in formulating the final rule. Q.5. Wage Stagnation. For the past 8 years, we have added jobs every quarter. However, wages are not going up. In fact, worker 2In general, if a financial institution has assets exceeding $45 million and originated at least 25 closed-end mortgage loans in each of the two preceding calendar years, or originated at least 500 open-end lines of credit in each of the two preceding calendar years, it must meet the HMDA reporting requirements for its asset size. See ‘‘A Guide to HMDA Reporting: Getting it Right!’’, Federal Financial Institutions Examination Council (Eff. Jan. 1, 2018), https:// www.ffiec.gov/Hmda/pdf/2018guide.pdf. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00131 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 128 pay in the second quarter dropped nearly one percent below its first-quarter level, according to the PayScale Index, one measure of worker pay. When accounting for inflation, the drop is even steep- er. Year-over-year, rising prices have eaten up still-modest pay gains for many workers, with the result that real wages fell 1.4 percent from the prior year, according to PayScale. The drop was broad, with 80 percent of industries and two-thirds of metro areas affected. Meanwhile, many corporate profits have never been stronger. Banks are making record profits. Companies spent more than $480 billion buying their own stocks. The increased profits are not going to workers’ salaries. Additionally, productivity has increased by 73.7 percent from 1973 to 2016. Please expand on your views about the connection between wages and productivity. A.5. Over long periods of time, I believe that the best way to get faster sustainable wage growth (adjusted for inflation) is to raise productivity growth. The linkage between real wages and produc- tivity is well-grounded in economic theory and both tended to rise together in the several decades following World War II. However, wage growth and productivity growth do not necessarily track closely over shorter periods, and even over a longer period of time, higher productivity growth does not guarantee a faster rise in real wages, as there are other factors that influence wages as well. This was evident between 1990 and 2010, when real wage growth for the average worker lagged despite a pickup in productivity growth.3 That said, in recent years, both productivity growth and wage growth have been disappointing, and my sense is that efforts to boost productivity growth will be needed to support a faster sus- tained pace of real wage gains. Q.6. At the hearing, you said that investment in education and skills were ‘‘the single best’’ way to increase wages for workers. But many have found that connection to be overstated. For example, Thomas Picketty, author of Capitalism in the 21st Century, wrote in a blogpost:4 ‘‘there’s a lot of hypocrisy’ in the rhetoric of conservatives who condemn inequality while failing to support policies like an increased minimum wage and ramped-up infra- structure spending . . . You’re saying let’s tax the top and invest that money into education for all. [Jeb Bush] is a proponent of school choice, of giving schools vouchers so they can attend public school or private school, whatever they want. Is this a good solution in terms of dealing with what he calls the opportunity gap?’’ Ball asks Piketty. 3This pattern is evident in many other industrialized countries as well. Economists have been actively researching this issue, but thus far have not come to a consensus about the cause. Plau- sible explanations include the rapid advances in information and computing technologies during that period, increased international trade and outsourcing, and increased product market con- centration among firms. But this is clearly an issue that warrants further study. 4Brinker, Luke. ‘‘Thomas Picketty Slams Jeb Bush on Education and Inequality: ‘I Think There’s a Lot of Hypocrisy.’’’ Salon. March 11, 2015. Available at: https://www.salon.com/ 2015/03/11/thomas-piketty-slams-jeb-bush-on-education-and-inequality-i-think-theres-a-lot-of- hypocrisy/. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00132 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 129 ‘‘From what I can see, he doesn’t want to invest more re- sources into education. He just wants more competition . . . there’s limited evidence that this is working. And I think most of all what we need is to put more public re- sources in the education system. Again, if you look at the kind of school, high school, community college that middle social groups in America have access to, this has nothing to do with the very top schools and universities that some other groups have access to,’’ Piketty replies. ‘‘[I]f we want to have more growth in the future and more equitable growth in the future, we need to put more resources in the education available to the bottom 50 percent or 80 percent of America. So it’s not enough just say it, as Jeb Bush seems to be saying, but you need to act on it, and for this you need to invest resources,’’ he says. Asked about claims by Bush and other conservatives that a so called ‘‘skills gap’’ is responsible for the growth in inequality, Piketty dings that narrative as simplistic. ‘‘The minimum wage today is lower than it was 50 years ago, unions are very weak, so you need to increase the minimum wage in this country today. The views that $7 and hour is the most you can pay low-skilled worker in America today . . . I think is just wrong—it was more 50 years ago and there was no more unemployment 50 years ago than there is today. So I think we could increase the minimum wage,’’ Piketty says, adding that the U.S. should also invest in ‘‘high-pro- ductivity jobs that produce more than the minimum wage.’’ Education is important, Piketty acknowledges, but edu- cation alone is not enough to ameliorate inequality. ‘‘You need wage policy and you need education policy,’’ he says. ‘‘And in order to have adequate education policy, you also need a proper tax policy so that you have the proper public resources to invest in these public services. Also you need infrastructure. Many of the public infrastructure in this country are not at the level of what the very developed should have. You cannot say, like many of the Republicans are saying, we can keep cutting tax on these top income groups who have already benefited a lot from growth and globalization over the past 30 years.’’ Data from the Sur- vey of Consumer Finances indicates that, even when ac- counting for educational and racial disparities, black households headed by a college graduate are still less wealthy than less-educated white ones.5 Please provide citations for your argument that education is the main driver for falling wages. How do you respond to analysis from other economists that say other reasons—tax policies, weakening unions, regulations that benefit the financial sector—are a stronger predictor for wage stag- nation? 5Reeves, Richard V., and Katherine Guyot. ‘‘Black Women Are Earning More College De- grees, but That Alone Won’t Close Race Gaps’’. Brookings. December 4, 2017. Available at: https://www.brookings.edu/blog/social-mobility-memos/2017/12/04/black-women-are-earning- more-college-degrees-but-that-alone-wont-close-race-gaps. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00133 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 130 Can you further elaborate on the wage inequities between racial and educational disparities? A.6. I would like to start by noting two good references detailing the important link between education and wages are: The Race Be- tween Education and Technology by Claudia Goldin and Lawrence F. Katz;6 and ‘‘The Polarization of Job Opportunities in the U.S. Labor Market: Implications for Employment and Earnings’’ by David Autor.7 The book by Goldin and Katz traces the coevolution of educational attainment and the wage structure in the United States through the twentieth century. They argue, in particular, that the demand for educated workers outpaced the supply begin- ning in about 1980, and that this supply–demand imbalance re- sulted in a rise in the wage premium for college-educated workers. In addition, both resources note that increases in educational at- tainment have not kept pace with rising educational returns, sug- gesting that the slowing pace of educational attainment has con- tributed to the rising gap between college and high school earnings. And, although the college wage premium has leveled off in recent years, it remains large.8 Of course, education is not the only factor that influences wage growth. For example, the paper by David Autor points out that the rise in the relative earnings of college graduates reflected both ris- ing real earnings for college workers and falling real earnings for noncollege workers. He attributes these trends to the polarization of job growth, with job opportunities concentrated in relatively high-skill, high-wage jobs and low-skill, low-wage jobs, and cites the automation of routine work and the increased globalization of labor markets through trade and outsourcing as the primary influ- ences on this trend. He acknowledges that changes in labor market institutions, in particular, weaker labor unions and a falling real minimum wage, may also play a role but argues that these factors are less important, in part because these wage trends are evident in many industrialized countries. With regard to racial disparities in wages, research by econo- mists at the Federal Reserve Bank of San Francisco shows that Af- rican American men and women earn persistently lower wages compared with their white counterparts and that these gaps cannot be fully explained by differences in age, education, job type, or loca- tion.9 I agree with their conclusion that these disparities are trou- bling and warrant greater attention by policymakers. Q.7. Regulation. Chair Powell, at your nomination hearing, you told me that you supported strong consumer protections. 6Claudia Goldin and Lawrence F. Katz, ‘‘The Race Between Education and Technology’’, Belknap Press, 2010. 7David Autor, ‘‘The Polarization of Job Opportunities in the U.S. Labor Market: Implications for Employment and Earnings’’ Brookings, April 2010, https://www.brookings.edu/wp-content/ uploads/2016/06/04jobslautor.pdf. 8A recent paper by Robert Valletta estimates that the wage premium for a college-educated worker (relative to a high school graduate) rose from about 30 percent in 1980 to 57 percent in 2010 and has leveled off since then. See Robett Valetta, ‘‘Recent Flattening in the Higher Education Wage Premium: Polarization, Skill Downgrading, or Both?’’ Working Paper No. 2016- 17, Federal Reserve Bank of San Francisco, August 2016. 9Mary C. Daly, Bart Hobijn, and Joseph H. Pedtke, ‘‘Disappointing Facts About the Black– White Wage Gap’’, FRBSF Economic Letter No. 2017-26, Federal Reserve Bank of San Fran- cisco. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00134 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 131 Please name at least five issues areas where the Federal Reserve will continue to lead in consumer protection. A.7. The Federal Reserve has a strong commitment to promoting a fair and transparent financial services marketplace. We conduct consumer-focused supervision and enforcement; conduct research and policy analysis; develop and maintain relationships with a broad and diverse set of stakeholders; and work to foster commu- nity development. Our consumer protection efforts include investigating consumer complaints, assuring consumers’ fair and equal access to credit and treatment in financial markets, assessing the trends shaping con- sumers’ financial situations, and offering consumer help via tools and resources developed by Reserve Banks and other agencies. Ex- amples of the range of our consumer protection priorities and ef- forts are described below. As part of our supervisory outreach, our Reserve Banks have var- ious consumer and community advisory councils. Additionally, the Board meets semiannually with its Community Advisory Council (CAC) as well as with a wide range of consumer and community groups throughout the year. The CAC is a diverse group of experts and representatives of consumer and community development orga- nizations and interests. This important line of communication pro- vides the Board with broad perspectives on the economic cir- cumstances and financial services needs of consumers and commu- nities, with a particular focus on the concerns of low- and mod- erate-income populations. With regard to our enforcement of fair lending laws and unfair or deceptive acts or practices (UDAP) laws, our supervisory pro- gram is rigorous and we are clear in our communications with firms about our expectations when we find weakness in their com- pliance management systems or violations of consumer laws. When we find consumer hmm, we make sure that consumers are provided any appropriate restitution, and when the situations warrant, we also impose civil money penalties. Fair lending violations may cause significant consumer harm as well as legal, financial, and reputational risk to the institution. The Federal fair lending laws—the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA)—prohibit discrimination in credit transactions, including transactions related to residential real estate. The ECOA, which is implemented by the Board’s Regu- lation B (12 CFR part 202), prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, includ- ing residential real estate lending and extensions of credit to small businesses, corporations, partnerships, and trusts. Lending acts and practices that are specifically prohibited, permitted, or re- quired are described in the regulation. Official staff interpretations of the regulation are contained in Supplement I to the regulation. The FHA, which is implemented by regulations promulgated by the U.S. Department of Housing and Urban Development,10 prohibits discrimination in all aspects of residential real estate-related transactions. 10See 24 CFR part 100. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00135 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 132 The Board is committed to ensuring that every bank it super- vises complies fully with Federal financial consumer protection laws, including the fair lending laws. A specialized Fair Lending Enforcement Section at the Board works closely with Reserve Bank staff to provide guidance on fair lending matters and to ensure that the fair lending laws are enforced consistently and rigorously throughout the Federal Reserve System (System). Fair lending risk is evaluated at every consumer compliance examination. Addition- ally, examiners may conduct fair lending reviews outside of the usual supervisory cycle, if warranted by elevated risk. Section 5 of the Federal Trade Commission Act (FTC Act) pro- hibits UDAP and applies to all persons engaged in commerce, in- cluding banks, and the law extends to bank arrangements with third parties. The Federal Reserve has the authority to take appro- priate supervisory or enforcement action when unfair or deceptive acts or practices are discovered at institutions under the Federal Reserve’s jurisdiction, regardless of asset size. We apply long- standing standards when weighing the need to take supervisory and enforcement actions and when seeking to ensure that unfair or deceptive practices do not recur. Examples of practices the Federal Reserve has found to be unfair or deceptive include certain prac- tices related to overdrafts and student financial products and serv- ices. With respect to these and other UDAP issues, the Federal Re- serve’s enforcement actions have collectively benefited hundreds of thousands of consumers and provided millions of dollars in restitu- tion. In addition to carrying out enforcement actions, we provide train- ing, direction and support to Reserve Bank examiners in assessing institutions’ compliance with applicable laws and regulations. On the consumer level, the System also has a robust process for responding to consumer complaints about the banks we supervise. We investigate every complaint of an institution under our super- visory jurisdiction and refer them to the appropriate agency if it in- volves an institution that we do not supervise. Reserve Banks must respond in writing in a timely manner. For the financial institutions we regulate, we develop and offer guidance to help reduce risk to consumers that supports our desire to ensure equitable treatment of all consumers, including those in underserved and economically vulnerable populations. We collect and analyze risk data and trends in the financial serv- ices sector affecting consumers and the financial institutions that we supervise, and we identify emerging consumer protection issues and promote compliance by highlighting these areas in publica- tions, webinars, and other outreach. Examples include our recently launched Consumer Compliance Supervision Bulletin, which pro- vides to banks and others high-level summaries of pertinent super- visory observations related to consumer protections, as well as our Consumer Compliance Outlook, a System publication focused on consumer compliance issues, and its companion webinar series, Outlook Live, both of which are targeted to the industry to support banks’ compliance efforts. Another example is our annual Survey of Household Economic Decisions (SHED). The SHED is designed to enhance our under- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00136 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 133 standing of how adults in the United States are faring financially, and the results of the survey are posted on our public website. Other areas include research particularly focused on the housing market, small business access to credit, and rural economic devel- opment issues. Through a number of events and on a variety of matters, we pro- vide outreach to consumer advocacy and community development organizations that outlines the risks in consumer financial product markets. Examples of such programs have focused on auto lending, FinTech/marketplace lending, and student lending. Q.8. Monetary Policy. If the Fed usually cuts the Federal funds rate by 5 percentage points to fight a recession and the neutral rate is around 2.5 percent, what steps can the Federal Reserve cur- rently take to offset a recession?11 Expand the balance sheet by buying treasuries? A.8. The possibility that the Federal funds rate could be con- strained by the effective lower bound in future economic downturns appears larger than in the past because of an apparent decline in the neutral rate of interest in the United States and abroad. Sev- eral developments could have contributed to such a decline, includ- ing slower growth in the working-age populations of many coun- tries, smaller productivity gains in the advanced economies, a de- creased propensity to spend in the wake of the financial crises around the world since the late 1990s, and perhaps a paucity of at- tractive capital projects worldwide. In any case, the Federal Reserve has a number of tools that it can use in the event that the Federal funds rate is constrained by the effective lower bound. One such tool is explicit forward guid- ance about the path of future policy. By announcing that it intends to keep short-term interest rates lower for longer than might have otherwise been expected, the Federal Reserve can put significant downward pressure on longer-term borrowing rates for American families and businesses. Another tool is large-scale asset pur- chases, which can also put downward pressure on longer-term bor- rowing rates and ease financial conditions. These tools have been an important part of the Federal Reserve’s efforts to support eco- nomic recovery over the past decade. Studies have found that these tools eased financial conditions and helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below the Federal Open Market Com- mittee’s (FOMC) 2 percent objective. The Federal Reserve is pre- pared to use its full range of tools if future economic conditions were to warrant a more accommodative monetary policy than can be achieved solely by reducing the Federal funds rate. Q.9. Many Federal Reserve officials—including most recently out- going New York Fed President Bill Dudley—have talked about the need for Congress to beef up fiscal stabilizers that can react auto- matically to a downturn. 11Bosley, Catherine. ‘‘Summers Warns Next U.S. Recession Could Outlast Previous One’’, Bloomberg. February 28, 2018. Available at: https://www.bloomberg.com/news/articles/2018- 02-28/summers-warns-next-u-s-recession-could-outlast-the-previous-one. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00137 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 134 Do you agree that Congress should be working on this? If so, which stabilizers do you think are most effective?12 A.9. The current monetary policy tools available to the Federal Re- serve can provide significant accommodation in the event of an eco- nomic downturn, although we recognize that there are limits stem- ming importantly from the effective lower bound on the nominal Federal funds rate. As a matter of prudent planning, we continue to evaluate potential monetary policy options in advance of an epi- sode in which our primary policy tool is constrained by the effective lower bound. Since monetary policy is not a panacea, counter- cyclical fiscal policy actions are a potentially important tool in ad- dressing a future economic downturn. In particular, automatic fis- cal stabilizers have been and continue to be helpful in providing timely accommodation and thus tempering the extent of a down- turn. A range of fiscal policy tools and approaches could enhance their effectiveness in helping to provide cyclical stability to the economy. However, it is appropriate that the details of fiscal policy changes be left to the Congress and the Administration. Q.10. At your most recent press conference you said—‘‘we can’t be too attached to these unobservable variables.’’ If that’s the case, do you think it is possible that the United States could sustain a long period of unemployment at 3 percent or even lower? Japan’s unem- ployment has fallen to 2.7 percent and Germany is at 3.4 percent. A.10. Monetary policy necessarily involves making judgments about aspects of the economy that cannot be measured directly but instead must be inferred. One of those aspects is the level of the unemployment rate that can be sustained in the longer term with- out generating either upward or downward pressure on inflation. That level is sometimes referred to as the natural rate of unem- ployment. Economic modelers have only a limited ability to esti- mate the natural rate of unemployment at any given moment; moreover, there is every reason to believe that the natural rate can and does change over time. For both of these reasons, policymakers must always be vigilant in looking for evidence that might cause them to revise their existing estimates of parameters such as the natural rate of unemployment. As of today, most estimates of the natural rate of unemployment in the United States range between 4 percent and 5 percent. Other countries will have different rates of unemployment that are sus- tainable in the longer run (sometimes markedly so), depending on the characteristics of the workforces in those countries (such as age and education), the geographic mobility of jobs and workers, and structural labor market policies, to name a few factors. Q.11. At the last hearing you described the risks to the economy as balanced, but it seems like the Fed has much more room to tighten policy—by raising rates and running down the balance sheet—than it does to loosen policy. Doesn’t that change the bal- ance of risks? If you hike interest rates too fast, you have limited tools to address an economic slowdown. If you hike too slowly, you have ample tools to address the overheating. 12‘‘Officials on Record: Automatic Stabilizers’’, Dudley, William C. ‘‘Speech: Important Choices for the Federal Reserve in the Years Ahead’’, The Federal Reserve in the Years Ahead. April 18, 2018. Available at: https://www.newyorkfed.org/newsevents/speeches/2018/dud180418a. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00138 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 135 A.11. The FOMC recognizes that the effective lower bound (ELB) on the Federal funds rate can impose a significant constraint on the conduct of monetary policy. This is one of the reasons that the Committee has normalized the stance of monetary policy at a grad- ual pace during the current economic expansion. That said, the Federal Reserve has other tools at its disposal to provide economic stimulus when the Federal funds rate is constrained by the ELB, including explicit forward guidance about the path of Federal funds rate and large-scale asset purchases. Moreover, with strong labor market conditions, inflation close to 2 percent, and the level of the Federal funds rate at a bit below 2 percent, the risk of returning to the ELB has diminished substantially since earlier in the recov- ery. Overall, the FOMC currently sees the risks to its economic outlook as roughly balanced. History has shown that moving interest rates either too quickly or too slowly can lead to bad economic outcomes. If the FOMC raises interest rates too rapidly, the economy could weaken and in- flation could run persistently below the FOMC’s objective. Con- versely, there are risks associated with raising interest rates too slowly. Waiting too long to remove policy accommodation could cause inflation expectations to begin ratcheting up, driving actual inflation higher and making it harder to control. Moreover, the combination of persistently low interest rates and strong labor market conditions could lead to undesirable increases in leverage and other financial excesses. While the Federal Reserve has tools to address such developments, these circumstances could require the FOMC to raise interest rates rapidly, which could risk dis- rupting financial markets and push the economy into recession. Q.12. Fed Governance, Diversity, and the San Francisco Fed Va- cancy. At your confirmation hearing, you expressed your support for more diversity among the Federal Reserve’s leadership, saying, ‘‘We make better decisions when we have diverse voices around the table, and that’s something we’re very committed to at the Federal Reserve.’’13 You also commented on the role that the Board of Gov- ernors plays in approving new Reserve Bank presidents, and as- sured the Senate Banking Committee that there is always a ‘‘di- verse pool’’ in searching for candidates to fill those positions. How- ever, the December selection of Thomas Barkin as the president of the Richmond Fed gives reason for doubt.14 Press reports note that you were very involved in vetting candidates.15 Then, in April, John Williams was announced as the new New York Fed president. A source close to the process said that the New York Fed search committee just could not find qualified candidates who were interested in this position, even though community 13CNBC. ‘‘Jerome Powell: I’m a big supporter of diversity.’’ November 28, 2017. Available at: https://www.cnbc.com/video/2017/11/28/jerome-powell-im-a-big-supporter-of-diversity.html. 14Sebastian, Shawn. ‘‘Fed Up Blasts Process, Outcome of Richmond Federal Reserve Presi- dential Appointment’’, The Center for Popular Democracy. Available at: https:// populardemocracy.org/news-and-publications/fed-blasts-process-outcome-richmond-federal-re- serve-presidential-appointment. 15Condon, Christopher. ‘‘Fed Documents Show Powell’s Hand in Richmond President Search’’, Bloomberg. July 16, 2018. Available at: https://www.bloomberg.com/news/articles/2018-07-16/ fed-documents-show-powell-s-hand-in-richmond-president-search. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00139 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 136 groups had given a list of qualified and diverse candidates to the New York Fed board in January.16 Can you explain why these candidates were not considered? A.12. It is crucial for us to conduct search processes that are trans- parent and open to public input, and that encourage interest and applications from qualified candidates with as wide a variety of personal and professional backgrounds as possible. The Federal Re- serve System needs such diversity to be fully effective in dis- charging its responsibilities, and we have observed that better deci- sions are made when there are many different perspectives rep- resented around the table. I am firmly committed to conducting each president search in as open a manner as possible. However, I also recognize the importance of maintaining the privacy of can- didates and the confidentiality of the composition of the candidate pool in order to encourage as many qualified individuals to apply as possible. Therefore, it is not appropriate for me to comment on the qualification of individual candidates. During the recent Reserve Bank president searches, the search committees proactively sought out candidates from a variety of sources. More specifically, in addition to engaging the search firm Spencer Stuart, the Federal Reserve Bank of New York (FRBNY) search committee engaged Bridge Partners, which has a specific ex- pertise in the identification of diverse talent. The FRBNY search committee itself also undertook an extensive program of outreach intended to solicit input and views from a range of constituencies across the district: • The search committee sent approximately 400 letters soliciting feedback on the attributes that would enable success in the role of FRBNY president, as well as specific names for consid- eration. • Members of the search committee met with the FRBNY’s standing advisory committees, including the Advisory Council on Small Business and Agriculture, the Community Advisory Group (comprised of nonprofit organizations), the Economic Advisory Panel (comprised of academic economists), and the Upstate New York Regional Advisory Board. • The search committee also held two meetings at the FRBNY with ad hoc groups of invitees, one focused on labor and advo- cacy organizations and the other on business and industry. Out of these large candidate pools, the search committees identi- fied candidates who not only had the desired experiences and key attributes but also confirmed their interests in the president posi- tions. The FRBNY search committee, at the conclusion of its search process, published the process timeline and the characteristics of the candidate pool.17 16Guida, Victoria, and Aubree Eliza Weaver. ‘‘In Defense of the NY Fed Search Committee’’, Politico. March 30, 2018. Available at: https://www.politico.com/newsletters/morning-money/ 2018/03/30/in-defense-of-the-ny-fed-search-committee-154624. Guida, Victoria. ‘‘Warren Leads Crusade for Diversity at Fed’’, Politico. April 2, 2018. Available at: https://www.politico.com/ story/2018/04/02/federal-reserve-diversity-elizabeth-warren-452122. 17For more information about the FRBNY’s president search timeline, see https:// www.newyorkfed.org/aboutthefed/presidential-search-timeline. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00140 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 137 Q.13. Former Honeywell CEO David Cote served as a banker-elect- ed member of the New York Fed board and search committee, but abruptly stepped down in mid-March. We later learned he had re- signed this position to take a job with Goldman Sachs.18 According to the New York Fed, the search committee had already settled on John Williams by the time that Cote resigned from the board. The outgoing New York Fed president was formerly Goldman Sachs’ chief economist, and there have been many reported instances of an overly cozy relationship between the Fed and Goldman Sachs, including tapes that leaked in 2014 showing that the New York Fed was very lenient in supervising Goldman.19 Do you think it is appropriate that one of the people responsible for choosing a top Wall Street regulating position was negotiating a job with Goldman Sachs at the very moment he was making the decision about who the next New York Fed president should be? Does this event raise concerns that the financial industry has too much influence on regional Reserve Banks boards? A.13. The process for selecting a Federal Reserve Bank president is set forth in the Federal Reserve Act. Subject to the approval of the Board of Governors, a Reserve Bank president is appointed by that Bank’s Class Band Class C directors. These are the directors who are not affiliated with banks or other entities supervised by the Federal Reserve. Class A directors, who are bankers, are not involved in the search process. Since 2014, Mr. Cote served on the board of the FRBNY and on the search committee as a Class B director, representing the pub- lic. Mr. Cote brought to the board his background in the manufac- turing and represented the industry while serving as a director. Mr. Cote promptly resigned his position on the FRBNY board of di- rectors, recognizing that pursuing new business opportunities in the banking sector would affect his eligibility to serve as a Class B director.20 Q.14. A recent analysis by the Center for Popular Democracy found that although there has been an increase in the gender and racial diversity of the Federal Reserve Bank’s directors, the Fed is still falling short of true public representativeness.21 Williams’ selection has opened up a vacancy at the San Francisco Federal Reserve Bank. The twelfth Federal Reserve district is the largest and most diverse in the country, including a significant Latino population. Latinos comprise 30 percent of the district. There has never in the Fed’s history been a Latino Federal Open Markets Committee par- ticipant, either as a governor or as a Reserve Bank president. 18Campbell, Dakin. ‘‘Goldman Sacks Teaming up With Former Honeywell CEO Cote To Strike an Unusual Acquisition’’, Business Insider. Accessed July 16, 2018. Available at: http:// www.businessinsider.com/goldman-sachs-and-former-honeywell-ceo-cote-teaming-up-to-buy-an-in- dustrial-company-filing-2018-5. 19Haedtler, Jordan. ‘‘Why Do Former Golden Sachs Bankers Keep Landing Top Slots at the Federal Reserve?’’ The Nation. November 30, 2015. Available at: https://www.thenation.eom/ article/why-do-former-goldman-sachs-bankers-keep-landing-top-slots-at-the-federal-reserve/. Bernstein, Jake. ‘‘The Carmen Segarra Tapes’’, ProPublica. November 17, 2014. Available at: https://www.propublica.org/article/the-carmen-segarra-tapes. 20For more information about our policies governing the directors, see https:// www.federalreserve.gov/aboutthefed/directors/policy-governing-directors.htm. 21Fed Up. ‘‘New Report Analyzes Diversity at the Federal Reserve in 2018’’, The Center for Popular Democracy. February 14, 2018. Available at: https://populardemocracy.org/blog/new- report-analyzes-diversity-federal-reserve-2018. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00141 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 138 Do you think it would be valuable for you and your colleagues to hear the perspective of a Latino FOMC participant? A.14. As I have said, we make better decisions when we have di- verse voices around the table, and that is something we are very committed to at the Federal Reserve. The Federal Reserve seeks di- versity in personal and professional backgrounds to be more effec- tive in discharging its responsibilities. We value a broad represen- tation of perspectives, and are working hard towards greater diver- sity at all levels of the Federal Reserve. Recognizing that the ap- pointment of a Reserve Bank president is, as a legal matter, the responsibility of the Class B and Class C directors who are by defi- nition not affiliated with financial institutions in the district, we at the Board worked closely with the search committee to ensure a strong and transparent process that identified a broad and diverse slate of qualified candidates. As you know, the Federal Reserve Bank of San Francisco (FRBSF) recently selected Mary Daly as its next president. The processes of the FRBSF search committee were fair, transparent, and inclusive.22 The FRBSF search committee included eligible di- rectors from its board who brought diverse backgrounds and expe- riences to the process. Further, the search committee partnered with Diversified Search, the largest female-founded and owned firm that specializes in identifying candidates from diverse backgrounds. The search committee carried out an extensive outreach program, both in person and virtually, with a range of constituencies across the district, to gain their input on the search process, obtain their views on the most important attributes for the Bank president role, and solicit their recommendations of potential candidates. At the conclusion of its search process, the FRBSF published ad- ditional information about the outreach conducted, timeline, and characteristics of the candidate pool. The FRBSF noted that of 283 prospective candidates 33 percent were from a minority back- ground and 33 percent were female. Q.15. Inflation Target. In a paper that was recently presented to Atlanta Fed President Raphael Bostic, economist Dean Baker ar- gued that the Fed should consider removing the shelter component from its core inflation indexes.23 The reason is that higher housing costs, particularly in a handful of metropolitan areas, are signifi- cantly outpacing other measures of inflation—and that these in- creases stem from a lack of supply. Baker further argues that con- tinued interest rate increases from the Fed might have the per- verse effect of sapping housing construction, thereby exacerbating the very problem (rising inflation) that the Fed is trying to address. What do you make of this analysis? A.15. We interpret the Federal Reserve’s price-stability mandate as applying to a broad measure of the price of goods and services pur- chased by consumers. Shelter makes up a large component of con- 22For more information about the San Francisco search, go to: https://www.frbsf.org/our-dis- trict/press/news-releases/2018/mary-c-daly-named-federal-reserve-bank-of-san-francisco-presi- dent-and-chief-executive-officer/?utmlsource=frbsf-home-in-the-news&utmlmedium=frbsf& utmlcampaign=in-the-news. 23Baker, Dean, ‘‘Measuring the Inflation Rate: Is Housing Different?’’ Center for Economic and Policy Research. June 2018. Available at: http://cepr.net/publications/reports/measuring- the-inflation-rate-is-housing-different. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00142 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 139 sumers’ expenditures, and a price index that excludes shelter would provide a highly incomplete measure of the cost of living. To be sure, because monetary policymakers need to be forward looking in setting policy, we also pay attention to less-comprehen- sive inflation measures to help gauge whether a particular inflation movement is likely to persist. For example, we examine price in- dexes excluding food and energy items, as food and energy prices often exhibit large transitory movements. But idiosyncratic price movements are by no means limited to food and energy, and they could well occur in shelter prices at times; we need to be attentive to whether such movements might be providing a misleading signal about inflation’s likely future course. My fellow policymakers and I will continue to factor such judgments into our analyses, even as we remember that overall consumer price inflation must be the ul- timate focus of our policy. Q.16. Immigration. Neel Kashkari, the chief of the Minneapolis Fed, stated that immigration has a net benefit on economic growth. He said slowing down immigration may slow down job growth and the U.S. economy as a whole. Do you agree with President Kashkari? A.16. Immigration is an important contributor to the rise in the U.S. population, accounting for roughly one-half of population growth annually. And population growth, in turn, affects the growth rate of the labor force as well as the growth of the overall economy. Thus, from an economic growth standpoint, reduced im- migration would result in lower population growth and thus, all else equal, slower trend economic growth. However, as you know, immigration policy is for Congress and the Administration to de- cide. Q.17. SIFI Designation. As a voting member of FSOC, you and your fellow members are tasked with the mission of identifying and responding to risks that threaten the financial stability of the United States, particularly in the shadowy nonbank ecosystem that required numerous massive bailouts following the 2008 financial crisis. Despite the large number of bail-outs conferred, only four nonbanks were designated as systematically significant by the FSOC. As you considering whether to reduce monitoring and oversight of one of those institutions? What about the financial state or inherent systemic risk of large nonbank institutions has changed since FSOC made the consider- ations that warrants removing any enhanced prudential oversight? A.17. The financial crisis showed that the distress of large and sys- temic nonbank financial companies could imperil the financial sta- bility of the United States, ultimately putting the American econ- omy at risk. The Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act) gave regulators new tools to ad- dress this problem, including authorizing the Financial Stability Oversight Council (FSOC) to determine that a nonbank financial company’s material financial distress would threaten the financial stability of the United States. If such a determination is made, such firms are then subject to supervision by the Federal Reserve Board (Board). The Dodd–Frank Act authorizes the Board, in con- VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00143 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 140 sultation with the FSOC, to establish enhanced prudential require- ments and to supervise nonbank financial companies that have been designated as systemically important. Further, the Dodd– Frank Act requires the FSOC to reevaluate each determination of a nonbank financial institution as systemically important on at least an annual basis. The FSOC is also responsible for making the determination to retain or rescind the designation of a nonbank fi- nancial institution. Financial vulnerabilities, such as high leverage levels and matu- rity mismatches between assets and liabilities, are not at the ele- vated levels they were prior to the crisis. Regulators have devel- oped a deeper understanding of the ways in which nonbank finan- cial institutions differ from banks, particularly in terms of their vulnerability to runs and the potential systemic impact this may have on the U.S. financial system. Further, several nonbank finan- cial institutions have made significant changes to the organiza- tional structure of their firms as well as the markets that they par- ticipate in, which has further reduced their overall risk to the U.S. financial system. However, the regulatory community has learned from the experi- ence of the financial crisis that it is important to focus on potential regulatory gaps and to deal with vulnerabilities that may build in nonbank financial institutions before the risks become material. In this context, it is important to continue to monitor large nonbank financial firms to ensure that, should they encounter distress, the functioning of the broader economy is not threatened. Finally, the possibility of de-designation provides an incentive for designated firms to significantly reduce their systemic footprint. Q.18. Stock Buybacks. The Fed’s 2018 CCAR cycle allowed the 22 largest banks to payout $170 billion in dividends and buybacks, around a quarter more than 2017. Banks subject to the CCAR proc- ess are likewise paying out close to 102 percent in buybacks and dividends as a percentage of forecasted earnings.24 In the wake of the Federal Reserve’s annual stress testing, Wells Fargo announced plans to buy back up to $24.5 billion in stock, and boost its quarterly dividend. Twenty-eight other firms were also al- lowed to proceed with additional proposals to boost stock buybacks and dividends.25 In your testimony before the Committee, you noted that invest- ments in training and education were ‘‘the single best thing we can do to have a productive workforce.’’ What does research suggest about whether dividends and buybacks raise wages for American workers? Does the Fed have any researching suggesting the impact on eco- nomic growth if a larger percentage of bank earnings instead went to raise wages of nonmanagerial and/or frontline bank workers? A.18. Productivity growth is a key determinant of wage growth, and investments in new capital equipment or innovative tech- 24Larkin, Michael. ‘‘All Banks Clear Stress Test—But This Big Name’s Payout Plan at Risk’’, Investor’s Business Daily. June 21, 2018. Available at: https://www.investors.com/news/stress- test-results-federal-reserve-bank-dividends-buybacks//. 25Bloomberg. ‘‘Wells Fargo Plans $24.5 billion in Stock Buybacks After Passing Fed Stress Test’’. Los Angeles Times. June 28, 2018. Available at: http://www.latimes.com/business/la-fi- wells-fargo-stock-buyback-20180628-story.html. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00144 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 141 nologies are important factors for improving productivity growth. Similarly, increased worker compensation can be a factor in en- couraging individuals to join or remain in the labor force and to de- velop new skills, which can further increase productivity and wage growth. However, comparing the economic effects of these uses of a company’s earnings to the eventual economic effects of stock buybacks is difficult because we do not know where the gains from buybacks will ultimately turn up. In particular, when a company buys back its shares or pays higher dividends, the resources do not disappear. Rather, they are redistributed to other uses in the econ- omy. For instance, shareholders may decide to invest the windfall in another company, which may in turn make productivity-enhanc- ing investments. Or they may decide to spend the windfall on goods and services that are produced by other companies, who may in turn hire new workers. In these ways, stock repurchases would also be likely to boost economic growth. Ultimately, companies themselves are the best judges of what to do with their profits, whether it is to invest in their business or increase returns to shareholders through dividends or share buybacks. RESPONSES TO WRITTEN QUESTIONS OF SENATOR JONES FROM JEROME H. POWELL Q.1. In the Federal Reserve’s 2018 Report on the Economic Well- Being of U.S. Households, the report finds that 40 percent of Amer- icans do not have the sources to cover an unexpected $400 expense. While the number of Americans responding in this manner has shrunk since 2013, as noted in the report, it is still an alarmingly high number. The report notes that the most common response among those who could not cover an expense is to place the purchase on a credit card. Are there broader economic implications of such a reliance on po- tentially high-priced consumer credit? A.1. According to the survey, conducted in the fourth quarter of 2017, 18 percent of U.S. adults report that they would pay a hypo- thetical $400 emergency expense with a credit card that they then pay off over time.1 In the initial survey in 2013, this fraction was 17 percent. The fraction of adults who said they would not be able to meet a $400 expense by any means declined to 12 percent in 2017 from 19 percent in 2013. Broader implications of such responses are difficult to gauge. The costs of financing such an expense would add financial burden on these households, relative to paying in cash. However, for some households, such credit access may act as a relief valve of sorts, al- lowing them to meet the emergency or avoiding even costlier forms of credit such as payday loans. Q.2. Does the Federal Reserve have further context on this re- sponse—how does the number of Americans unable to cover a $400 expense compare to previous decades, or to other advanced econo- mies? 1For the survey and report, see the Federal Reserve Board’s Survey of Household Economics and Decision Making at www.federalreserve.gov/consumerscommunities/shed.htm. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00145 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 142 A.2. The Federal Reserve first asked how individuals would handle a $400 unexpected expense in 2013. While we do not have an exact comparison in prior decades or in other countries, the Federal Re- serve Board’s triennial Survey of Consumer Finances (SCP) reports that the share of households with easily accessible savings remains low and has changed little in recent decades.2 Liquid savings, such as cash, checking or saving accounts, are the least costly and easi- est assets to use for unexpected expenses. The 2016 SCP reports that nearly half of all families did not have $3,000 in liquid sav- ings, almost the same fraction since 1989 in inflation-adjusted terms. Q.3. Does this inability to cover expenses increase dramatically across certain groups for example, seniors, young people, or minori- ties? A.3. Yes, financial security and the ability to cover expenses, dif- fers across demographic groups. As one example, in 2017, one-quar- ter of white adults without education beyond a high school degree did not expect to pay their current month’s bills in full. Among Af- rican Americans and Hispanics with the same education level, that fraction was 41 percent and 35 percent respectively. Financial security is more common with more education, but a gap by race and ethnicity remains. As a second example, only half of young adults (under the age of 30) would use cash or its equiva- lent to cover an unexpected $400 expense, versus 57 percent of middle-aged adults (ages 30 to 64) and 71 percent of seniors (age 65 and older). Even with such differences by age, race, and edu- cation, the economic recovery has improved the finances across many groups. Q.4. I am concerned that for Americans that live paycheck to pay- check, the United States’ payment system can, at times, fall short. In particular, I believe there is great need for faster payments, in- cluding quicker access to consumer funds after deposit. When con- sumers do not access to their own funds, they often resort to and rely on high-cost products that are outside of the traditional bank- ing system. The Federal Reserve has acknowledged the need to help foster a faster payments system with its work and creation of the Faster Payments Task Force. What are the next steps and future prior- ities for the Task Force? A.4. In July 2017, the Faster Payments Task Force (FPTF) con- cluded its work upon release of its final report. The FPTF’s Final Report reflected the task force’s perspectives on challenges and op- portunities with implementing faster payments in the United States, outlined its recommendations for next steps, and included the proposals and assessments for the 16 participants that opted to be included in the final report.3 The FPTF recommendations identified the need for ongoing industry collaboration to address in- frastructure gaps; to develop models for governance, rules, and 2For more information, see reports and research on the Federal Reserve Board’s Survey of Consumer Finance at www.federalreserve.gov/econres/scfindex.htm. 3Faster Payments Task Force, ‘‘Final Report Part One: The Faster Payments Task Force Ap- proach’’, January 2017, and ‘‘Final Report Part Two: A Call To Action’’, July 2017. Available at https://fasterpaymentstaskforce.org/. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00146 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 143 standards; and to consider actions and investments that will con- tribute to a healthy and sustainable payments ecosystem. A num- ber of recommendations called for Federal Reserve support to facili- tate this ongoing collaboration. Following up on the work of the FPTF and other efforts to ad- vance the Federal Reserve’s desired outcomes (focused on speed, se- curity, efficiency, international payments, and collaboration) for the payment system, the Federal Reserve published, in September 2017, a paper presenting refreshed strategies and tactics that the Federal Reserve is employing in collaboration with payment system stakeholders.4 The Federal Reserve kicked off these refreshed strategies and tactics in the summer of 2017, by facilitating the industry’s work to address the FPTF recommendations related to governance, direc- tories, rules, standards, and regulations. In addition, consistent with the FPTF recommendations, the Federal Reserve has been as- sessing the needs and gaps to enabling 24x7x365 settlement in support of a future ubiquitous real-time retail payments environ- ment. Further, the Federal Reserve has started to explore and assess the need, if any, for any other operational roles to support ubiq- uitous, real-time retail payments. These efforts are being pursued in alignment with Federal Reserve’s longstanding principles and criteria for the provision of payment services. Q.5. As you know, new accounting standards, based on a ‘‘current expected credit loss’’ (CECL) model, developed by the Financial Ac- counting Standards Board (FASB) will go into effect in 2020. While the new accounting standards underwent multiple years of study, the implementation of these standards will result in one of the larger changes to banking accounting in recent memory. The CECL standard is likely to affect bank capital in uncertain and potentially volatile ways, especially as banks begin the transi- tion process to this new accounting standard. Did FASB consult with the Federal Reserve for how these changes might impact bank capital? A.5. The Federal Reserve Board (Board) along with the other U.S. Federal financial institution regulatory agencies have supported the Financial Accounting Standards Board’s (FASB) efforts to im- prove the accounting for credit losses and provide financial state- ment users with more decision-useful information about the ex- pected credits losses on loans and certain other financial instru- ments. Throughout the development of the current expected credit loss (CECL), the FASB conducted extensive outreach with a diverse group of stakeholders, including the Federal Reserve System. Stakeholders provided input and feedback through the public com- ment letters and participation in public forums. The FASB did not 4The desired outcomes are outlined in the Federal Reserve System’s ‘‘Strategies for Improving the U.S. Payment System’’, January 26, 2015. Available at https:// fedpaymentsimprovement.org/wp-content/uploads/strategies-improving-us-payment-system.pdf. The refreshed strategies and tactics are outlined in the Federal Reserve System’s ‘‘Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the Payments Improve- ment Journey’’, September 6, 2017. Available at https://fedpaymentsimprovement.org/wp-con- tent/uploads/next-step-payments-journey.pdf. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00147 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 144 specifically consult the Board regarding CECL’s impact to bank capital since their mandate is to establish and improve financial accounting and reporting standards to provide decision-useful infor- mation to investors and other users of financial reports. In response to CECL, the Board, with the Office of the Comp- troller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) (together, ‘‘the agencies’’), recently issued a joint proposal that would address the forthcoming changes. In par- ticular, the proposal would provide firms the option to phase in the day-one regulatory capital effects of CECL over a 3-year period. The agencies intend for this transition provision to address films’ challenges in capital planning for CECL implementation, particu- larly due to the uncertainty of economic conditions at the time a film adopts CECL. The agencies are currently reviewing comments to the proposal in preparation for finalizing it. In addition, the agencies will con- tinue to monitor the effects of CECL implementation on regulatory capital and bank lending practices to help determine whether any further changes to the capital rules are warranted. Q.6. Is the Federal Reserve taking into these rule changes as it continues to implement capital rules created by the Dodd–Frank fi- nancial reform law? A.6. The Board is indeed taking into consideration the impact of CECL in connection with the Board’s ongoing regulatory and su- pervisory functions. For example, the agencies, earlier this year issued a joint proposal entitled Implementation and Transition of the Current Expected Credit Losses Methodology for Allowances and Related Adjustments to the Regulatory Capital Rules and Con- forming Amendments to Other Regulations.5 In the joint proposal, the agencies proposed to amend the regulatory capital rules of the agencies to address changes to U.S. generally accepted accounting principles (GAAP) resulting from the FASB’s issuance of CECL. The proposal would provide firms subject to the capital rules with the option to phase in, over a 3-year period, the day-one adverse regulatory capital effects of CECL that may result from the adop- tion of the new accounting standard. This transition period is in- tended to address the potential challenges in planning for CECL implementation, including the uncertainty of economic conditions at the time that a firm adopts CECL. In addition, the proposal identifies certain credit loss allowances under the new accounting standard that would be eligible for inclusion in regulatory capital. The agencies are currently reviewing comments received from the public on the proposal. The Board will continue to monitor the effects of CECL implementation on firms supervised by the Board and on the U.S. financial system. Q.7. As the CECL requirements go into effect in 2020, the first tests of how they impact bank capital may come during annual CCAR process. Will the Federal Reserve be taking into account these rule changes as it undertakes the 2019 and 2020 CCAR process? 583 Federal Register 22312 (May 14, 2018). VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00148 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 145 A.7. In May 2018, the Board published a joint notice of proposed rulemaking with the OCC and FDIC to address changes to U.S. GAAP associated with CECL, issued by FASB in June 2016. Under the proposal, the Board would not incorporate CECL into the su- pervisory stress tests, and would not require a firm to incorporate CECL into its stress tests, until the 2020 cycle. If a banking orga- nization were to adopt CECL for the first time in 2021, it would not be required to include provisioning for credit losses under the new standard until the 2021 stress test cycle. This proposal avoids ‘‘pulling forward’’ the effect of CECL, by aligning the dates that firms are expected to include CECL in their comprehensive capital analysis and review projections with the ac- tual date of implementation for those firms implementing in 2020 and 2021. In advance of CECL implementation, the Federal Reserve is con- sidering feedback received during outreach discussions with indus- try representatives, developing approaches for incorporating provi- sion for credit losses in its supervisory models, and preparing for parallel testing of those models. VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00149 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON 146 ADDITIONALMATERIALSUPPLIEDFORTHERECORD MONETARY POLICY REPORT TO THE CONGRESS DATED JULY 13, 2018 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00150 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.10081717 147 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00151 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.20081717 T LETIER OF RANSMITIAL BOARDO f GOVER~ORS Of TilE FEDERAL RE SI:RVE Sl'STEM Washington, O.C, July 13,2018 THEP REStO£~• Of TilE SeN,m THE SPEAKER OF THE HollSE OF REPRESENTATIVES The Board of Governors is pleased to submit its Monet(lr)' Policy Repqtt pursuant to section 28 of the Federal Resen·e Act. Sincerely. Jerome H. P01vell, Chairman 148 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00152 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.30081717 STATEMENT ON LONGER-RUN GOALS AND MONETARY Poucv STRATEGY Adopted ~ffectiv~ January 24, 2012; as amended effeclile /anuary 30, 2018 The Federnl Open Market Committee (FOMC) is firmly committed to fulfilling its statutory mandate from the Congress of promoting maximum employment, stable prices, and moderate long-term interest rates The Committee seeks !Oe xplain its monetary policy decisions to the public as clearly as possible. Such clarity facilitates well-informed decisionmaking by households and businesses, r<'duces economic and financialuncertaint)', incre~ses the elfectil'eness of monetary policy, and enhances transparency and accountability, which are essential in a democr.uic society. Inflation. employment, and long-term interest rnte$ fluctuate o1·er time in response to economic and financial disturbances Moreover, monetary policy actions tend to influence economic activity and prices with a Jag. Therefore. the Committee's policy decisions reflect its longer-run goals, its medium termo utlook, and its assessments of the balance of risks. including risks to the financial system that could impede the attainment of the Committee's goals The inflation rate 01·er the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committeereaftirms its judgment that infiation at the rate of 2 percent, as measured by the annual change in the price index for personal consumption expenditures is most consistent o1·er the longer run 11~th the Federal Reserve's Statutory mandate. The Committee would be concerned if inflation were nmning persistently above or below this objective. Communicating this symmetric inflation goal clearly to the public helps keep longer-term inflatione xpectations firmly anchored, thereby fostering price stability and moderate long-term interest rates and enhancing the Committee's ability to promote maximum employment in the face of significant economic disturbances Tile maximum level of employment is largely determined by nonmonetary factors that aft'ectthc structure and dynamics of the labor market. These factors may change owr time and may not be dir<'Ctly measurable. Consequently, it would not be appropriate to specify a fixed goal for employment; rather, the Committee's policy decisions must be informed by assessments of the maximum level of employment. recoguizing that such assessments are n«essarily uncertain and subject to revision. The Committee considers a wide range of indicators in making these assessment~ Information about Committee participants' estimates of the longer-run normal rntes of output growth and unemployment is published four times per year in the FOMC's Summar)• of Economic Projections. For example, in the most recent projections. the median of FOMC participants' estimates of the longer-run normal rate of unemployment was 4.6 percent. In setting monetary policy. the Committee seeks to mitigate de1~ations of inflation from its longer-run goal and de1•iations of employment from the Committee's assessments of its maximum level. TI!ese objectil'es 3re generally complementar)'. Howel'er, under circumstances in which the Commiuee judges that the objeeti1oes are not complementary. it follows a balanced approach in promoting them. taking into account the magnitude of the deviations and the potentiallyd ift'erent time horizons 01•er which empiO}~nent and inflation are projected to return to levels judged consistent with its mandate. The Committee intends to reaftirm these principles and to make adjustments as appropriate at its annual organizational meeting each January. 149 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00153 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.40081717 CONTENTS Summary ..•.••.•.....•...........•..•........•.......•..•• 1 Economic and Financial Developments ......................................... 1 Monetary Policy . . ............... . Special Topics. .... _. . . . .. ............. 2 Part 1: Recent Economic and Financial Developments ................ 5 Domestic Developments. . . . . . . . . . . . . . . 5 Financial Developments...... . . .. .. .. . • . .. ............ 23 International Developments ................................................. 30 Part 2: Monetary Policy ............•..•......................• 35 Part 3: Summary of Economic Projections ......................... 47 The Outlook for Economic Activity.. . .. • . .. .. .. .. . • . .. . • .. . .. . . . . 48 The Outlook for Inflation ......................................... 50 Appropriate Monetary Policy ................................................ 51 Uncertainty and Risk~.. . ............................................ 51 Abbreviations .............................................. 63 List of Boxes The labor Force Participation Rate for Prime-Age Individuals... . . . . . . . • . . . . • . . . 8 The Recent Rise in Oil Prices . . . . . . . . . . . . . . . . . . . . . . ..................... 16 Developments Related to financial Stability. . . . . . . . . . . . .. 26 Complexities of •\\onetary Policy Rules.. . . . 37 Interest on Reserves and Its Importance for Monetary Policy. . . . . ...•....•....•..... 44 forecast Uncertainty_. . . . . . . . . . . . . . 62 Non: This rtporl refle<ls information thai was publicly available as of noon EDT on july 12, 2018. Unlessotherwise~Ated, thetinleseriesinthe figures extend through. ford.>ilrd.>t.l,/uly II, 2018; formonthlyd.>t.l. June 2018; and. for quarterly dat.l. 2018:QI.In bar charts. except as noted. the change for a gi1~n period is Aleasured to i~ final quartet from the final quarter oflhe pre<eding period. ~=orr!pl'SI6¥1dl4,n.:«'ch.Jil.he$.\P>OOII'dbandlflt0ow~s..nloln6.'-:t;«tpcoductsdS.Sf>OoN~~llC<~ndbf~ai~IA'SM!d fl>,•b<toli<<•sollc•.,.brd<llo.«i.Ccp,~ONII~IPI)o.lcn<>Wct!llC.•<l'lslcoci~IPC!cb.l....t'eti:s"';t-.AII~""""'­ ~~~nd'or~'ingiB~<.fv;lCtocinp.ll'tMtprohl>ilednittloul~<.li:wl~dS&POow~~ltC.Forfi'IOo't ~on-nrofs.\POowkww:ilndicflllC'$inclktsplt.as.e\~'h'"W.spd;A:etn.SSM~~·€'Jcd~dSund.Nd&fbor'sr~ I<M«>UC.">dD>w-~••..,;;,o«tv-ciO..-T•-Hcl6ni>UC.""-'"'!.!PO...-I""'"UC.D>w_T_ ~UC.thtu.-ifii'ICI:tsi'IOI'thtifi!Wd~li«nsmrrw~Mf)'«P~ionaY>:A~r.l'*-~«-.i«lasiO!ht~·d'.vrt.'~kl XW:Uf~l(~lflt~~CC~S«tord\Mit~IIOrtptt'Sti'C..-ndnei:her~f>Oo<n~lndic~llC.I)ro!.v~lr~~ llC.I.hl:ir~il:tsncw~thitd!Nit)'lic~~ll~~.!nylihl~b.lny~~orif(~d¥Jy~orr:ht'd$itd;ldPc;lt/ll.'c~ falisJ.n'Ailllhtbc».'hrrolMRfsmt'SM'Idlt'S~tb.\~A:IIq-,•nottttwt~DTCCSol~llCI"'i)fiiJfoii:u~WII bl-~iOI'o~t~t·ft!OtSOt~iti¥1)'0TCC~I'Icludtdin~p.blic¥oiol\.~d~\"<IV!t~nd.in~f'.tte.W!IOTCCc:r~d .,,.....,t>."""'"'''Y~""-.,.'""""""'~~--1<!>1""-«"""'"'""os""'"'""'""""cl>. ti'Dig~.u'ldopp:ttlric')'(0>6tin~v.1tttlhis~iaca 150 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00154 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.50081717 SuMMARY Economic activity increased a1 a solid pace a si1.able increase in consumer energy prices. over 1h e firs I half of 20 IS. and 1h e labor The 12-monlh measure of in8a1ion thai market has cominued 10 strengthen. In8a1ion excludes food and energy items (so-called core has moved up, and in May, Ih e mosl recent inflation). which historically has been a beuer period for which data are a1-ailable. inflation indicator of where overall inflation will be in measured on a 12-monlh basis was a linle the fmure than the Iota! figure, was 2 percent above the Federal Open Markel Commiuee's in May. This reading was '/:percentage point (FOMC) longer-mn object h-e of 2 pen:enl, above where il had been 12 momhs earlier. as boosted by a sizable increase in energy prices. the unusually low readings from last year were In Ih is economic em;ronment the Commiuee not repealed. Measures of longer-run inflation judged thai currem and prospective economic expectations hal'e been generally stable. conditions called for a further gradual removal of monetary policy accommodation. In line Economic growth. Real gross domestic product with that judgment, the FOMC raised the (GOP) is reponed 10 ha1-e increased at an 1arge1 for the federal funds rale 111;ce in the annual tale of 2 percent in the first quarter first half of 2018, bringing i11o a range of of 2018, and recent indicators suggest thai 1% 10 2 pe~ttnt. economic growth stepped up in the second quaner. Gains inc onsumer spending slowed Economic and Financial early in the year. btlllhey rebounded in Developments the spring. supported by strong job gains, nxenl and pas! increases in household The labor market. The labor market has weahh, fal'orable consumer sentiment and continued 10 s1rengthe11. Over the first higher disposable income due in par110 the six momhs of 2018, payrolls increased an implementation of 1he Tax OtiSa nd Jobs Act average of 215,000 per month, which is Business im'eSimenl growth has remained somewhat above the a1-erage pace of 180.000 robust, and indexes of business sentiment hai'C per month in 2017 and is considerably faster been strong. Foreign economic growth has than whal is needed. on average. 10 provide remained solid, and nel ex pons had a roughly jobs for new em ranis imo Ih e labor force. neutral elfecl on real U.S. GOP groWih in the The unempi0)1nenl ra[e edged down from first quaner. However, acti,;ly in the housing 4.1 pe~ttnl in December 10 4.0 percem in June. market has leveled otr this year. which is about Y, percentage point below the median of FOMC parlicipanls' estimates of Financial conditions. Domestic financial its longer-run normal Im i. Other measures conditions for businesses and households of labor milization were consis1e111 with a hal'e generally continued 10 support economic tight labor market However. hourly labor gro111h. After rising steadily through 2017, compensation gro111h l1as been moderate. broad measures of equity prices are modeslly likely held down in pari by the weak pace of higher. on balance. from their levels allh e end productivity growth in recent years. of last year amid some bouts of heightened volatility in financial market~ While long Inflation. Consumer price inflation, as term Treasury )ields, mortgage rates, and measured by the 12-monlh pen:entagechange yields on corporate bonds hal'e risen so far in the price index for personal consumption this year, longer-term interest rates remain expenditures. n101'ed up from a linle below low by historical standard~ and corporate the FOMC's objective of 2 percent a11heend bond issuance has cominued a1 a moderate of last year to 2.3 percent in May. boosted by pace. Moreover, mos11ypes of consumer loans 151 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00155 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.60081717 2 SUMI\1\RY remained 11idely al'<lilable for hoLLSeholds 11ith accommodatil'e. thereby supporting mong strong crcditwonhiness. and credit provided by labor market conditions and a sustained return commercial banks continued to expand. The to 2 percent inflation. foreign exchange value of the U.S. dollar has appredated somewhat a,o:~instthecurrencies The FOMCexpects lhat further gradual of our trading partners this year, but it increases in the target range for the federal remains below its le1<el at the start of 2017. funds rate will be consistent 111th a sustained Foreign financial conditions remain generally expansion of economic acti1•ity. strong labor supportiw of growth despite recent increases market conditions. and inflation near the in financial stn.'SS in several emerging market Committee·s S)1nmetric 2 percent objectil<e economies over the medium 1erm. Consistent with this outlook, in the most recent Summary of Financial stabilit)'· The U.S. financial system Economic Projections (SEP). which was remains substantially more resilient than compiled at the time of the June FOMC during the decade before the financial crisis. meeting, the median of participants" Asset valuations continue to be elevmed assessments for the appropriate Jerel for despite declines since the end of2017 in the the federal funds rate rises gradt1ally over forward price-to-eamings ratio of equities and the period from 2018to 2020 and stands the prices of corporate bonds. In the pril'ate somewhat above lhe median projection for nonfinancial sector. borrowing among highly its longer-run level by the end of 2019 and le1<ered and lower-rated businesses remains through 2020. (The June SEP is presented elevated, although the ratio of household in Part 3 of this report.) Howe1·er. as the debt to disposable income continues to be Committee has continued to emphasize, the moderate. Vulnerabilities stemming from timing and size of fmure adjustments to the le1•erage in the financial sector remain low, target range for the federal funds rate will reflecting in part strong capital positions depend on the Committee ·s assessment of at banks. whereas some measures of hedge realized and expected economic conditions fund leverage ha1<e increased. Vulnerabilities relative to its maximum-employment objectil'e associated with maturity and liquidity and its symmetric 2 percent inflation objective. transformation among banks, insurance companies money market mutual funds, Balance sheet policy. The FOMC has and asset managers remain below levels that continued to implement the balance sheet generally prevailed before 2008. normalization proo,ram described in the Addendum to the Policy Normalization Principles and Plans that the Committee issued Monetary Policy about a year ago. Specifically. the FOMC has Interest rate policy. Over 1he first half of2018, been reducing its holdings ofTreasury and the FOMC has continued to gradually increase agency securities by decreasing. in a gradual the targ~t range for the fedml funds rat~. and predictable manner, the reill\'eStment Specifically, the Committee decided to raise of principal payments it recei1<es from these the target range for the federal funds rate at securities its meetings in March and June. bringing it to the current range of I~ to 2 percent. The Special Topics decisions to increase the target range for the federal funds rate reflected the economy"s Prime-age labor forct participation. Labor continued progress toward the Committee"s force participation rates (LFPRs) for men and objectil<es of maximum employment and price women beh,·een 25 and 54 years old- that is. s1ability. E1<en with these policy rate increases. the share of these indi1iduals either working the stance of monetary policy remains or actively seeking work- trended lower 152 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00156 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.70081717 MONETARY I'OIICY Rri'ORT: lUll' 2013 3 between 2000 and 2013. Those trends likely when deciding on a policy stance they deem reflect numerous factors, including a long-run most likely to foster the FOMCs statutory decline in the demand for workers with lower mandate of ma.,imum employment and stable levels of education and an increase in the prices. They also routinely consult monetary share of the population with some form of policy rules that connect prescriptions for the disability. By contrast, the prime-age LFPR policy interest rate with variables associated has increased notably since 2013, and the with the dual mandate. The use of such rules share of nonparticipants who report wanting requires. among other considerations. careful a job remains above pre-recession levels. Thus. judgments about the choice and measurement some continuation of the recent increase in of the inputs into the rules such as estimates the prime-age LFPR may be possible if labor of the neutral interest rate, which are highly demand remains strong. (See the box '"The uncertain. (See the box "Complexities of Labor Force Panicipation Rate for Prime-Age Monetary Policy Rules" in Part 2.) Individuals'"i n Part 1.) Interest on resmes. The payment of interest Oil prices. Oil prices ha1•e climbed rapidly on reserves- balances held by banks in over the past year, reflecting both supply and their accounts at the Federal Reserve-is an demand factors. Although higher oil prices essential tool for implementing monetary are likely to restrain household consumption policy because it helps anchor the federal in the United States, much of the negative funds rate within the FOMC"s target range. eft"ect on GDP from lo\\~r consumer spending This tool has permitted the FOMC to achiere is likely to be offset by increased production a gradual increase in the federal funds rate in and investment in the growing U.S. oil sector. combination with a gradual reduction in the Consequently, higher oil prices now imply Fed's securities holdings and in the supply much less of a net overall drag on the economy of reserve balances. The FOMC judged that than they did in the past, although they will remo1~ng monetary policy accommodation continue to have important distributional through first raising the federal funds rate effects. The negative ciTect of upward moves and then beginning to shrink the balance in oil prices should get smaller still as U.S. oil sheet would best contribute to achie1•ing and production gro11~ and net oil imports decline maintaining maximum employment and further. (See the box ''The Recent Rise in Oil price stability without causing dislocations in Prices" in Pan 1.) financial markets or institutions that could put the ~anomie expansion at risk. (See the box Monetary policy rules. Monetary policymakers '·Interest on Reserves and Its Importance for consider a wide range of intbrmation on Monetary Policy" in Part 2.) current economic conditions and the outlook 153 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00157 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.80081717 PART 1 RECENT ECONOMIC AND FINANCIAL DEVELOPMENTS Domestic Developments The labor market strengthened further during the first half of the year ... Labor market conditi<>ns have continued to I. N~1 cb-.lngc inp 3)TOIJ C'mp!oymml strengthen so far in 2018. According to the Bureau of Labor Statistics (BLS). gains in total nonfarm payroll emplo)~nent averaged 215,000 per month over the first half of the year. That pace is up from the average monthly pace of job gains in 2017a nd is considerabl)• faster than what is needed to provide jobs for new entrants into the labor force (figure I) .1 Indeed, the unemployment rate edged down from 4.1p ercent in Docember to 4.0 percent in June (figure 2). This rJtc is below all Federal Open Market Committee(FOMC) participants' estimates of its longer-run !fJIJ l:IIO2 011 2012 lOll XII~ rots 2016 roUllliS normal level and is about Y, percentage point below the median of those estimates.' The unemployment rate in June is close to the lows last reached in 2000. The labor force participation rate (LFPR), which is the share of individuals aged 16 and older who are either working or actively looking tbr II'Ork, ~~~s 62.9 percent in June and has changed little, on net, since late 2013 (figure3). The aging of the population is an important contributor to a downward trend in the o1·erall participation rate. In particular, members of the baby-boom cohort are increasingly mO\fing into their retirement years. a time 1111en labor force participation is typically low. Indeed, the share of the civilian population aged 65 and over in the United States climbed from 16 percent in 2000 to 19 percent in 2017 and is projected to rise to 24 percent by 2026. Given this trend, the Hat trajectory of the t. Monohlyjobgain< inolte mngeof tJO.OOOoo 160.0Cl0 areconsis1e-m ~i1h.an un~-hanged ui:'K'mploymcnt ratt and an unchanged Iab oor forct panicipation r.ue. 1. Set Ih e Summary cr£.conomic Proje\"1ions in Pan J of this repon. 154 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00158 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.90081717 6 PART 1: R£aNTECOKO.IliCA-'OflNAKCW.0Ml0f'MENTS 2. Me3Sun:s of labor undcruliliZ3tion _,, -II _,. -12 - 10 - I I• I I ~•o :Gl6 llllS Non.:ll~a.'llln:tm..~.klCIJ~\'\Ias:a~/.!(lhtbh.Jc(OI\Y_lJ..4~10C.al~~~~~'\1"'\'d:«S.asa ~"fmm~tJflhtbbt'f'l«~~~~~utt"r$.~~·~fta~of~·~~ud:t.'liv.~•f»a:eflollcuTtl'ltlylootiflsl'or•orl. l).~theybcliC\~tiO~ilCI\'ii~bb,I.,\S~wl~\"d~~~~·w.-btdi(Jih,:bborfot«,tii~Oflh::bl:« !Ot«pllb~~~~·~"dool:b;~f«<.'t.M~-ty.:tl(t,(d•'(lltcru:eCIXIOtb.:'bbot~."'11'lt~¥en-aibbkb•cd!.aodfs)I('~(IJ for:ajobia~~llmotll.h:s.U-4~N·~~l'J~~~·~",_.'<f~m.p.\seCIW~W,on~~:Xf«~\'CQlll'ni(~asa r-~ofehrbborl««plui;all~X!kb.'\1-..~-n..lb:~l:w~.s•f'C'OO:'of'~R\~as&-fino."b)·lb:~~o4 '""""""""'"'"' ~J:tt &wll'a!ofb.\xSietlo;'HbKmTAIIIl)OO.. LFJ'R during the pasl few years is consistenl wilh s1reng1hening labor markel condilion~ Similarly, 1he LFPR for individuals belw een 25 and 54 years old- which is much less sensilil'e to population aging- has been rising for I he past se1-eral )'ears.(The box ''The Labor Force Participation Rate for Prime 3. Labor ron.~ padicip.11ioll rates :llld Age lndil'iduals" examines I he prospecls for emp!oymcnt·to-popu13.1ion r.:nio further increases in participation for these individual&) The employment -to-population ratio for indi1;duals 16 and over- the share of I he total population who are working was 60.4 pem:nt in June and has been gradually increasing $ince 2011, refletting the combination of I he declining unemployment rate and the ftal LFPR. Other indicators are also consistenl 1111h a slrong labor market. As reported in 1he Job Openings and Labor Turnover Sumy !IXl6 l009 ))ll lOIS JJ\8 (JOLTS), Ih e r.ne of job openings has remained quite elevated' The r.11e of quits has Non:Tkdaa:tl!ll.'ldtly.Tk~b.Xc'fon.Y~'On!t. KlptTI.~dtfltp:tflllbOOa~H 10St Thtbb.."fbtt~ ~-lhrftiiPio)1llml·~ra'tioa:t~'T\~cllkp.'9Q~ J. lndetd.ohtnumber of job openings nowabouo ~lh:ldcr..:t. SdHl; BomMidl*'T~Iiafl.ll'l:J~tlo:$,. matches: the numbero f unemployed indl\ iduals. 155 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00159 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.01081717 MONeTARY POLICY Rtl'ORT: lUll' 2013 7 s1ayed high in the JOLTS, an indication that workers are able to suc-cessfully switch jobs when they wish to. In addition. the JOLTS layoft' rate has been low. and the number of people filing initial claims for unemployment insuranoe benefits has <remained near its lowest le1'el in decades Other sun·ey evidence indicates that households perceive jobs as plentiful and that businesses see vacancies as hard to fill. Another indicator, the share of workers who are worki'ng part time but would prefer to be employed full time-which is part of the U-6 measure of Iaber underutilization from the BLS-fell further in the forst six months of the year and now stands close to its pre-recession le1•el (as shown in figure 2). . . . and unemployment rates have fallen for all major demographic groups The continued decline in the unemployment rate has been reftected in the experiences of multiple racial and ethr1ic groups (figure 4). Tile unemplo)'nent rates for blacks or African Americans and Hispanics tend to rise considerably more than rates for whites and Asians during recessions but decline - 4. Uncnlploymct\1 r3te by race and cthnicity ..... - IS 8bd:orA.fnc.AIIICidl - 16 - I• - ll - 10 - s -. - 6 lOIO lOIS 1\.orP. U~~t.'qlkiJ.l':(:fllra!t~IOCllm..~'tiJas2~oflkbl:uk«e.P.:tSOC!So.f»s.:'tlhrtirilyisid<a6fr.:dasHI¢orl.airloe'lly"kof tl!l}'tlo.~.lll<~bw~a p..'f'iod~fbusioo:s$r~as6..'6o."dbrlk~'21:~8:art:IGof~Rc:st:.wb. Soc.m: 8ur~oll.abxStMtis:ia\-i)K1,l'rr\tla~tKs.. 156 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00160 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.11081717 8 PART 1: R£aNTECOKO.\liCA-'OflNAKCW.0MlOf'MENTS The Labor Force Participation Rate for Prime-Age Individuals The "'"'all labor force pMicipalion rale ILFPRJ 11M increases in au!ornation. such as the use oi robotics. generallyb..n vending lower since 2000, and ~>bile and \'3fious aspec~ oi globali,.tion hm spurred 1he aging ol1he babr-boom generalion iniO reliremenl 1he eliminalion of <Orne lypes of jobs-in particular, ages !)lovides an importanl reason for lh.ll decline, some manufocturing jobs !hal h"'~ histor~llr been it is not the only reason. Al'tOlher contJibuting !actor, held by \\OOte~ wilhoula college education-and as shown in •igure A. is 1ha1 lhe LFPRs of f)li~age eme<gingjobs mar require a diiferenl Itt of skills. These men and '"'men (lhose f>et;,ton 25 and 54 )~•~ developmeniS mar ""'•led "'""' """'"' 10 become old) vended lowe< lhrough 2013 Mn though prime discour;god "'"" 1he lack of S\Ji1<1ble job OflPO!Iunities age LFPRs are largely unaffected by lhe aging oi and dropOUiollhe labor force.' The ri~ng share of lhe population: The prime-age male LFPR has heen college-<ducated ""'ke<s, whidl m.l)' partly reflecl declining fO< ~'decades, and lhe pri......,ge female indi,;duals r"'Jlonding 0\'0IIime to lhe declining LFPR has drilled lcMe< sinoe 2000 afle< a multidecolde demand for jobs lhai require less education, has likely in<reast. Ne.'(l(lheless, f)limNge LFPRs ha'-e n101-ed pr.--ented 0\-en ~eeper r~lines in lhe prime-age LFPR. up nolably and consi~en1ly since 2013, as imp<01·ing as bette<- educated worke<s h<l\e highe<LFPRs and labor mad:et condilions have drawn some incf. .i duals may be more adaptable to unfO<..een disruptions in back inlo lhe labor force ancJ encouragod Olhe<s 00110 particular lobs or iodoSiries. 1,,.,. .. These rece<ll increa<es in lhe prime-age lFPR. Anolhef po1en1ial factor may be !hat an incr~ng in lhe conlexl oilhe i<lnger-run !rend decline, fdiselhe share of lhe prime-age population has some rfiff~ulty que<~ion of hcnv much addilionalscope !here is for \\Ming bec>vse of f)h)•ical or n1en1al diSJbililies. iurthef increases in prime-age labor force participalion. For el<.lmple, flgUfe Cs hcn•• !hal about 5 pe<cenl ci To gauge whether furthet increa<es are P"'Sible, a bOih f)liroo-age men and women reportlhallhey are useful ~arting point is unde<>landing lhe faclors behind ou1 oi 1he labor force and do nol """'' job due10 the longer-run decline in the p<in1e-age LFPR, aslhese diSJbilily or il " ln '" es " s ' ; I ! hose shares h.l'e ~ended highet iactoo ma)' limit additional increasg ii they continue "'"' 1he past decades. Olhef research wgges1> to exet1 some downward pressure. Ore f.(lctor ~· 1h.a1 iocreased opioid use may be ;,mociated with 41 be a secular decline in lhe demand for """'"' "ilh 10\,er prime-age LFPR, although il is unclear hOiv ""''" levels of edocolion. Indeed, "shcnm in figure 6, much of lhe decline in lhe prime-agelFPR can be lhe long-run decline< in prime-age LFPR ;re much dire<!~· explained br Of>ioid ust or "ilether increases larger ;mong ;dul~ without a college degree than (conlinuedl among college-edocaied aduiK Research wgg.,lslhal ct.I... ..f,o_r Miera oo d;,plac"""" '""" tt<hnologK-.JI A. Primt·3gc 13-bor fM"e p311icip31ion r.ncs S<e0>.id H."""'-03\id Oorn, •nd Go<don H. Ha.,..llOtSI, -u,.n&lingTr>de.OOT<Ciu>ology:E,·idenc• irom Lcolt..aob,o.t. .M, 1ri:et5," (COI'ICWr)(' loorrul, \'OI. 12) ~\\.1)1. W· Gll-16; Acemoglu ond r.scu.1 RC'511epofl017~ •lloiJols and fol>so Evidence from U.S. Llbor Mo&tts; 'BER \\'odin& P..-per Stvies l328S {C.Jinl:wid~e, ~\m.: National lkue.au Oi E<ooomk Rese.arch. Ma«hl, 1\'wv..nber..c)f,&' plj)MI\vl32BS; and O"""Acemoglu and Pa<cual Reslrepo (10181, "AMK~Il~e1Hgence,A!Jtom41ior1. and\\'~' '11ER II'O&ingP4ptrSO<i<$l4196(~.•'""-'-'~;on,l 8v"<u of f<ooom~ Res<•rch. ~Mryl. llllw,nbef.or&' p.J:per.Jwl-1196. Few E.'\<idence on glol»liution-in p.lrtictJI~ impott~itionsillCttht 2000$~0a-.-id H.A~Of, Oa"id Oorn, and Go<don H. H..,.. (lOll~ "Tht O.illa Synd.-: Loc.!llabor Ma&~ rif«<S of lmpon Com"'""'" in the Uniled Sl.a:es: Amttk.dn Ccooomi<: ~·iew. \d. 103 (OctoiJ«), pp.llll-68. A d"""'ioo oft'-"< and othe< e>p~.,..,;..,. ~also P<"''ided iA Kam.nne G. Abr•ham and Meli<~a S. Ke.l""!'ilOIBI, "b:p~irung 1he O.:l;nein 1he U.S. E~<o-lllput.tiooRalio:A Rev<wollhe Evidence; ' o " S " o f t " t " : ~ T h r r ~ l ' ! tw b D b t a i r dt e fD ~ : · , ~ ! b T )• h tx t ~ ~~ Nts B i w ld m i c o r . l w ~ ~ N NB .ll f i R on W a O l8 <I u <i r o t g .l u P o a i p E e c r o s o . o .; m ., i l c 4 1 R 3 es 3 eM 1C C . h m ,. b fr r o ic r i w ;< r , v M ). a \ s \ s \ . \ : W .nbet. So.:ta:BI.I't3ad~~ "'&P•P'"IwWll. 157 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00161 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.21081717 MONeTARY POLICY Rtl'ORT: lUll' 2013 9 B. Prime·a.gt labor ron.".'e pallicipationr ates by fducation Worrw:n -1'8 _, - !0 - 86 Non:: The data are scasooally adjast«<ll-mooth mo,tng atms-.-s and <~te-nd through May lOlS. TM: sbadcd bus indk:atc p:-riod$ of busi~ ~t~."'I."SSi\Jn as defined b) the Natioll31B uccau ot Ecooomic R~:arcb. Socao.:: U.S. C~s Bttl'\"3ll Cbrm:u Popt~btion Stm't)'· in opioid u<e are an indirecl re<ull ol poor eMploymenl responsibilities as women participate in the woMorce opportunities.1 in greater numbe<s. for ~ially those for Caregi,ing r"'iJJ'''ibjlities play an import.ml role in whom childc.are costs are not am ajor concern-no~ expi.Jining "lly LFPRs for prime-.Jge women are lower p.utkipating in !he labor force may rep,....! an than for men, and the)· n\a)' play an increasing role in unconst,.ined choice to care for olher membffl oi thei< e>:pl.lining de<lining prime-.JgelFPRs for men as well. families. for others, howe>~. 1his decisioo may reilec1 As shown in figure C, rooghly IS percent ol prime- alack of affordable chiI dea,.. age women report be;ng out ollhe labor force for Addilionally,lhe share ollhe population caregi•ing reasons-by far the largest ,. .s on for prime panicular~· block men-will> a hilloryol incar«<ation age "omen to report not wanting a job-but this share "" increal<!d "'~ time. lndoiduals who""'"' has been fairly 141 "'~ aime.ln cor*•ll. while a much pr. .i ously been incare<t<!ed oiten ""'"' uouble finding smaller fraction ol men ;ue out olthe labor force fO< ""'t in pan because many emplo)-et~ choose 001 to uregi\•ing reasons. t.hat s!Mre tw:s trended up in recent hire people with su<h a bad<ground and likely also decades, likely reilecling some sh;ft in household in pan because in<•rceration preven~ IJeOPie from accumulating"""' experience and de\oeloping skills 2. £\idence lhilt opX>id use could be signifiiC.lnt for '·aluable to emplo)"'"· Discrimination could also help undffilanding the doclillioglfPR ;, pr<w<Jed 17! Alan B. explain !he lack ol panicipation for some minority K'"'&"'\ZOin, "111lttelia\tAIIoheWO<k"'CootiAn group>. as •hey ""ognile that such discrimination l R "' > !! : l e it ; y 8 J in o t o o f ; ! ; h n e g s D P e • c p l< e< oe l O rl fl t ! h c e " U " . " S " . " l> 'A lw riM f0 t 1 y < , 0 F • P l . ~ u p lic p i , p 1 Jt - i 3 o 2 n , lim l i n u < ! e h rn e a ir l i j o o r b u l o c p o p m or p tu a n ri i s ti o e n s. ; may help clarify the hlrpsi"'"".b<ookings.~'lX""'"'~l&llll klueg«taof•llbpeJ.pdi, \\-hi~ little re-.iorohip """'"" importance oi some ol those f.1ctoo. Since 1990, !he op'<>i<! pr<s<rip6ons ""'. ....,..,...,. a1th e """"Y l<>tlo (contirwed on nexl page! fouDd in I.Jnet Currit>,lorus Y, lin. i!nd Molly Schrwll QOI31, ·u.s. Emplo,..,.,. •nd Opioid>: IsT here • Cormea<>nr NBER II'O<kinsP.>per SEries W.W !Umb<idgt, ·'""-' N.lt.iooa18urNu d Ecooomk Rese.Jtclt Macch~ \\\\\\,nber, Chri•ina P•rk.•nd C~ud~ Salrm\20131, •S~mr"lgl;g!\1"" orsfP3P"""l"40. Some "'i<lenceOfl•hdhe< illeq>io<l Our Ecooomic .Jnd Fin.1ncial Lio.·es; FEOS NOles, h~A'<v.\\, epidemic v.tri(>s with loc-.a.l «onomic ooncfitions is pt01>-ided iederdfresen.'!.got."J«'OM'!Inol:~nolesfshedding-light.on· by feff lanimore, Alex Duran.:t. Kimberlr Kreiss, Ellen 1\.t,etry, our-ec«XXIfllic..and·flnancial·I~'\'S·2018051l.hlm. 158 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00162 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.31081717 The Labor Force Par~icipation Rate rcominwdJ C. Prirrte·3gt nonp3rticipa1ion b)' reason - 16 - " - 12 - 10 - ; Non: The d3la art ~sonaiJy adjLISIN ll·moolb mo,inga·l'trng.::s aod ntmllhrough Ma)' lOIS. 11M~"<< bars indk21t> ~"tiood$ of~)if~C'SS rcn~n 3S dctira<.:d b)· Ih e ~31ioool &rt:~u of Economk R~~':lrth. Soulre U.S. Cmsus Bllr~\J. Currtnl Popu.la1torl SLI.I'\'C)'. ptime-agc LFPR in the Unit..O State> has de<lined self·rep<>rt as """ting a job (de;pite not hol\;ng actil-e~· conside<ably for bolh men and \\(K1len rela~il-e 10 other searched for a job recently) has been declining since ad»n«<J counlries. Some factors, like automalion and 20t 0, !hot sh.lre foe men remains between II and glob.llization, ila>'< affected all atl.•nct<J economies ro 11 pe<cenragc point ab...-e i~ 2007 I<-eland eatlier some degree and foe some lime, )'<i dil'<rging long·ron ""pansion pealcs. furthermo<e. ptime-age men and rrend< in prime-ago lalxi< foo:e participation ha'e ~ill ",.,.,.. "llo had prO\·iously rep<>rted being oot oi the occurred. Re>earch ~thai part oi the reJati,-e labor force and not "•nting a job due to disability or de<line in the United Stat. . ~ e;p!ained by diffe<ential illness ha"e been enre~ing the lalxi< force at increasing changes in work-famil)' pofic:ies across countries. rales in recent rears. Olher parts of the dil'<'gence rna)' be ""plained by looking fomord, hO\'' can politymaketS suppo<t other policies, indudingp<>licies designed t"''"d additionJI imptO\-emen:s in 1he prime·agc LFPR? keeping those affected by automation and glob.lliution fol\'OOblel•lxi< market condirions can likely help. ar uched to the labo< force, or other fa<toe>-such as and monelary policy can rhe<ciore play a role through incarcefation or opioid use-4at differ ac<oss those suppo<ting Slrong cyclical conditions as part oi ill countries..1 maximum-employment objecli\'e. Howm-er, Sltudural Although many of the factors behind the factors lin contra~ wirh cyclical Ofi<S}" e also multide<ade de<line in the ptime·•E< LFPR may important to addr(>SS; policies to address ~uch factoo persist. 50me continu.uion of the incre.l$t$ in the LFPR are be)<>nd the scope oim onel a~· policy. 0\-er the pa~ few years II<''OIIhei<ss seems possible, especially if !abo< marlet conditions remain fol\1lf.lhle. Indeed, as shO\·m in figu<e C. although the share of a M n o d o h t o < w ") ' 1 f M un m d a a y O a J f 3 f« 1, t ' l d a ii b ie o r r < f n c c r « c e i P n , t n fP < R ;p . a s li e o e o l ~ i " n "' M ti ·a o n n> c l e d nonpal1icipating ptime-age men and",.,.,.. \\M !conom;,s: o.;.,, and PrOSj)C<~; c•2 in ll'"ld !c-Ou!look:C)dico!IUpl"~SUocMo!ICh.lnge J. for receot trends oo prime-<v"lFPRs in the United ~Ya>hinston: tMf; Aprill, Ill' 71-128. for "'"""'•on how ~at('S (()f't~rtd with ~her de---eloped coun!rie'S, see "¢.familypolki<lmayaiicapri~lfP!tsinll>tUoi:ed ~"'ion.,. EcooomicCo-optr"ion and De\~ 5u:es relati\-e to dher Q(CO coorntil's,. see francine 0. B!au U013), OfCO Ccr>norr>ic Sun")>: Unir<r!~"" 1018(Paris: and J.a\\·rence 'l Kahrl 1201)). ·r.m..~t tAbor Supply: 111>y OfCO Pu~ishiogi.cb.~O.Ii371«o..w•-q>-usa·l013- lslheUnired Stn<'S F.allit~g Btbindr A.tnttk.m~ oo. For <1 dtscription d polityd"afffftOCes ac-ross cou~rifs -'·'"'·10li'la)'pp.2Sl-Si>. 159 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00163 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.41081717 MOMTARY POliCY REPORT: MY2018 11 more rapid~· during expansion~ lndffil. 5-. ,..,.... ..... rom:~. .. -byractaod- the declines in the unemplo)ment rates for <tl!ructty blacks and Hispanic;; ha1·e been particularly striking. and the rates have recently been at or near their lowest readings since these series " began in the early 1970s. Although diiTerenccs -ij in unemplo)ment rates across ethnic and -_.~, racial groups have narro"ed in I\'ICtllt )ea~ they remain substantial and similar to pre· _1,.0 rt'ctSSion kl-els. 'fb( rise in LFPRs for prime· _,.. age indi1 iduals over the past few )ean has also been e1 ident in each of th~ racial and - ,n. ethnic groups, with inmases again particular!)• notable for African American~ Even so, the LFPR lor whites remains higher than that for \ort:lhc-l'l'f'INCt.._~~ra.:isa~oltbt the other groups (figureS).' ,.~~u-~ hnom•t~DK~~~·~· i.Jmo)BI)kfl-r~ Tk-lft~+Wt,·h'tltutr lncrtases in labor compensalion ha1e . ~ Dillt~ ~ a)lll .l.f.* - ' . <f - t , F . t. ' * r - k i t a b . l e o . W tl h ~ r l ~ b a a p r ml < l \ l . tl been moderale ... s.:...r-a.ca.tfl.IM~' Despite the strong labor market. the a1ailable indicaton generally suggest that increases in hourly labor compensation have be.:n -· modernte. Compensati.on per hour in the _, business sector- a broad-baS<.--d measure of 113ges. salaries. and benefits that is quite 1olatile-rose 2%p ercent 01-er the four quanen ending in 2018:QI. slight!) more than the 01\mge annual increase 0\er the pn'tcding -· se-en or so )"tats (figure 6). The empiO)ment cost index- a less I'Oiatile measure of both wages and the cost to employcn of pro1 iding benefits like"isc was 2% percent higher in LL......... ~ the first quarter of 2018 relative to its year· MIO 1011 ~1-' 1016 Ml~ earlier le1·el: this increase was 'h percentage \ml:~-~1:'1)111~~~ -.r«lk~_..tolle.k\.~~""(f*•!~~11" p m o e i a n w t f r a e s s t e th r a th t a d n o i n ts o t g a a c in c o a u ) n C t a f r o C r J b r e li n e e r. f i A ts m . ong .~. ll.l a..tl d.. t.l. l _a t. - l - ..e ; ~ .l f a.. l, - . r,il l.q - k,r.,A M *. t .- r . ; r 1 f o \ «n ~ t · , ~ · a v · . . ! . . . C. . t 0 . ) . - 1 ~ p 1 c o 1 t 1 : T . r D< g w .i . r . w a t ; ' S .. U o. . .t . -. I . _ ! ,. 01\tragt hou~· earnings rose 2'<p eroolt in Six*'.: lwa.fl. ..~ ,. . tt.r.;:r!bll)~fiCd.:r11~ June relati1e to 12 months earlier. a gain in kletAIIIIca,••c-.•ttdcr line 11ith the a1·erage increase in the p~'COOing few years. According to the Federal Reserve Bank of Atlanta. the median 12-month 11agc 4. The t"''" 1<\<1< of labor fore< panicipauoo for tlw><olhtt pwpsdilfer illlponant~· by"'· For Africaa ,...,... .. - lu>• ...., p>rlicipnioo "'" """" to •lo:t1 11m. •llilt Ill< partiripolioa nolt IOf African iiiDtnC>ll•"""" ~"' •i!ltaslhat or •ll•t< ._,_ B) contt.l5t.tli< loa<r lFPRs fllf HispaniCS ond AsioJb rcflc:tt 10\\n pJnicip;uioa among ~a.omt'ft, 160 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00164 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.51081717 growth of individuals reponing to the Curren1 Population Surrey increased aboU13\\ percen1 in May, also similar to its readings from the paS1 few years. s ... and likely have been restrained by slow growth of labor productivity Those moderate rates of compensation gains likely reflect the offs elling inHuences of a strong labor market and persistenlly l. Cilang<in bulintss-s«tor OUtP'Jt per boor weak productivity growth. Since 2008.1abor producti,;ty has increased only a linlc more than I percem per year. on average. well below _, the average pace from 1996through 2007 of 2.8 percent and also below the average gain in the 1974-95 period of 1.6 percelll (figure 7). -; The weakness in productivity growth may be panlya nribtnable to the sharp pullback -l in capital im·estmenl during the most recen1 rece;·sion and the relatively slow recovery that follo11~d. Howe1-er, considerable debate remains abomthe reasons tor the recem slowdown in productivity growth and whether it will persist• SQn;~if'ti!IC'-cdflU!IIC)aolihr)~~-Jy~ tb:~~Q:(I(Ikli!W~"C'. . oltkpericd. Tht-fll'ldp.oftod is m:-&.U{dfrom1COO!Q-:~2018!QI. Price inflation has picked up from the Sot.IWi! Batlllafi.M....,SLI:Nics\"iafLI.\'tt~ticf.. low readings in 2017 In 2017. inflation remained below the FOMC's longer-run objectil•e of 2 percent. Partly because the softness in some price categories appeared idiosyncratic, Federal Reserve policymakers expected inflation to mo1-e higher in 2018.' This expectation appears to be 5. The Alb11ta Fl."dS mt'3sure difttr.s fromO thers in 1ha1 it measures~~ wage grov.-1b on~· of work«S who \\"tn! e:mptoycd both in 1he C'urrtnt Sufltymoruha Ad 12momhsearlier. 6. The bo' "ProdUCii,·ity De\'clopm<nts in the i\d-.n«d Eoonorniesin thelu~·1Qll.I/IJIU!IQf)' Polity Rtp!m pto,id.s more information. S.. Boefl! of Gowmors of the l'e<krnl Resen·e S)>tem (Wil). MMftOT)' Polity Rtpon (Washington: Boord or GO\·<rnors. July). pp tl-1J . hnps:ll""'".fooemtre•"'·e. gov/mone<arypolk)·/1Qll·Ol·mpr·p.tnl.htm. 1. ;\dditional details. ranb e found in the JurlC 2017 Summary of Economic Projectioos. an addendumt o the minut,~oftoeJune2011 FOMC mNting. S.. Boefl! of GO\tmors of the FC<fernl Resen< S)>lem (2011). ~~linu1es of the Federal Open Market Cornmittce. 161 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00165 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.61081717 MOMTARY POliCY REPORT: MY2018 13 on Ir ack so far. Coosumer prict infta1ion. as - measurtd bylhe 12-monlh pem:nlagechange in Ih e price index for personal consumplion cxpendiiUres (PCE), mored up 10 2.3 pcn;enl in May (figure 8). Core PCE inflmion. which 10 excludes consumer food and energy prices !hat are oflen qui1e rolalile and l)pically pro> ides - !t a beuer indicalion 1han Ih e 1o1al measure of where 01erall inflation "ill be in 1be fulure. • lj was 2 pcrctnl 01er 1he 12 monlhsending in It Ma) 0.5 perrenlage poim higher !han it w - J had been one year earlier. The 1o1al measure --- exceeded core infla1ion. b.--cause of a siable increase in consumer energy price~ In L.t.. 1 . 0 . 1 . 1 . ... 2 . 0 .. 1 2 - 201) I ZOI~ 201S 11)l6 2017 201S contrasl, food price infla1ion has corninued 10 .. \ . \ . m . : TbrcOW..f\lt.'OoStllous'\lly.))lf:~.-tfnwnont)IW be low by his1orical s1andards-da1a lhrough M3)' show the PCE prioe index for food and B S lf o t c a .w le r. l & f« .. l . l : l A ll . f . t t) l ' t t . > -. . f .• a ' S •" n -c ll r t A or II c I} ! 1 \t t W rr. f " l 5 lD . albrl;:b•ct;t. be\eragcs ha~ing increased II'>Sthan 'l: pcrctOI 0\Crlhe past year. The higher readings in bolh lotal and core infla1ion relalive to a year earlier reflttl fasler price increases for a wide range of goods and serrices Ih is )'ear and the dropping oul of 1he I2 -monlh calculalion of Ih e Sleep one-monlh decline in Ih e price index for wireii'>Sielephone stl\ices in March last year. The 12-monlh change in the Ir immed mean PCE price index-an allemaliH: indica1or of undtr~ing inflalion produced by the Federal Restl\( Bank of Dallas that may be II'>Ssensilile Ih an Ih e core index 10 idiosyncm1ic price movcmenls-slowed by less Ih an core infta1ion over 2017 and has also increased a bil less 1his year. This index rose 1.8 perctnl om Ih e 12 momhs ending in May. up a IOlKh from Ih e increase 0\-.r the same period last )tar.' lull< 13 14.2011," pmo ~icaS<. Jui)' l. https:// '.1.\\'\\ .rooc-rnlrcst!' '·SO\"Inro-st\nt"pr&~lca'iN monttal)101 iOiOSa.htm. 8. Th< trimmod mean in<kx<'«lud<> •hart~cr Jlf1'<S ""*nl rio< b'l'<'l iom355 or ck<m"' oaa """ ..,.Ill: b-cwnplt. rheslwpdniiat 11 pric<sb •11<1<» t&phooc !mi«s,.~ ta~illOI J •»< l<'fudN fromthi,~ 162 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00166 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.71081717 9. Brrno spoo ond filrut<S priees Oil prices have surged amid supply concerns ... - IJO As noted, the faster pace of total inflation - 120 this year relatio·e to core inflation reflects a - 110 substalllial rise in consumer energy prices. - oco !0 Retail gasoline prices this year were drio~n - co higher by a rise in oil prices. The spot price of lO Brent crude oil rose from about 565 per barrel - c,o. in December to around S75 per barrel in early July (figure 9). All hough that increase took place against a backdrop of cominued strength in global demand, supply concerns have become more prevalen1 in reccn1 monlh& (For Son! Th: 4r..llll\' 'i!IC.i..tj. ~\~of dally dl:a IOJC'\l«ld ~ a discussion of the reasons behind the oil price M S r o 1 u 1 n .1 .: < l lC lt E Bfttllftr-J:a:,u~ increases along with a reo~ew of the eft'ects of oil prices on U.S. economic growth. see the box "The Recent Rise in Oil Prices") ... while prices of imports other than energy have also increased no- - 101 Nonfuel import prices rose sharply in early 2018, partly reflecting the pass-through - 100 of earlier increases in commodity prices (fignre 10). In particular. metals prices posted - 9S sizable gains late last year due to strong global demand but hare ret rea ted somc1111at in n.'Cent week& co- Survey-based measures of inflation ~ll ~Jl Nl4 Wl5 2:016 :017 lOIS expectations have been stable ... SO'n; llxQ:... CxrR.'adia:lpx1~-~:tQXIibl) DiC'\k'DJ~ Expectations of inflation likely influence actual Mt.~·lli$.Tk~for~I!Xtlba:~•~·f\~of43if)•dl:a Dl<>IO>l""'-'b""'l9.l01S. inflation by af leeting wage-and price-sening ~ Soli((: ( I F X « U lt C .. «s<.f.u o .i C ~ SC'I l~ ~ ~ ~~~% o « ( b ~ . \ \Y I ~ ll lit l\ t " '« 1 decision& Surwy-based measures of in Hat ion AM~t iel.. expectations at medium· and longer-term horizons hao·e remained generally stable so far this year. In the Sumy of Professional Fon.usters conducted by the Federal Reserve Bank of Philadelphia. the median expectation for the annual rate of increase in the PCE price index orer the next I0 years has been around 2 percent for the past several years (figure II). In the Unirersity of Michigan Surveys of Consumers, the median value for inflation expectations over the next 5to I0 years has been about 2\', percent since the end of 2016.though this Jerel is about V. percentage point lower than had pre>-ailed through 2014. In contrast. in the Survey of Consumer Expectations conducted by the 163 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00167 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.81081717 MOMTARY POliCY REPORT: MY2018 15 - Federal Resm-e Bank of 1'1~ York. Ih e median of respondenrs· expected in Hal ion ra1e 1hree years hence has been moving up rectnlly and is currendy a11he lop of the range it has occupied Ol'er the past couple of years. .•• 1\hile market-based measures of innation compensation ha1·e largely mo1 ed side\\'il) s this year lnHatioo c.'pcctations can also be gauged b) market-based measures of inflation - I eompcnsation. Howel'er.the inference is not straightforward. because market· based measures can be importanlly aft'ccted ~~ · Tb: M~~:bi. .I II'IC)' 6at1 rtt mor4ty, Tb: Stf 4m for intl.at1011 by changes in premiums thai pro1i de op.~f«pmcoal~npaldrtl#C'f~~·Wco'W'Dd eompcnsation for bearing inflation and m~ S ' ol O w • t . : . l . t . n . ~ . t , i l \ O I t I iQ L l ' fllp~~'SolC~Ftd:n!IN1\co liquidit)' risks. Mrasures of longer-term Bdttl~$w\c,.i~fctttMIItf\t$f'f\. infta1ion eompcnsation-deri1ed cilher from differmces btt"l!ell yields on nominal Treasul') securilies and those on eomparable-maturit) Treasury lnflation-Prolected Securi1ies (TIPS}o r fromi nflalion 111~ps ha1·e mol'ed sideways for I he mosl part I his year atler ,. having reiUrned 10 lel'els S<.'en in earl)' 2017 (figure 12}.'The TIPS-based measure of - u 5-lo-IO.)r.tr·forward inflation eompensalion ,. and I he analogoll$ mea;ure of inftalion swaps a re re sp n c o c w tn a d b y o . u " t i l 2 h p b e o re lh en m l a e n a d su 2 r 1 es ': p be c l l o t' w tl l 1 l. h e --IJ ,. ranges Ih al pcr..istcd for mos1 of the 10 years before Ih e s1ar1 of the nolablc declines in L.... .: . ' . 0 u 1 . 0 . ....u !0 , 1 z ! .. ,, :01 , 4 . ," 2016 r. 1~1$ mid-2014.10 ~. Thrd»wt M\"4.~ J'l~ol~ 4aci..J~Uted llwOIIJh " h S l "O ) I". ~ m : ·" x rc' t d" t m S -l . R n M P -o S t rw; :t of ~ ' • ~ d l \'9 a 1 t \. ~ ~ " ) W~ . ro.1collttitf'lt 9. lnlbtion compensation impli<d by 111< TIPS ~"' icll.ttioo ratt ~ boS<d on th<dolfmocut C\lllj>Or>bi<mluriti<>.bec•. ..) idd>OO"""". .. Trmol} «a~~~~i<sw)ldd,; oo TIPS. •hoc!lorr111&l<d totll<k!IMaJilSWII<fpric<~(CPIJ. lafbtooa""PS 1rr romoosin •hich oot pon) mili> Jl3lll1tll~ or ~rtaln fiM.'d nomin31 amou11ts in twhn~ ri.lt cash ftffi'lthat "~ index.C'd 10 cumuiJii\<C PI inH:uion OH'r some horizM. ~Ocu)ing on inflattoncornpcMalion5 to 10 )<aru.h<ad is useful paoti<ul3rly for mo""Ull) policy. b«3u« such fol\l~«< mtasu"" <nrompas:. mark<t ~niripanu',ft-s about wflere inllation 'lAili )(ttlt in tbc loasttrm •fkrdc\tto...,..ts inftutncinsinlbtlOII in th< sbon term hi>< ruo t11rir roDJ>t. 10. Asth<oe.....,.,..aoel>os<dooCPIIIILuoo. 00< >llollld prob>bl) subtnct ahoot '. to •,; 1""""1>¥< point th< ;nm~ d[~=tial•ith PCE infbtioo '"'' the pa~ h\O <kcldts:-10 in ftr inftation comp:n~twn on a PCEbo<i> 164 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00168 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.91081717 The Recent Rise in Oil Prices Oil p<ic., h>l~ increased more than 50 pe«:ent the count~/' economic and poiti<al cris~. Prices ako 0\'l!f the pa~ l""· with the spot p<ice of Brent crude increased aner President Trump announced on Ma)' 8 Oil rising from a bit 0010\V $50 per barrel tO ai'OUOO that the United Slates was withdr;n.,.ing from the lrJn SiS per barrtl (tlgure AJ. for much of the period, nuclear deal and that "nctions again~ Iranian oil iunhet-dated futures prkes remain<O reloti1~ly sl<!ble, exports would be reins~ted. in the neighbofhood of SSS per barrel; h''"~""· since The pattem of spot and futures p<ices iiiOicates February, futur., p<ic., """f ll0\.0 up app<eciably, that 1113rket pilnicipilnl> generally anticipate that oil reaching 0\'ef $70 per barrel. pri<es 11ill decline slowly over the next few )'earS, in Bolh >upply and demand factO<> M'e CO<ltriboted pan retlecting'" expect. lion that supply, including ro the oil price iocrease. In p3nicular, the broad-based U.S. !-hale oil production, will gt0\1' to l1lE<I demaoo. imprOI'efnent in the ovuook iO< the global economy In addition, the higher p<i<es pu1 p<es>ure on OPEC's was a ~(!)' dri\"er oi the price increase in the second NO\'ember 201 b agreement with cert.Jin non-OPEC half of 2017.1n recent months, supply concerns ha1~ countrieos 10 restrain production. A Slated aim oi the become more p<evalent affecting both spot and further agreen1ent 11~s to reduce the glut in global in~..,tO<ies, dated futures prices. Despite sharp!)• rising U.S. oil and, in recenl months. inv~nlocy le\-efs ha\-e iallen p<oduction, marke~ ha~'e bten attune< to escalating ldpidly toward long-run awtages. In response to both connict i>e!l1'ten Saudi Arabia and Iran as well as the l01ver im'entories and higher prices, OPEC leaderS p<ecipitov><!ecline in Venuuelan oil p<oduction amid ~ightl)• relaxed the production agreen1ent in June thi> (corr!inu«<J - 90 _,. _, - «> 165 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00169 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.02081717 MONEIARYI'OUCYREI'ORT: JULYI018 17 )~ar, reducing some oi 1he upward pressure on priCI'I. pow« abmad lhan in1 he past as much of !he nega1ive Thai !did, fulures prices h.r.~ 1101 re\Uin<d 10 !heir early effect on GOP from l011-et household conwmprion 20181evels, imp~·ing 1ha1 mad:el panicipan~ expecl is likely 10 be offsel by inaeased produclion and some oi 1he recto I incr<>ase in prices to be long lasting. in~'eSl.melll in lhe IVO'\''ing U.S. oil se®r. On netlhe IVhal is 1heexpec~ed effec1 of 1he recefll rhein oil drag on GOP from higher oil p<ices is likely a small p<ices on 1he U.S. economy? To begin wilh, high« oil iraclion oi ~~~al il was a decade ago and should get prices are li~ely 10 resYain household consum1~ion. smallet slill il U.S. oil produc:tion conlinues to gr01v In p.1rticularthe incttase in oil prices since last year "jli'Ojecl<'d-<.gure C-and 1he ne1 oil import <hare 1 ~ es1ima1ed 10 h.J1~ 1ronsla1ed inlo a roughly S300 shrinks toward zero. ii"'Crease ina nnual expendituces on g.noline fOI' the Indeed, if U.S. oil uade 1110\.., fully into balance, 3\'1'138' household, from ahoul S1.100 10 S2,400. lheoiisetting effeciSof a change in the relatil~ priceoi H"'"''"'· as U.S. oil produclion h" IV"''" rapidly oil mighl be expected 10 ne1 oul within the domesti< "'"'lhe pa11 decade, 1he ra1iool ne1 U.S. oil impons e<:ononl)'· How'e'\oer, f\'tn if the United States is no lo U.S. gross domeslic p<oduc:t (GOP! has declined longer a net oil importer, to 1he extenlthat highe< suhllanlially (figure 81. As a result higher oil prices oil pt:ices cause credii<OlUirained consumers to cut n01v imply much less ol a redis1ribu1ion of pu<Ch.Jsing spending by morelhan oil producers exp.1nd !heir in,~nl. this redi~i~tion oi purchasing po-orer 8. Nctoilimponsharc could !lill have negalil'e effeciS on 01-erall GOP. C. U.S. crud< oil prorlli<tioo _,, - 12 11 - 10 - ' I I I I, I I, I I I I I I, I :»li!OOl~lfi/I2009NI12'01lZOUlOI?~l9 - 8 I''"'"'''"'"""'''" ' I )ll~ 20lS ZOI6 :'011 2'01$ Zlllt 166 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00170 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.12081717 13. O..nse ;, r<al gross dom..'SO~ produco and gross Real gross domestic product growth domes!i<: income ..... .. slowed in the first quarter, but spending _, by households appears to have picked up in recent months _, After having expanded at an annual rate of _, 3 percent in the second half of 2017, real gross Ql domeslic product (GOP) is now reponed to - ) ha1-e increased 2 percent in the firs1 quarter of this year (figure 13). The step-down in growth - 2 during the first quarter was largely a11ributable _, to a sharp slowing in the gro111h of consumer spending that appears transitory. and gains in GOP appear to hare rebounded in Ih e second quarter. Meanwhile. business investment has remained strong. and net exports had lillie etfect on output gro111h in the first quarter. On 14, Ch:tnse inn :al ptrsooal ronsump1ioo c~nditures: balance, over the firs1 half of I his year, 01·erall and disposable p.'1><lfl3! iocome economic activity appears 10 have expanded at a solid pace. _, _, The economic expansion continues to be _, supported by fa1·orable consumer and business senliment. past increases in household -_,) wealth, solid economic gro111h abroad, and _, accommodative domestic financial conditions. including moderate borro111ng costs and easy _, access 10 credit for many households and _, businesses _, Gains in income and wealth continue to support consumer spending ... ~Oll~ Tht\1;1ucsbb)I3:HI~Iflt~~MI)Q4~"S. SOU<f: Bl.mae(E~A~~~111b\uAflal:.1id Following exceptionally strongg rowlh in 1he founh quarter of 2017. consumer spending - in the first quarter of Ih is )'ear was lepid, IS. Pcrsorolsa\ingt3te rising a1 an annual ra1e of 0.9 percent The slowdown in gro111h was evident in ouilays for mo10r 1•ehicles and in retail sale$ more -11 generally: moreover. unseasonably warm weather depressed spending on energy services. -10 Howe1·er. consumer spending picked up in - 8 more recent months as retail sales firmed. and PCE in April and May rose at an annual rate of 2\'. percent relative to Ih e average orer 1he first quaner (figure 14). Real disposable personal income (OP!), a J I l I I 1 I I 1 I I I I I 1 measure of after-lax income adjusled for !1).16 '2«18 ~10 l012 Xl14 2016 l'OJS: inflation. has increased at a solid annual rate S So a l n t< : t D : ~ S l &m u u . o r ! ~ E l oo k a • . ~ : ' . ~ m r k 2 ~ 0 ' t S S i :;:liatb,"CJArW)ticr.. of about 3 percent so far this )'ear. Real OPt 167 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00171 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.22081717 MOMTARY l'OI.ICY REPORT: MY2018 19 - has bctn supported b) the reduction in income ta'es 01\ing to the implementation of the Ta, Cuts and Jobs Act (TCJA) as 11ell as the continued strength in the labor market. With '"(r<'"; 'I« - u consumer spending rising just a little less than •h!n - to the gains in disposable income so far this year. - s the personal S3\1ng rat~ has edged up after having fallen for the past t\10 yms (figure IS). - 0 -_,.l Ongoing gains in household net 110rtb hktly h:l\e ai>O supported consumer spending. - u flouse pri= which are of parti(ular -~ importance for the balance sheet positions of a large set of households, ha1•e been increasing at an a1·erage annual pace of abo11t6 pcrtent in 11 ~ < 1 . 1 . : . l f b « :d l .l k u l ro o r l ~S " .~ " P a f~ b l o k o r d ll i l b d < t C lu ~ : ® c M o 1 d~ < A 1 p 1 n d ll ~ O l t l S l) . r p e r c ic e e n s t h )~ a a r r t s p ( o fi s g te u d re m 16 o } d . e 11 s A t g l a th in o s u , g o h n U n . e S t . . t s 'q o u f i a t r y ! ~ O l S b i c l ! u a n t : f f n« « l! ~ l d l n lo . .. * _ T P l• n t cT •W ~ ~ U l n f o l . l ~ hi S $ l •p P o C &d ~ fi ~ l.S P this )ear. this Hattening followed Stltral years b Jam. I~ U•C . , .....~.c .-- I,Fo.r. b, J.s ~ ~~ of sizable gains Buoyed b) the cumulati1-e t)_ \\t>Jdl.to....-- incrmes in home and ~uity ~~ate household net worth was 6.8times household ~ ------------------~b~o income in the first quarter. down just slightly from its ratio in the fourth quarter the - 1.0 hight~t-ever reading for that ratio. which dates back to 19~7 (figure 17). _., ... and borrowing conditions for _, conwmers remain generally fil1orable ... Financing conditions for consumers are -u gell(rall) fa1orable and remain supporti1e of gro11th in household spending. Ho11e1~r. !1111 t.t.ttrt ,,,, banks hare continued 10 tighten standards :!tOO !® 1006 1'IXJit ZOU MIS 2018 for credit cards and auto loans for borrowers :-:.m: Th:l(ft.')nlkrlt!O~blu!doidlltlt~orll)~~ """"' 11ith low credit scores. possibly in n.-sponse Souc1: f« M ~~oOI'Iil, tNo:ul Rntrw 8owd,. ~ R~ 11, to some upward mores in the delinquency ' ~\ " - f l - b\ - f . t ' AM U I I ) I 11 ~ r < r i r l .' l \ k . l~S!m'":for~.lllwa.ol£~ rates of those borrowers. Mongage credit bas remained readily :1\-ailable for households 11itb solid credit pro~les. For boiTOII~~ 11ith !011 credit scores. mortga.,oe financing conditions ha1e eas..'d somewhat further but remain tight overall. In this en1 ironment, consumer credit continued to increase in the first few months of 2018. though the rate of increase modemed some from its robust pace in the pm·ious year (figure 18). t...:....___;_; II. Forlh<1113jorit)of~,h<>mt<qull) ~ l!IUt .:'tl! !el.l :116 l'CII~ m:ol<> up th< lat;'<>l sl!are of tbtir •<3Ith. \1m.~ arr t~ &. ~.ccd to }'Of-tO! nftP1101S ~·~-~6\lml017'()4Dllll~l Sol.ttt: FC\Jml Rn."'Tit lk"'«'d. SUmigl IMc:a~ 2.1, "F~t~W.al M~ollkt..'ntlil:d~~ 168 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00172 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.32081717 ... while consumer confidence remains strong Consumers hare remained upbeat So far 1his 1\:110 year, I he Michigan survey index of consumer :- '··-~\.~¥- sentimem has been atcar its highest iel'el since 2000.1ikcly renecting rising income. job gain~ and low innation (figure 19). Indeed. households" e.~p«tations for real income · ,. - _ lfi'\ .. . •-: . . c a h b a o n v g e e l s e \ 0 e \ l C s p f a rc be te n d e in x g t) a e h a e r p o m r 1 i 1 o 1 u 0 n s o re w c e s s ta si n o d n . - Business investment has continued to rebound ... l~ ~~ t · l Tl N lt~ :rrt M J '! ~ ti ~ i' - I) I Md I ,I ! JJ t t<: ~ ll~l'J'W a W . t tb il t ' l l6t\ t ~10 t 10 ~ 0il Investment spending by businesses has .o .iN.,'• q • ~ u t ~ rc:wor ~ ra-of - ' - b f i a < a O i » f} > ~ ~ I •- O . p •• t I p Im lk - '« D ' ) . I . 6 ~ •. . continued to increase so far this )"e"Jr. 1vith ""'V notable gains for spending, both on equipment Sroll'l .....f N).,,tdlptStnquCr~ and intangible$ and on nonresidential strudures(figure 20). Within strudures. abe rise in oil prices propelltd another steep ramp-up in imestment in drilling and mining ---------------------~--- stn•ctures-albeit not )et back to the le1~ls lO recorded from 2012to 2014-while investment Ql in nonresidential structures outside of the energy sector picked up after declining in 2017. Forward-looking indicators of business in1-estment spending remain favorable on balance. Business sentim~nt and the profit e.xp«tations of industf) anal)-sts ba1e been positiveO\·erall. 11hile ne~~ orders of capital goods have ad111nctd on net this year. . . . while corporate financing conditions have remained accommodative 21. S<k«<d """""'""of"" cl..., f""""~l for Aggregate ft011~ of credit to large nonfinancial ooaf.-ial bu!ixs_"' firms remaintd strong in tbe first quarter. supported in JX!rt b) rdati1e~ lo-~· interest rates and accommodati1e financing conditions (figurt 21). The gross issuanct of corporate bonds sta)td robust during the first half of .. 2018, while yields on both inrc~tment-and speculative-grade corporate bonds mored lO up notabl)' but remained low by historical A•1-'HA-JLJLILILII~LIIJ-_,t. standards (figure 22). Despite strong growth in -· business imesumnt. outstanding commercial and industrial (C&I) loans on banks' books rose only modestly in tbe first quarter. It 1 I I t although their JX!ct of t'JXInsion in more ll))) ))10 2012 201C :&It ~- rerent months has strengthentd on arerage. In ~WI f(d:nl RntM &.d. SIDIIcll ltbc' J I, -rNK'ill ~clthtl..'liled~- 169 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00173 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.42081717 MOMTARY POliCY REPORT: MY2018 21 - l April. rtSpe>ndents 10 1h e Senior loan Offictr Opinion Surrey on Bank lending Praclkts. or SLOOS. reponed that demand for C&l _, loans 11cakened in the lirsl quar1cr e1·en as lending standards and terms on such loans eased." Respondents auribUied this d~XIinc in -- IIII demand in pan to firms dra11ing on imemall)' ~, ~=~ generated funds or using aherna1i1e soun:tS of financing. Mean11ftile. gnllllh in commercial rtal estate loans has moderated some but - ~ remains strong. In add ilion, financing conditions for small b~sincsscs appear 10 ha1·e remained generally accommodatil'c, 11i1h lending standards liule changed almost banks - and with most firms reponing that they are S s o o i n 1.1C : r . ' : l I k ( ) '( " -l W d&. ..,o..t• • A ~ l > 'l " l( ' tl W o t ;• O II \ . k l r O n .) ll u L k )' o O h tb . ~ ..S •lib able 10 obtain credit. Although small business credit gi'OIIlh bas been subdued, suney data - - suggest this sluggishness is largd) due 10 continued 11eak demand for credit b) small _,.. businesses. But activity in the housing sector has IU leveled off - '" Residential im-estment. which rose a modest 2~ percent in 2017, appears 10 ha1t largely mored sidtll'a)~Orer the first fi1e months of _,., the )ear. The sl011ing in residential in1ts1men1 like!) is pari~ a result of higher mortgage ;- i lo n 1 t 1 e b m y t h r i a s t t e o s r . i c A al l t s h t o a u n g d h a r t d h s e , s e th r e a ) t ' e h s a a 1 n e : m st o il 1 l e d »>t -1 ~ - u · I ! Ot• I I Z ~lf I I .2011 I I up and are near their highest levels in SCI'en years (figun: 23). In addition, higher lumber prices and tig)ll supplies of skilled labor and dmloped lots reponedly hal'e been restraining home construction. While stans of both sing)e·fami~· and multifamily housing ,..., __ .... _ units ro;e in the founh quaner. sing)e·famil) stans ha1e been liulechanged, on net. since then. "hereas multifamily stans oonlinuoo !I 10 climb earlier this year befort Hanening out (figure 24). Meanwhile. OI'Cr the first fil'e - u months of this year, new home sales ha1·c held at around the rate of late last year. but sales of existing homes hal'e eased some11 hal (figure 25). Despite the continued inertases in house pricts. the pact of construction has ll. ThtSlOOSis;~~~il>bl<oolltdloonlh<b><IO:ot lJ. X ... £ L 6 ..... ~ :!'OtO .!OU ~U !AI6 ' M IS http;1~'••.f<ll<ratr<S<rl'e.E'J\IdatofsJoo,.'~oos.htm. 170 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00174 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.52081717 ..-.-- ---- not kept up \\ith demand. As a resuh. the months' suppl) of in1entories of homes for - .. sale has remained at a relati1ely low level, and " 1he aggregale vacancy ra1e s1ands a11he lowes! " - u level since 2003. 6l u ll Net exports had a neutral effect on GOP ,!.I grow1h in the first quarter H - .. Afler being a small drag on U.S. real GOP It glll'l1h last ym. net e1pons had a neutral ,u, -- effect on p1h in 1he fii'SI quaner. Real U.S. exporls increased abou1 3'h pertenlal l\1)6 !(lO J S . ... ~ L 10 J !012 11)1.$ :cll6 !01$ J an annual mlc, as expons of atllomobiles and consumer goods remained robust Real ~n·OM.J:c~·at:d<'IC'OJ1b•~by::OIS: ~·~befar:-A.., -ool)~ok"'""'"""'""'-·""·~· imporl gro111h slowed sharply following ~ S - ol ~ • . •· W fo C rl \ le X ' l il ' o~ W ~ t l s i . . S.l'm!Wikn:IIK..,('l_,bl,ww: a surge !ale last )eaT (figure 26). Nominal ..'- -'--' \~-ol~·\llfii.Mf.Wl}illl.'l, 1mde da1a 1hrough Ma) sug,_l!eSIIhat e.xpon ol"""' groMh picked up in !he second quaner. kd 16 Clluov il rQ) illpx!s ad «ppil> --- b)' agricuhural C\por15. 11hile impon gfOIIth was 1epid. Alllold. !he 3\1!ilable data sugges1 ·.·.. -· thatlhe nominal trade dcficillikely narrowed ,_ relative 10 GOP in 1he second quaner (figure 27). -' Fiscal policy became more expansionary this year ... - l federal fiscal polic) 11 ill like!) pfO\ide a moderate boos110 GOP p1h this year. The _, indi1idual and corporate tax cuts in the TOA should lead to increased priva1e consumption and inves1men1. 11 hile 1he Bipanisan Budge! Acl of 2018 (BBA)enables increased federal spending on goods and ser~ ices As !he eftocts - of 1he BBA had yet 10 show lhrough. federal g01~mmen1 purthases pos1ed only a modes! .............( ,Of gain in !he fi~l quarler (figure 28). Afler naTTOIIiog significantly for !el'eral )tan. the federal unified deficit 11idened from about 2Yi pertenl of GOP in fiscal year2015to 3Yi percenl in fiscal201 7, and il is on pace 10 move up further in fiscal2018. Ail hough expenditures as a share of GOP in 2017 -_,l were rela!ively stable 3121 percenl, receipts _, mo,·ed l011er 10 rough!)' 17 pertent of GOP and ha1e remained 31 aboulthe same level so !\~'.~! xoa 3 ' 106 X(C ) ' )I , t ' ~ . l I :o tn I t Jl iKI : I tlS I far this year (figure 29). The ratio of federal 171 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00175 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.62081717 MOMTARI' l'Ol.ICY REPORT: MY20t8 23 debt bdd by the public 10 nominal GOP "as 2$. C1aot<. raJ"" ......... ~ .. 16'!) perrent at the end of tiscal20 17a nd is '"""""""'ondinl- .......... quite elel<lled relatiw to historical norms (figure 30). . . . and the fiscal position of most slate and local governments is stable The fiscal position of most Slate and local go. emmems remains Slable. although there is a - : _, range of e.\perienctsacross these go.cmmtniS -· and some states are still struggling. After se•eral )tars of slow gro"1h. re1enue gains of state gol'ernmems hai'C strengthened notably as saks and income tax collections hal'e picked up OI'Cr the past few quarters. tn addition. house price gains have continued to push up property tax revenues at the locallc•el. But e\penditures by Slate and local go•emmtntS h:M been restrained. EmpiO)mtnt gM~th in this S«tor has been moderate, "bile real outla)S for conmuction by these go•emments ha1e largely been mo1ing side11a)s at a relatil'cly tow Jerel. Financial Developments The e\pOOed path of the federal funds rate has mo1 ed up t71t j I I Market·based mtaSures of the path of the federal funds rate cominue to suggest that t ''" ~ "n - .. ~ p lO~t' ......~. ~..p.r.a -r&nt"GDP)'., .I..i f w . f . x . t t o - . market participants expect further gradual ~ U ~ lll • ll Q ll } lhs . ~• . \L I i « r, ! ( G i( I ) J V . tt I . t 6 \~ tl' l tw l q l to d f! ~ O ~ l7: t Q t ; W f« 10 l 1S l Q k 1 increases in the federal funds rate. Relatil'c ltn"ripps~ni-'Cftditut(\lff••.,.~ks&s.. Sot.fi1: Off"'~ofM~Wid~'~HI\'C'fAul)~ to the end of last year. the expected policy rate path has moved up. boosted in part by imcstors' perreption of a strengthening in the domestic economic outlook (figure 31). In particular, the policy path m01ed higher -_I,.t in response to incoming economic data so far this year. especially the empiO)ment n:ports. 11 hich 11~re seen as supporting expectations for a solid pace of growth in domestic etonomic - lO activity. In addition. itwestors reportedly - 40 interpreted FOMC communications in the first half of 2018 as signaling an upbeat economic outlook and as n:inforeing expectations for funher gradual rtm01-al of moneta!) polic) accommodation. "-= lk. ..... ,... "--* ,.., tal',~.~ ..... '* Fo.inllickkM.,..""' ..... Wi:l:ll4kt.kT~~ adl•kdlftl~«~tGrill~~~w..~·­ ctld«lbtqiDM' Soulc'l:: f«(iOP.~ofl.«o.JmKAml)')H.\Dib\ftA!at}til."),l.'lf ~ ~ fCidml lNft< t1o1n1 SUiutd Rcl-N Z.l. "f~l M~od'~L'11ki.!$U:c.~ 172 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00176 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.72081717 Sul'\'()··bastd measu~ of the e~peaed path of the po!ic) rate 01er the next few years ha't ~--------------------~~~ also increased modeslly since the end of last year. According to the resuhs of the most )g rettnt Survey of l'rimary Dealers and Sumy of Market Participant~ both conducted by ~-~ the Federal Resene Bank of New York just before the June FOMC meeting. the median of responderus' projeelions for the path of the federal funds rate shifted up about 25 basis points for 2018 and beyond. compared "ith " the median of a=sments last December." Market-based measures of uncertainty about lOll the policy rate approximately one to t\\'Oy ears . II . ! . I \ . P .J IK n ' - d a f l * d b b i t ' m I f IJ c J o d I f m M J l I I ( l ) O ' · t 1 ! l I e 1 l 4 . f 1 2 l ' ( 1 0 t 1 1 t t i p l t . d 6 i i i 1 t 10 s U t . b lf .t * _ t c fr d - c d .n b , 1 ) . 1 . ' C O ~ ' (a . k a u o o l o o 0 W \f l t , $ 'b ~ *il a l d N lK t\ , a le h w ea is d a i t n t c h re e a e s n e d d s o l f ig l h as tl t y y . e o a n r . b alance. from their :'fl1.1\t,..~.-·191Drawrw~t.~·kftlrm- ol0'--""""'"""'-~ S.t•n ~fal:nl~.tsmc:&w;-;14~ The nominal Trtasury yield curve has shifted up The nominal Treasury )idd cum: has shifted .... up and flanened some,. hat further during the first half of 2018 after flanening considerably _, in the second half of 2017.1n particular, the _, yields on 2-and 10-year nominal Treasury ~unties increased about 70 basis poirus and - s 45 basis pointS. respccthcly. from their ~~~Is _, auheend of 2017 (figure 32). The increase in Treasury yield> seem, to largely reflm im-estors' yeater optimism about the domestic growth outlook and firming expectations for further gradual remo\'al of monetary policy aceommod:uion. Expectations for increases in the supply of Treasury s..'Curitie.s foll01•1ng the federal budget agreement in early February '·m. n.tT~-msod~fltllt»rar~IWWlt} also appear to ha\e contributed to the increase tsm. n•• fd o l . lw , ) . l - l o . r ~ 6 la t :: T d~ :~-. "*ocra•Jct:..,f.~ in Treasury yield~ "hile increased concerns about trade policy both domestically and abroad. politiall d~elopments in Europe. and 1he roreign economic ou1look weighed on longer~ated Treasuf) yield1 Yields on 30-year agency mongage·backl-d securities (MBS)-an important determinant of mortgage interest t3. Tht r<>utt> o( th< Sun"l or Prim:ol)' D<al<ri and do• Suney o( \11rte1 P>ruapws m :n-.ilalik ooth<FcdmiRtstn<B.tnl:od''\'" \'od:S.'CioiittOI ~up>J;Iln-:ortfcd.orpln:uL«>pnmll}d<:lkr_ !111\')_qu.stion, html>od hllps;/•"'"'·""'1ortf<d.O<JI 1113rk&'>Uf\t).1113rl<t..pan<ip:~nt>. "''l'<ti>'* 173 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00177 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.82081717 MOMTARY POliCY REPORT: MY2018 25 ra1es increased about 60 basis poin1s owr !he - -·- find half of 1he year. a bi1 more !han !he rise in 1he 10·).-ar nominal Treasury yield, bul remain low by hi110rical sland.ards (figure 33). Yields on corpora1c dcb1 secu.ri1ies-bo1h in"es1mcm "' grade and high )ield- rose more 1han Treasury yield~ leil\ing !he spreads on corpora1c bond l ields 01er comparable-maiUrily Treasury - ·~ )'kids no1ably \\ider tban a11he ~nning of . !he )ear. l- - Broad equity index~s ros~ mod~tly amid l - some bouts of market volatility Aflcr surging as much as 20 percelll in 2017. -..:m~lbcO.Ut«d&.il~ Y~ld ihollt1. f'ottbtfatlfti.:o~"'-:~ broad s1ock marke1 indexes rose modcslly, n ,ti0,1 n 1.6 t d k « p ~ n i M l I• k p ~ tt l .« ' '" l '· & , . c •• Sp W rQ ~ I~ n ' ~ II « Ii < il ! tt i G. « : W »m W tt t d' l dl n t on balance. so far I his year amid some bouls 5-a:il. .r c•.-..TmNII) )dk. nt.-a..m~Jif) II, of hcighlencd volalilil)' in financial markels Sou,, ~t(dltTICW).Ia'<~'- (figure 34). The boos11o equil) p~ from fir.d-quaner earnings repons 1ha1 generall) beal analysis· e.'pectalions was reponedly offse1 by increased uncenainly abou11mde policy. rising imeres1r ates, and conctrns lOO about polilical de1-elo1)ments abroad. While m slock prices for companies in the !ethnology and consumer discretionary sectors rose ,., no1ably. those of companies in I he industrial and financial sectors dedincd modes1ly. After - " spiking considerahl) in ear~ Februar), the - ,. implied 1ola1ility for !he S&P 500 inde' tht VIX~eclined and ended the period ,,,-, ll slighlly above 1he low levels 1ha1 prevailed in ~ :UDX01 ~ :006 - ~ ~10 Mil MU 1016 ~II 2017. (For a discussion of financial s1abili1y Sol.m!~~~lb.lonN.I~\'il~IForl);)oll issues. see 1he box '·De1·elopmems Relaled 10 JeMII'ldl.:uh.~·rot!UIIftl,ta:Chtnte.tOD!k('«~~MJpltt.) Financial S1abili1y.") Markets for Tr~asury stcuriti~, mortgage ~d~ ~riti~, and municipal bonds ha1 e function~ well On balance. indica1ors of Treasury markel funelioning remained broadly s1ablc over 1he firs! half of 2018. A l'llriely of liqt1idi1y mc1rics-induding bid·ask spread~ bid si1.es. and e:.1ima1es of 1ransae1ion COSIS hal'e displayed minimal signs of liquidily pres:.ures 0\CraiJ, "ilh lhee.,ctp!ion of a britf period of redUctd liquidi1y in earl) February amid eiCI'31cd financial market 1ola1ili1). Liquidil) condi1ions in I he agency MBS markcl were 174 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00178 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.92081717 Developments Related to Financial Stability The U.S. fioancial system remains subolantially mo<e A. forward price·t0oe3Jflings ra1ioofS&:P 500 finns ... re;ii~~IIM~ duri~g I~ ~l~ bel~ t~ fiMollial crisis.' Vdlr.tations continue to be e1ev.ated fOI' a range oi assets. rn the pti\tJte nonlin.anc.ial sector, the r<~tio of tool d<btto gross domeslic prodU<:l !GOP! is ab oot in - JO line with an ~imate ol its trend, and vulnetdbilities associated with ~ rem.1in moderJte on balance. -1S While borrowing among hi~hly lel-ered and ~q,,~. - lO rated firms is ele\'.ated and a future weake-ning in L'O)fl()l1lic activit)' could ampli~1 wme wlner.1bilities in the corpor.te ~tor, the ratio ol housdlold del~ to dispos.lble income h.Js remained stable in recent ~~ars. - ro Vulnffi'lbi1ities associ<tted wilh !e"erage in the financ:ial - s sector appear to.v, reflecting in part strong capital po>itions ol banks. How.,.er, sorne measures ol hedge fund 1"'-erage hil\~ increa>ed. Vul"""bilities associ"ed with maturity and liquidity transfCM'mation continue to ~lkO..Ocplct(t!.:~crot-."WPf".~~rUot be low corn pared with lel.-ls that generally prMiled WXOfir!M.Th:~D!'Ibllsbt:$fdtalht.afrQCIII'meolh..• pt6(ftl~Nrl~ptfll'Jsofr~as&fllllo.'\lbyWNJI:KCW before 2008. ikmool£maom~R(k&il. DlllJ«b&'llti!OCII!~C'\f'o.'~ Valuation pressure-s in \'arioos asset markets """"'"'"""" remain el.,.•ted b)• hillO<ic•l ~andards, although ~"l(l!SufT'~~coT~R~IB£$.. they have ~lined """"''hat since the ~art of the ~~ar, as corporal£ bond prices h.Js~ fallen and higher m.1rl<ers, cornme<ei.ll property \Oiuations continue to earnings ha\-e hetped ratiomlize equity prict>S. l\o\ad.:et be Wetched. Capitali,.tion rates (computed as the ratio ffiO\-tments were outsized in Februa.ry, around I he time of net operating income relati,eto property values) o \O f O t t h i e l i p ~ r · t l h \• . i J o s u r s e c M e O de I> d I , l t a a l r t y h P o o u l g ic h y i R t h R a p s o e rt n . d S e in d c u e p th ~ e i n g , h tly y re ie m ld .1 s i n o l n o w 1( , ) a . n J d ~ , r i T n r e r a e s c u e r n y t ~ q u u r a i rt t e i r e s, s t h h 3 e \ i - r e s . p . ~ ,. ~ . d o s d to o wn above the low le,~lsseen in 20t7. Even with higher consider~blr ~Rilll)~ -.lu.11ion pressures in resi~tial e>peeted earnings due in port to changes in Ia< law, the r"l eslate m.1r~e~ increased modesll)·· Aggregate price fomord <Guity price-to-earnings ratio fe< the S&·P 500 to-rent ratios, adj~ed for an ~irna1e of their long-run remains in the upper end oi i~ hi~orical disuibution ~end and the carrying~ of housin~ are approaching !figure A). Treasury term premiurm ha'~ increased the cycle peaks olthe early 1980s and early 19901 but modeslly from the beginning oft he)~" but remain remain "~II beiO\v the 10\-els obse/\.0 on the.,.. .o i to.v relati\~ to histori<ally obse<ved '~lues. Corpotate the ilnanciC~I crisis. bond )'ields and their spreads to yields on comparable· 1\'tth households and busines>es token togerher,the maturityTreasury~urilies f't{l\"e increased no1abty, ratiooltotal ~to GOP is about in line with estim.1tes but they continue lO be to.v b)• hi~orical standard~ In of i~ uend, although podret> ol stress are l?'i~t. In particular, spe<ulati,-e-gr.Mie rields and spreads lie in the household sector, the ne1 expansion of housdlold the bottom fifth and bottom fourth of their respecrive debt has been in line wilh income gr~)'l\1h and is historical disrributions.tn le-~raged loan m.1rke'~. conceotr~ted among prime-ritted borrowe-rs. Ho\\'e\'ef, issuance has been robust. spreads hil\~ re.!Ched their deli~uertey rates for sorne forms of consumer credit ""'~ 10\~ls since the fonancial crisis, and the presence hal~ 010\'ed up, ~ing rising strains among riskier olloan r:m~nB has ~reased further. In real estate borrO\\-e/Se\~ with unemployment '"el\' IO\,•.IIanks are reportedly tightening standards on credit card and 1._ MO\«vitwcltheframeworkfor.,..,;ngfiooncol auto loans. In the nonfinancial business sector,ltl\~e stAbil1ty 1n 11'1e United St.lt('S is pcovidro in l~ Br<Jitwd of corporate busines>es remain; high, as indkated by ~Ot81, "An Upru:eOClthe f«<«at ResEnt's finaocial S..bili~ a po>iti'~ ~toral crediHo-GOP gap. Net issuance o1 A .w g d < B o u d 5 .l .i ; n ! e p s e s, t < S h te t r n k S l' c « h « o < o a l o tr f h 8 e u C sin o l" o ! : o e s, r N fo 'e r w C Y ! M ob : ; U l ! n c i o v n m on il l \ ) ', • r th iS e L g )• r d o e w b t t h h a in s. 1 r 0 is \. e , t .a ~ g in O O re l c o e a n n t s q ( u fr a g r u te re r s B , m !. W ain h l) i ' l e d c r u i\· r e r n en D t ) · ~ewYork.A¢13, lmps.1Mww.fedetJ!resen-e,g(rdnf'l.~~ff.tv spet<h1lraiNrdl018040Ja.hrm. (con!irwedJ 175 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00179 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.03081717 MONEIARYI'OUCYREI'ORT: JULYI018 27 8. TOE3IIltlissu>DC<ofrisky<l.-bl a 50\- ere global recession.' The h)')lolhetical '"'"'ely a<h-· !t~n.lnO-t~ li'oO!t wintMt !t~atio ret .led in lhe Board's wess tesll, \\ith the u.s. unemployment r.ne rising almost 6 pe«entage poin~ to - 00 I0 pe«eot-proj~ S578 billion in total losses fO< the -_,(<.!) S 35 in c p e a n 2 i 0 c 0 ip 9 a , t t i h n o g l b e a R n r i> n~ d h u ; r n i - n e g a l d h d e e n d i n a e b o q u ua t ~ $ e 8 < 0 s 0 t e b s il l l e i d o . n _., in common equity capit.11. The Board also 0\•;luates the capital planning p<OCesses of the participating banks. including the firms' planned capit.ll actions, such as _., dividend parments and !hare bo)1>lcks.' The Board did not o!Jioo to lhe copital plano of 34 firn11. Although _,. the recent U.S.t<IX legislation is expected to increa<e bank( post·t.J• earnings, and hence their abili~· to accrete capital, it did !<ad to one-time losses. '*' deueasingbanks' capit.11 ratios atlhe end of20ti, the .\00: l:t"~ 1110\1118 fl~tAdt\\:1'16~ ))J$.-W, jumping-<>ff point of the wess tes1S.In part bec:a01e S T f O " b \' l 1 o lb . l 1 i ~ \{ o ' f -p r . i k s 10 l 1 ) u & te b m t lb i o S o 4 .k 1 2 . t : ld - k ~ ;~ o - f - rb.!r.d~Of of these effect<, evident in te>rt figure 36. ~\1) firms Sc:u:n: ~~ rt,Ciilroblmaii.Sti.~Dallttir.S&I" u..~ were required to maintain theit caplt.1l disllibutions """"""'rl"'"- at the 10\-.ls they paid in recent yea~. Separately, one firn1 \\ill be re<1uired to address the management and CotpOiate credit conditions are f.l\'Oiable O'l<'fall, anal)'is of its counterpart)• exposure under stress. The with low int«esl e>penses and default>, the elel>ated Board objected to the capital plano! one bank bec:au~e le\'e1'age in this se<.101' coufd result in higher future of qualitative cone ems. default rates. In addition, weak p<otec:tion from loon l'uln«abilities associated \\ith liquidi~· and CO'I'enant> could reduce early inten~ntioo by lenders mawrit)• lr.ansfotmation---{hat is, the financing of and ""'"' recO'I<'f)' rates for im-e<too on default illiquid assets or long·m aturity assets \\ith shor1· lnvestOIS may also be el.p()Sed to signifiCant rep~icing m<~lutit)• debt-continue to be !0\\~ owing in part to risks bec:au~e bond yields and credit risk p<«niums are liquidity r<gulations for banks and money market bothiO'Iv. '""''&• refor-m. large baoks ha-. wong liquidity positions, Vuln«abilitie< from financial-sector bec:a01e their ""'oic ore deposits as a sourte of continue to be relativ-ely low. Coce flnantial funding and their holding> of high-quality liquid intetmediilties, including large banks, insurance assets temain neat historic.al highs~ \\'hile their use of companies, and broket-doaler;. 3J'P"" well positioned short·tefm wholesale funding as a share of lidbilities to weather economic stress. Regulatocy Cetpilal •atios {Of is~~ historiCAl! lows. Since the rn<>ne)' market fund the global l)'<lemically i mpo<tlnt banks h.n't remained refor-ms implemented in Octobet 2016, as~elS under \\~II abo\~ the lull)• phaled·in enh,10ced r<gulatory ma.,gemcnt ot ptime fundi, iflllitutions that ptO\W requiremen~ and are d01e to hi~orical high~ Capit>l wln«Jble to runs in lhe past. ha\~ retnained far l>eiO'I'' 1",.'' at insufdnce companies and lnok«·deal«> pte-reform 10\-els. In addition, the 8'"''1h in al:ernati\'t H als " o ' ' r " « '" n ' a · i n relati\-elr ~ by historical ' l " t " an 'a d g a e rd l. short·tetm in\estnle01 \'ebides, which-may htwe some some indicators of hedge fund in (cor>~nued oo nex1 page! the equity marke~ ""'h •• the provi1ion of lola! margin c ei r O e \ d •a iu te o d e 1 q 0 u \- i . ~ ls · , i a n n v d es i l n oe t < h . e h p ,w a~ e r i i O se \\• n q t u o a h ~ i « ~o > r d ic e a a ll l« y s i ~ 2 r 0 l d . t : 8 S S l . ! . r · . e f< s S .s d o T e a e < r st a d s, i o ' R " f e p G < r < t t S > r S w . r . l! e . o fe , . . ! o a r s f d e t , R J h ! u e 'l n i t e ' " 2 < " 1 d ' , e R h < ' t " a tp ' i l s R 1 " " M o "" w f ~ w ~ S . " i " " "' " Y ha,,. reportedly ea...!, on net, price terms to their ieder<J~tien"t,gorlntwSE'\~ts.sreleasesl hedge fund client>. lxff8W18061ta.t.m. b)• l T h h e e F r e e d s e u < lu al o R f e w s p e e n r - \< el iS lo O a I r ) d ' w co e n s f s i r t m es t ~ h r a e t l t e h a e l e n d o i t n io J n u 's n e t20 3 t . 8 S •, . . · B f< o d .! e r < d a o i f R G ., < . > ,~ " " R " ! " ' o lt fl a h s e es i' R < e d su e h <al s Re o se f n~S ~ y•e ~ m upila1Mllr%and Re\ie-viCG\RJ; P"s' release.lune19, Llrgest banks are wongly capi~lized ;nd would be httpsiAw.. w .fedef.alreservt~·Jnew~atn!i')xess.rele.J:SeS/ able to lend to houstho!ds ,,nd businesses""" during bcregrol !0629a.lllm. 176 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00180 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.13081717 Financial Stability (ccori~>wd! similar \'Uinerabillti~, continues 10 be limited, ~s rno<e pronoonced vulnerabilities, rellecting some in.O<lor> ""'~ shifted p<inwil)' from p<irne fuM< into combination of the foiiO\ving: substantial corpo<ate g<l'<rnmtnt funds. l~'efage, fiscal concems.. Of E"xcessi\'e ,e-Jiance on Risks from abroad are moderate 0\'<fall. Ad\om foreign funding. Global I)•. po:ential dO\vnside ris~s to foreign e<:ooornie< (llfEs), many of which ha\-e international fi..,nci•l ""lltets and financial stability signifocanttlnanci.JI and ,..I linkages to the United include political uncertainty, an intemification oi ttdde S~:es, conbnue to have nolable or ele-.ted v•luations tensions, and challenges posed by rising intere<t r.ues. in some .asset markets and. in a few coonu-ies, high The countercyclical capildl buffer (CCy81 isa le\-els of household debt relahve to COP. These m.lCroprudentialtool the l<de<al Reser\~ Board call fdCloo ha\~ conviooted to some AFEs onnooAcing use to increase the ~lieroceofthe financial sy>tern or implementing ,..croprurlential actions. including by railing capit.tl requirements on lhe largest banks. increases in counterr;ydkal capildl ooff.,, 0\'eflhe Acti-.ting the CCy8 is appropriate "ilen S)'Stemk p.llt couple of)~~. More ;gene,.lly, AFE financial \'Uinetobilities are meaningful!)' abo\'e normal.~ The sectors contiAue their siO\v pace of dele\-er•ging Board is cl<ll<l)' monitoring the le,~land configuration th.lt staned aiter the global financial and euro-arca of 'l"en'ic \'Uinerabilities descrihed ca~ier. SO\oreign debt crises. In a<ldition, low corpo<ate debt s c in p o t u r o e n a a t d r n i s ) e ' i s m n ' < n t ~ h o r e n k f e p l d . n 1 i . 1 a o t n c f r d e e a w a l ) s C e ~ O i ' f n f " > O t " e J " \- a ' e te r ~ a s ) e g ~ c e t t i o n t r o s m v . S o a s n o t s m o la e f t t e m h e a s jo e r 1 U r2, p 0 4 .1 i . , l 6. a S .! l e ,. · B . e R, B u ,o f o g l f . e o u < u r \ ; d J l t f m o o if f r i p . y < J i t e A U m p . p o < « i l 1 < i ~ c n : y i l M n " o R g l " 'u" t l " e" l s " u l : " T e .s f ' h t . e e { s d F i . l e e ! < < d < r e ! • l l < e I 1 • 1 t R t 1 N e R C « . o r . . \ n - R ~ t · • S l « S y q S 2 • < . 9 o r ., ) m ~ < , • f t s emerging ,..Ike; e<:ooornies conbnue to h.l!bor l«<<r•l ~· ,. ... 3tlSept"""" to). pp. 636$2-83. 177 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00181 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.23081717 MONEIARYI'OUCYREI'ORT: JULYI018 29 also generally stable. Overall, the functioning ofTr easury and agency MB S markets has not been materially affected by the implememation of the Federal Resem· s balance sheet normalization program. including the accompanying reduclion in reini'CSimenl of principal pa)1nen1s from the Federal Reserve's securities holdings Credit conditions in municipal bond marke1s haw remained stable since the tum of the year. 01-er that period. yield spreads on 20-year general obliga1ion municipal bonds over comparable-maiUrity Treasury securities edged up a bit Money market rates have moved up in line with increases in the FOMC's target range Conditions in domestic short-term funding markets have also remained generally stable so far in 2018. Yields on a broad set of money market instruments moved higher in response to the FOMC's policy actions in March and June. Some money market rates rose during the first quarter more t.han what would normally oceur with monetary tightening. For example. the spreads of certificates of deposit and term London interbank oft'ered rates relative to overnight index swap (OlS) rates increased notably. reportedly reflecting increased issuance of Treasury bills and perhaps also the amicipated tax·induced repatriation of foreign earnings by U.S. corporation~ The up1vard pressure on short term funding rates, beyond that driven by expected monetary pol icy. eased in reoent month~ leading loa n;~rrowing of spreads of some money market rates to OIS rates, Ho11-ever, the spreads remain wider than at the beginning of Ih e y~r. Bank credit continued to expand and bank profitability improved Aggregate credit provided by commercial banks continued to increase lhrough the first quarter of 2018 at a pare similar to Ih e one seen in 2017.11s pare was slower than that of nominal GOP, thus leaving the ratio of total commercial bank credit to current-dollar 178 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00182 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.33081717 3-5. R.acioofc01al romi"Jl(fCial ~nk rn.'dit to norninal gross GOP slightly lower than in the pre1•ious year domeslk prodoc1 (figure 35). Available data for the second quarter suggest that gr0\\1h in banks' core loans continued to be moderate. Measures of bank profitability improred in the first quarter - i.S of 2018 after having experienced a temporary decline in the last quarter of2017. Weaker fourth-quarter measures of bank profitability were partly driven by higher write-downs of deferred tax assets in response to the U.S. tax legislation (figure 36). -» International Developments 1 It I I I! I II I I 1 I I 1! I I l J l'OOOZ00!~2():)6,X(IS !0102:012 :0014 2GI~ZGIS Political developments and signs of Sort«.: F<'lin3 R~'t BttW. ~ Rd:N HJ. ·As5ru »d ~oiC«rm."!NNIbnksintb:-U~~"':Ikt.:.of~ moderating growth weighed on advanced A»>));is,J.JHN.fAnai)1Jr."$.. foreign economy asset prices 36. Profl1abiti~· of bank holding too1panies Since February. political developments in Europe and moderation ine conomic growth outside of the United States weighed l I J J l - - ~~~~~ -_J,O. on some risky asset prices in advanced foreign economies(AFEs). Interest rates on u- sovereign bonds in SC1-eral countries in the 5 - European periphery rose notably relative to core countrie~ and European bank shares 5- -_1,.0 came under pressure, as in•-estors focused u on the formation of the Italian go,·ernment. IJ- Nonetheless, peripheral bond spreads 1..0- - JO remained well below their lerels at the height !1 2IX Kt ! I ' 00110 I 1 t )1 2006 b ! :O I S J 1G IO 1 I '01 ! 2 Z ! OI" ! 1'0 ! 16 2018 of the euro-area crisis, and the mol'es partly retraced as a gol'ernment was put in place. ~n: lb:dlti~U~¥!4il'c~!)~~(li SW So < l o .n = f F « c l & ll n e l l . ~ I""" t ' R C_ an , fc _ m FR \'-9C. C~ Flt\Wial Broad stock price indexes "~re little changed on net (figure 37). In contrast to the United 37. Equi1y indexes for .,t,~lod fO«'ign «<OllOIIios States. long-term sovereign yields and market· implied paths of policy rates in the core euro area as "~II as the United Kingdom declined somewhat, and rates were little changed in Japan (figure 38). -_,IJ,O. Heightened investor focus on - 110 vulnerabilities in emerging market economies led asset prices to come under - 1.0.0 pressure tm•estor concerns about financial vulnerabilities in sewral emerging market I It !I . llS ! I 2 ! '01, t I. ZO t I 1 I I! ) ! )JS I I j economies (EM Es) intensified this spring SOT!: 1k dau :we .,.-ffit)' l\~ of daly &:.1 MtJ ('lj(f)j ~ against the backdrop of rising U.S. interest Ju S i) Q I . U .-. O u; I & F . « cwo.-a W EaS.:.,...\-.; l~:i«"UIIIl<'IJK~F'TS$ rates. Broad measures of EME so1~reigu 100 ~i: lo&:~: b nn.,P. IIJiri:ct~ MSCl Uo..,P. ~ lcaiCwt<O.-yll).\:\;~\~~ 179 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00183 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.43081717 M().\EIAAYPOXV~EI'ORT: MYl0t8 31 bond sprtads Ol'ct U.S. Tr taSUT)' )ields lt ._....,.tO.)<arpCftll<!llbood!i<ldsiD 11idened notably, and benchmark EMEequity l<k<W ""''IIC<d C<ODOOii<s indexes declined, as investors scrutinized macroeconomic policy approaches in se1-eral commie& Turkey and Argentina. which faced 10 persistently high in Hat ion. expansionary fiscal lJ policies. and large cur~nt account deficits. !. 1\(re among the worst performer). Trodc -u ,. polk)· de-dopmcntsbetwcen the United - States and its troding panners also 11righed on E~t E a&~et prires. especially on stock prices - J in China and some emerging Asian countries. EME mutual funds saw net outfl0111 in May and June after generally solid inflo\\S earlier in the year (figure 39). While mo1cmcnts in asset prices and capital flo11~ "~re notable for a number of economies. broad indicators of financial stress in EMEs remained 1011 relati1e -- to le\ds seen during other periods of stress in .... rcctnt )"ears. ......... , The dollar appreciated After depreciatingd uring 2017, the broad exchange l'alue of the U.S. dollar has appn.'Ciatcd moderotely in recent months (figure 40). Factors contributing to the appreciation of the dollar likd) include modmting gr0111h in some foreign economies combined "ith continued output strtngth and ongoing policy tightening in the United States. do11 nside risks stemming from political dc1<elopments in Europe and sercrJI EMEs, ~1: lllt-~and~'-61\owdaa.a~ttqunctt)'5111Mof•MI)· and the recent de\'clopmcnts in trade policy. d d3 U bf t ~ iml A l. ; n a u l t 1 ) . 2 1 0 . 1 2 ~ 01 1 ~ 0 . 1 ' 1 0 rl M t) . O W , \i ~ l) I l B , 2 T 01 h & t . f i B ll J d ! m b oo l l :s b 4 l 1 y U . n . . . ct o .k l• ( M ID I h )· Sereral currencies appeared particularly ~-a... TbrJP \S.,"q.W~f. ... MJdttsBoodlD&_,~ scnsiti1c to trade policy del'elopments, ( , l\l , E ~ IJ o. .,..l r,C.' ...m ,* l)' .:t.\.(,1" 1~dlbd) 4lu -~"tid ltmiP Jut)'~. induding the Canadian dollar and the Sot.IU; ,_,.,..),unc.wcliwl\181·.1' -~""""-""'""'•8loooloi ~k<ican peso. related to the Nonh American Free Trode Agreement negotiations. as well as the Chinese renminbi. which fell nolably against the dollar in J~ne. The pace of economic activity moderated in theAFEs In the first quaner. real GOP growth dereleroted in all major AFEs and turned neg:uile in Japan. d011 n from robust rotesof actirit) in 2017 (figure 41). Pan of this siO\\ing is a n.-suh of temporory factors. though, 180 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00184 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.53081717 40. U.S. dollar exchange r.Jt~ indexes including unusually cold weather in Japan and the United Kingdom, labor strikes in the euro area. and disruptions in oil production in - I~ Canada. In most AFEs, economic indicators for the second quarter, including purchasing manager surreys and expons, are generally consistent with solid economic growth. Despite tight labor markets, inflation pressures remain subdued in mostAFEs ... Sustained increases in oil prices provided upward pressure on consumer price infiation Non: fh:4#1.•hidlaxa~CVT~X~.."Yu=sp:t6cltbJ.~•~'~tr across all AFEs in the first half of the year ~"""'old>Oy"'"ID!"'-""""'''>"I)'II.lOitM<O<..-.!b)d. (figure 42). However. core inflation has "~""".~'Vin.Sl.h"t"c"W""~"U"S"."c"l -a.IJ'S('~m:ldc\-rt&-S generally remained muted in most AFEs, '" S " o " t. " «t ' : " F '" td ' . " .'n l R('SCr\'t Jbrd. S~ Rc\cw' H.IO. "f~ despite funher improvement in labor market condition~ In Canada, in contrast, core 4t. l R d c \" ; i l ln l o g o r . o . s ro s r d e o i m g < n s < ec ~ - p o r n < om J< ie f s l Jclp1binsc-k<l<-d - i p n u f s la h t i i n o g n t p h i e c k to e t d a l u p in a f m lat i i d o n so r l J i t d e w ab a o g v e e g r t o h 1 e 1 ~h, central bank target. .,.., •""'"' ... prompting central banks to maintain -s • • cEu.r.ooJ;:.t ~ _, highly accommodative monetary policies With underlying inflation still subdued, the Bank of Japan and the European Central -1 Bank (ECB) kept their policy rates at -I historicall)' low levels, although the ECB indicated it would again reduce the pace of its asset purchases starting in October. The - I Bank of England and the Bank of Canada, which both began raising interest rates last lO" 2016 lOll lOIS year, signaled that further rate increases will CJ S lO o . l ' l I t O (t ! ; l " F ~ « «. t G k o l \ i o n . i ' ' ! . 1 N m K . ~ 'C O II l Io r th t pD « :tc k w c -t ~ b 5 t : C 1 u t a i : s ~w t : ) ; . . . t , ~ . r.. . f ... c « ~ -*. be gmdual, given a moderation in the pace of ~c_..n,iltb\~~~ economic activity. In emerging Asia, growth remained solid ... Economic growth in China remained solid in the first quarter of2018. as a rebound in steel production and strong external demand bolstered a recovery in industrial activity and overall growth (figure 43). Indicators of investment and retail sales have slowed in recent month~ howe·m. suggesting that thea uthorities' effort to rein in credit may have softened domestic demand. Most other 181 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00185 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.63081717 MONEIARYI'OUCYREI'ORT: JULYI0t8 33 emerging Asian economies registered strong 42. Consumer prire inRa[ion ins cl«tcd 31.1'-aoc«t foreign gro11'1h in 1he firs! quaner of 2018, panly C\."00011l.ics. reflecling solid ex1ernal demand . . . . while growth in some Latin American ·-·- -· economies was mixed - J In Mexico, real GDP surged in 1he firs! quaner as economic acli,;ly rebounded from 1wo -_l, major carlhquakes and a hurricane las! year. Following a brief reco\'ery in I he firs! half of 2017, Brazil's economy Sial led in 1he fourlh quaner and grew lepidly in 1he firs! qua ncr. - I a ac n l d iv a il l ) n ' i t n c k !a e l r e s' M m a i y k . e paralyzed economic 1 I I 20 I lS I I I 2(1 I 16 I I I W . l 1 I I ~IS I 1 ;.;on:'fb:&-.J:(Ot~C\IIO~~~ftWINZirtu~(«J~ Mt~n.«u"'c.,.,_.,..,~.,..~,-~ Mi~ !OIS. &;.,,:10: F«tbtl.~K~Offi,.~IOt~S&a:istits:f<w~ \lmis.tr)ofi~AffM.~C~..UOOS:kc'ckCW\la:t&, ~<~IOO"~Ctt!itkEwopt.-C~fortw.i.l.Sbti.il).'5 C.-h:;all\illb\ttrAIQI)ta."s. 4). Real gross dom<stic product gMAlh inS <i«led ~'fi'ICrg.ing ll'l.11Xct ttOnomies I Clio> • K(m - 12 . Mrt.ieo I &.ol Ql - J - J :0014 201S 20'16 11)17 :'018 \Ott~ Th:dlltaf«OiRallc~·a6juib!~·bdd'Jhcd)Q I«K«t<~,\]tt;a.,JOJbl*'t~·adjw..'l!~lbrit~'tft~ J(I\\TM'ICI:I.~ Sol.'ltt f«(li:la.ChiniN~Bimiool~ies::IOrKOI'Q.Sri: ofKON:(b~1ruro.I.D$tiMo~dt&tklb1it.l)~ll:f« Brdlt~SU~It.JO&Iiiklro&~ut8&auslk&;al\lalb\('t'Aml)ti."s. 182 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00186 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.73081717 35 2 PART MoNETARY Poucv The Federal Open Market Committee of the labor market and the aocumulating continued to gradually increase the evidence that, after manyy ears of running federal funds target range in the first half below the Committee's 2 percent longer of the year ... run objectil'e. inflation had mol'ed close to 2 percent. Since December 2015, the Federal Open Market Commiuee (FOMC) has been ... but monetary policy continues to gradually increasing its target range for support economic growth the federal funds rate as the economy has continued to make progress toward the Even after the gradual increases in the federal Commiuee's congressionally mandated funds rate Ol'cr the first half of the year, the objectil-es of maximum employment and Commillee judges that the stance of monetary price stability. In the first half of this year. the policy remains accommodatii'C, thereby Commiuee continued this gradual process of supporting strong labor market conditions scJiing back monetary policy accommodation, and a sustained return to 2 percent inflation. increasing its target range for the federal funds In particular, the federal funds rme remains rate V. percentage point at its meetings in both somewhat below most FOMC participants' March and June. With these increases, the estimates of its longer-run value. federal funds rate is currently in the range of I¥. to 2 percent (figure 44)." The Commiuee's The Commi11ee expects that a gradual decisions reflected the continued strengthening approach to increasing the target range for the federal funds rate will be consistent with a sustained expansion of economic activity, t4. S.. Board ofGo,<morsofthe Fodera! Re;cmSyst<m(20t8). "fedtrnl Rosc~·dssucs strong labor market condition~ and inflation FO~IC Stat<m<nt.'' press release. Man:h 21. htt(IO:i/ near the Commillce's symmetric 2 percent www.f«kral~rvc.go,/ne,:rSc!wnts/pressrekascY objective Ol'tr the medium term. Consistent mon<tary201S0)2ta S .h l" tm " : " an d Board of Gowmo,.of with this outlook. in the most recent til< Fedcrnl Re;cn< (lOtS). "Fnlcrnl R""~< Summary of Economic Projections (SEP). w ls w ;u w c . s f O F O O e M r. C t l S ~ ta n t · e e. m . go e \ n · t / . n " e p t\ re ~\ s$ 'e ~ n ' t l s e f a p s r e e . s J s u r n e < le : a I S J c . . h W u (IO:i/ which was compiled at the time of the June montlary201S061.h.hun. FOMC meeting, the median of participants' -- ·l - ) _, _, - 0 It I I I I I I I I I I! I I I I I I I I I I I I I I I I I I I I! I I I I I I I I 2Im 2009 2(110 lG\1 Z'Oll 1'0U 20!4 :'GIS :'016 l0l1 2018 !\olt:Tbe2-)'t*'~l~'t'#Tt~111!e~o~tht~.f!'lllll.liJY)idds~cotbtt:IOSiani\'ttyuadai~ SoliO': ~ofrbe-Tr~~Froctal~c8QW. 183 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00187 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.83081717 36 PART2: ,\ION!TAAY 1'0\«:Y assessmems for the appropriate le1•el of the as useful benchmarks. However. the use and target range for the federnl funds rate at interpretation of such prescriptions require, year-end rises gradually over the period from among other consideration~ careful judgments 2018to 2020 and stands somewhat above the about the choice and measurement of the median projection for its longer-nm level by inputs to these rules such as estimates of the the end o( 20i9a nd through 2()i().1S neutral interest rate. which arc highly uncertain (see the box ·'Comple.,ities of Monetary Future changes in the federal funds rate Policy Rules''). will depend on the economic outlook as informed by incoming data The FOMC has continued to implement its program to gradually reduce the Tlte FOMC has continuod to emphasize Federal Reserve's balance sheet that. in determining the timing and size of future adjustments to the target range for The Comminee has continued to implement the federal funds rate, it will assess realized the balance sheet normalization program and expected economic C<lnditions relative described in the June2017 Addendum to the to its maximum-emplo)ment objective and Policy Normalization Principles and Plan~" its S)OJlmetric 2 percent iaftation objective. This program is gradually and predictably This assessment 11~11 take into aocount a wide reducing the Federal Reserre'ssecurities range of information. including measures holdings by decreasing the reinrestment of the of labor market condition~ indicators of principal pa)1nents it receives from s..cocurities inflation pressures and inflation e.,pectation~ held in the SystemO pen Market Account. and readings on financial and international Since the initiation of the balance sheet development& normalization program in October of last year, such payments hare been reinvested to the In evaluating the stance of monetary policy, extent that theye xceedod gradually rising caps policymakers routinely consult prescriptions (figure 45). from a varietyo f policy rul~ which can serve 15. See oil< Jun< SEP. 11hkh appeared asan addeodum 16. The addendum,adople<l on June 13.1011, is 10 rile minure<of rhe Jun< 12-13.2018. metring of rhe 3\•ilablear hups:l/ll"w.f<dt'!'alrese~<.g<>~1moneta~poti()·/ FOMC and ~ p= nre<J in ~an 3o f rhis report flles'FO~ICYoli:yNom)a]izlt1ion.lllllU613.pdf. ~~-Principal po)'lll(niSon SOMA """rili<s As.:ncy d<bl and mong•~b.lck«< s<rurilics - so IR~ - 10 lkC'Itl\~ - ro - ~1oathl}~ - ro - 60 - 60 -_,~. -~ _, ~~1111111Whl11nuulnm~, ~ - 10 1017 1018 ZOI9 Nore: Rtin\'(;)tmrtll3nd r\'(.!cmpbon amoUIItSof3~'fK1'mOf1pgr-lxtd:cd$00urit~art proj«1toosSUtnins inJW'IC 201$.. Thcd;,ti' o1cOO l~roustJ IAX\"'lllxr 2019. Sot'U"E': F<d.T.II Resc~t Bank.ofN~· Yor~: Fede-ral Rescot Soard staiT~l"'btiruls. 184 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00188 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.93081717 M().\EIAAYPOXV~EI'ORT: MYl0t8 37 Complexities of Monetary Policy Rules Overview mlKt 1M lltret ~ p<incipl~ of good mo~t~UI)' pGiily noled e"lier. Each rule t.J~es into .JC<O.Jnt estin13tes ! , f . o N ,i o a t \ d l \ I s > 0 N r 1 l .> o 1 t : & o H e, 1 a i 1 ) p 0 p ' i p a o c o . , l a l . i , ~ l c l . \ ) n i ' r n i u n : n . l d < u r u . s m c s l a ~ u b r > r e e . < & ! m l d t t ', a i s l t o h u t c e d c h m h t « . . . ' l o t " l s < i C ' t " o i a n ' l " l t o l o r d m . r d m i o i c o u < L i . l t H • t ""' o o R n f e h c s f o c l e p J w n u r ~ l n f s d a s c u t t l t b u h h a o e e l l - e f o m n c t - l . e o n r n d u o a iK t m o y p I ~ IIC f i r i o u ; d m d e a t m h c e h a i c . t ' < l f i i i . n . i . g . f . m , t h e e m n F p t l < o l m er• - l . .nt from o:s wgt1 ·~lue•b>&"'"' on <SbmllOoi ,.....ICt ~,. .. the rottd unempl0)100ftt that is SIJSUinablt g ~ u a i c d k a i n n c e ti f l o t r ( ( p 0 o 1 l 1 i 01 c 1 y 1 n ) 1 '. 3 P ke o ~ l S ic . y ln r d u e le tc s l c , a s n in J c l e 'O 2 ' 0 id 0 e l , h elpful r in at e th \ e th Io e n u g n e e < m ru p n iO a ) n m d e t n h t e " ru '" rr g tn ip t l ; ~ th m e fi e rst n -di t ff" ""t prescriptions from policy rules hm IX'«1 included rule includes the change 10 the unempiO)ment gap In wfiUen ma~erials that are routinely sent to the "ther than its le-~1.' lit old<lition, four of the fi"e rules fcde<.tl Open Market Committ. .I F0.\10. HO'>\t\'tl', include the difference bC!\\ctn '"'"I inflation and the lnte<preti~tion of the p<escriptions of policy rules FO.\IC's longet-run oblecti,-ell pe«ent<11 measured «<~"'"' c>ttlul j~Jd&moat about the me-t of by the annual change '" the price incle-< f<lr per!Mll c th o e o< in id p o u ta t t s i O 10 I I t S h e N r ul t e i s l t d . O .. d . . th , e d o im n p o l 1 ~ u al l i .t O i R n S t d o a t c i c lt c " u " n ' L " ' l < e\-.1 ru ~ le in< t b > l p es tn t d h tu e r w t<. b ( t ) l I w PC ee £ n 1. t w he hi l l e e \" t 0 h 1 e d p p r n n c es Pel)() rule< c.n moo.pora:e I.e) proac•plts d good lOeb.· one! the le\-.1 d pn<K that would btob<tn~ I1II>MII) poli<\. One by pnnciplt is that ntOIIOiat) iii nllalion hod IX'«1 consuot at 2 pe«ent from a i p n o l « o o <) o o si m lou ic ld c r o e n s c p l o ~i n o d n s in -A a s p e r c e o c n lic cl u le b y lt p " r " in ~ c t i o p l c e h i . s !n ses t s h p e o r c e! i > f ) « · < u s k t . a s n i a n c g c ) o - u e n • 1 • I o I f ' t I h J e ~ d ) t . \ ' ·i T o h t e io pr n n d -l e in s f - l . a t ti o r n u l f t r orn i t n h O at < m tio o n n e is t . b tr e y l o p w ol i t c h y e s d h e o s u ir l r d o b l e e - a ~ c 1 c a o n rn d m e o m d. p l l u o • y ~ m w en h t e n lcoounu«i on nex~ p.~ge! is ~ow its: m.tximum suSUiinab!c 1('\'tl; (00\'tfStly, i o m n p R o p . o ! o t e o s t i o o t n r o y . h t p h o o e ld l p i s c o . y A l i s c i t y l h o r i u r a d l : d e k b s e h e y o f p u t r l l l i d r n i c b c i t p t i • l a e t c i i " ju s l s " t t e o " n c '' l t b 1 h ) 0 • e S m l. o lb re il ize aA P R c < i-J li l & c , < r "u n . "< - t S 'll ' . m · n l ' l< ~ - " s o C 9 " I l ~ . I C ' h I i " : a l f p ' \ < \ ~ , J d " I l ! ' • i r ~ • e • " • l " I U ' d R . " t i . " n w ' . i n " K . " • : k " B i s " . o " ! I n " \ H n " 1 b k o t y c l d t e i . h . K \ e o 1 a r o \ r . o ; d w ~ e . < ol thon ..,..(or. .... in «SppOiS< 10 ptr'i>ltnl inctt.JStS or ,.._l9Mt&l.prlf"""'."""". ............... c!Krt-ininlb:ion. iolrocb:tdbl""""'-~·lOOl\-.1 rulK Ec , o • o n o < m l > u S cl 1 i S n g il a th < e -e " o - n el o l l - ) k z n e o d l\ 1 N 1 i T l a \ ) ' l - or tl9 ~ 931 r p u o l l e ic . y . ~ \ .. - · . , l " l - l " f " . i " c . c , , A l . p N , o , I l > _ i · < • . y . * . N . " . i " . t s " o s " ~ o b , o t p u n p l J . o o 9 . 8 h ' l J n - o & t v T O m " l l i ; . o l A r Otlw< rulei include the •IJalancro "f'P'''Ch. rule, the ondJohnC. 1\JI-•ZOin ~"'!!le•r<IRobuSIRulr-lfor •adjll!led Taylor (1993( rule, the •prict le. .• l• rule, and MMtt.v)' PolK'\,. . 1n ~mli!IM. fr~n ilnd Mic:h.ltl the 'fil11 diffetence· rule If'S"'' 1\l-' These policy rules ( W ,\m oo ll d < i < o d o . l l , l < lt d N s . o . r f o l M .l f r o x ii / J b r o < o ! l l, . A cl I . · l 8 f ~ () S l 9 lf . ! ~T•lhceon,.o.m,i. a ,, . ( m u i. M JB I' t. f<l1 di!<.,.iorlll'g.lrdi ng prin(lpifs for lilt CooclKI cl - o h lt e li s < o H oh lJ t< > t d b b .a o n o p ld o M lic « \ - - . r w u y le lc > C fo I> rd I e )t f l f l l i( in s• g ls p o c l l • i " n " « '' l ' < e-c.. .....p c o l l th i t < r y . o d n er d a - i ~ R p « o M• liq S ) N - io ~ s 0 .I 1 < 8 'O II . oo , <d _ ol . pce J s . c r T ip h c e l 1 on 1 5 \l . o r <1991• rvlo..,..,......t!bd: in"""""' l · l> · li " < ~ yi ' 'M - c f ip " l ' fs " o " n ." d .." f' . l " _ .. . ' _ p .ll o o l o " <d ' c - iC -p ..' o "" l "" i h < a \ p ­ lc• . - .o l l t iu . : t io l o c " i " i " O " I ' . I .. p . > . ! " ' " - '~ ~( - ;I - ) " I' " ·M " d . • . b . . .. a . t ~ CiOP•ouldbtilf ..« OfOI'I'I \Jo.K~~~ <1 l 9 . 9 1 !\ 1 ·1o1-'1,.A.1.o,.l.'ll'o19liolcii\U x i u t ~ " t> " . ' . ~ , " .. " . " . " . l . . . "' - lor ~ L t < q il i o b ubO - I . I T ~ he I N II II f -I - < . I . f. . . " .. " . " A ' . & ., ' .. P .. " .. " ., ' . ' !b a d d ; , i b< n aus - t . N "l i 0 n" t . « >" o l" . c y . ' 'r . '<Y - . d 0 ' 1 ~ . 0 . S ' J . P o O h I' . n · S t & 9 o > o T - l > 1 l ) t l . < o o r . ( b - l n 9 l 9 r .. 9 . b 1 . . , . l 'A ~ . n . < H , « . i h ! , t IQ . p , p I ! . I( O J , > I I M d . l l I M I 9 )> < O . o . l . m t ~ r ' W e ~ .t ' i W b tn e r u a e m e so < e l " f m " t'§ ' ¢ O " q " U , ' t ! n C "" M t u r t o . 1 ' ~ l1 \ I 1 O C ~ ' ' t . i • e o " m n " t .1 n " r l " e i " h i l i n g · l t s ~ ~ o · a o c f i o : i e r O r t f p N i r a : o : t e r i d \ n . ' o f t o o t l Ruh!Ch 1 k \J " i " ic : y U R n u i> le « s s ; i i l n y o jo iO hn N 8 u . g T o O P ) l I o C r, 'S < S d i o ,p M p. O J tW t~ W l r . P T o h lic e y ma 4 c . e C in . f l o c r u m l.> .u lin io g n l . h K e ' p t « lh !C e n ri o p t t e io b ns e b ol v l i f l ~ t g p Ur r e i c A t . - lt\tl rule ol<ftv<~IT>ylor!l99llniltw"wcll<d10ll".JR~I;clwidor r~i•es setro.ng;) ~111ng )~.U fOt the price lt\-el from whkh ' II " IIi ' < f - o , l o ln n , C l . . \ , \I . l . l . ; . .. . ~ . 1 . 2 , 0 1 0 1 0 . 1 ._ . • ' / l < h Ju < iiW ,. / l c , l . l , l . o . M , fo y r . C M t o t6 r. 1 .U o r n y d a to s c th um e., u r l t > in :• g th \f e M l . p A «« r 1 o 1 u 1 r " < " lt ' t " .o I l i i M oll. f l . ti t o h n t . . . f . ' , S .. ' . J . r i e n B g l u l< « n s d t9 98 . " .. . " . . . " " . " " . " " . ' - " ' ' " i " · o " l R l P l" d O " l < e n f < t s l t b : l . e t s 1 lo . '. . l l p • ' i p t o 9 . - 9 $ S - l i \ A o . p b , n b < _ o . . o .. n . . d ,. f , t l . r IM ~ ul . t 1 " ol J i . o i t ~ f W t l < " . b " t o , l n . o . n , d . . , . _ ... ~ . " . ' .. r .. a i l " i " J '' I m .t .c i .o oo . "~'!"U'dboolstt .m.l 185 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00189 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.04081717 38 PART2: ,\ION!TAAY 1'0\«:Y Monetary Policy Rules (continu<d! A. Moneta!)' policy rules Taylor (1993) rulo Balaoo:d·approoch rule Taylor (1993) rule. adjl;ted FirsHiiffr:renct rule Non;: R.~. Rl-'. Rl'~. R/>t, and ~~·~ rtprcseot tlx: '"J.liJC'S. ofttM: oominal ffdml funds nne Pf(S('ribcd by the Taylor tl993), b313111.'\-d-3J1PCOOC'b. adjust~-d Ta) lor (1993). pri«·lc\\'1, and fifil-diffm'flfX ruks.ttSpX~i~cly. R.,cknot~thc-actual nominal f«l"tal fu.ndsra1t:forq1.13n:cr r.tt is four~uarttrprict infhtiott forqU3rttr r. u,i$ tht unemploymtnt rateinqoon~ r. and ,,u istJ\colt\'tlofthe ntult.ll real fNI.."nl funds r.ucin t~ longer run thlt on 3\'ttagt. iJ c-x~··ud to bcoonsistrnt \\itb :su~1aining ma.\imumnnpk)rmrnt and intbtion at the t!OMC's 2p cn.<totloogcr-runobj«ti\'t, t•.tnadditioo.u}•is ti:K-r:neofunemplo)mtflt in tik lor~~rrun. Z,isthccumulatirc sumofp.Jit dc\i31ioosofth:f~-&:r.tl f\ll'lds rate from~~ pl'\'$(Ti~nsofthcT3}1or(l9?3) 1'\11.! \\'hen that n.dc prescrilxsstnin,gtl'K-fcdr..'131 r~,~.nd$ ra.tc-~tow ttto. Plgilp,iStht J)el\'tntd.."\iationofthe3C:I.U3l k\<tl o(p ricts rrom.a prire lt\·\'ltb.lt rists2 petctnt pt.."'l }'W fromitsltwlina S(JM!i<d Sl3ning period. The Taylor (1993) rukand'()Li-.'f poli1• I'\IJ..:s are gco..'r.aU) v.'Ti!trn in tmn~ of the dt\iatioo of ml ootpul from its full <;'~~city lc\cl. In ~ t<juatic>ns.. the output gap has bctn rtplao.'d ~~oitb L~taP b:twctn tbt rate of t~MIJlpiG)mtnl in tt.t loi)$rrun3nd i1$3ttuallc'wi(LI$itlg3 f\"lalioal$}1ip kttO\Io'J\bOl:tln's law) in order to ttprtStt~ttbt ruk$ in rcrmsoflbc FO~IC's st3tUt01)·pk Historictlly. nxwcmcnts in the ®tput and un.:mploymcrll gars ha'l' bml high~·oombtcd. Bo..~ note 2 pro\».."S rd'crrnm: for •he poli..)' nJb. the long·run objl!(til~ in earlier periods as 11~1las also recognizes that the federal funds rate cannot be the currer~t p • e b r o io l d • . Thus, if inll.ltion had beerl running redoced matt<ially below zero. If inflation runs bei0\1' peru~erld)• 2 percer~t, the p<ice-lel'd rule would the l percent objecti1~ during periods 11i>en the rule prescribe a high« It'-d for the federal fuoos rate than prescribes sefling the federal funds Idle 11~11 bei0\1' rules that u<e the curr"'t inflation gap.li~ewise, 1..ero, Ih e price.lif\-el rule'~ ill, O'l't'f lime, ptO\•ide if inflation had beerl running pe<>ist..,tly below accOillmod,llion to ma~e up iO< the past inilation l p<tCer~l, the p<ice-iel-.1 rule would prescribe sefling shorti•ll. the poli<y rate lower than roles that use the currer~t The U.S. economy is con1plex, and the mooetary inflation~. policy rules shown in figure A do 001 capture many The ~justed layiO< 11993) rule recogni<es that dements that are relev•ntto the cooduct of monet.lry the federal funds rate cannot be reduced materia II)· poli<y. MO<<OI'er, as shown in figure B, different below zero, and that following the prescriptions monetory policy rules often offer quite differer~t olthe stond.udlayiO< (1993) rule after a reces~on p<esaiptions ior the federal funds rate.' In practice, during which interest r.tles ha\•e iallen to their lower thefe is no unique criterion for fawxing one rule 0\'ff bouoo may. for a time, 001 provide enough poli<y ano!her. In recent l~•o;. alnlOSiall oi the policy rules accornnlOdation. To make up iOf Ih e cumulati\-e (conUnu<d) shortiall in a<commodatiO<l I.Z), tilt ~ju~ed rule prescribes only a gradu•t return ol the policy rote to S. These prescriptions"' alcul.!!ed uling !II poblisOOJ 1 ti 1 l 9 t 9 lp 3 o ) s r i u ti l l e 'e a ) f t l e e r w th is e p e r c e o s n cr o i m be y d b I~ e · g t i h n e s t s o t. l r n e d cO a \ rd ~r T . a ylor S < n I b t .H \ l l a t \ ' r i t o i ). l r .b r i a u n s i l e la d in t e io l s e n t « i m a ii n . a d r t . e - t s t h c o e a i u n t n d h e t t m h lo ~ e o - ! g o m t o e t g · t , « u ~ - n r t u \ r n i a i i t \ ! e ' J a e a l u n o e d f o t ( h 2 f 1 t t h e The panicul•r p<ice-le-d rule spe<:iiied in figure A u~mentralc. 186 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00190 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.14081717 MONEIARYI'OUCYREI'ORT: JULYI0t8 39 ... , -_I, _, -l _, -a "t' 2014 l0t6 ))IS ~:t:Th:rulo!:s~~'~¢1whr$on.~f<6.'0:1M6$~21'141h:~ltlmll'lC{,~iJt:o.'«<l::t{\j~lb:~p.'tt.~~ia lbt~iral."tlkc~~t'\j.\.~(fa)~fi»!XId~.~,~P'oj..'\1:it»SofiMtaa\~lkclbrW:ni~fll(ad llx-.~D."'Il!Wxt~-Ntboup~t(tumu:X~'1i.1csfNaaB~""'f.«a..lcaKID&~llx~\-biGilD:ots.bl'(ll ~~ pcttm. Thc-bl$(lukol6.:fM" lr\"i i&lb:n·.:"'~~p:hdcllh:~iD&'i f\'lrPCE('\~~~a'XI"R ia 199S~•lr:'I'('I,'UP,'f )'Qt. Sct.JJCI:f~~~e.dolfflt~Wo."..;nK);v.-.,.,Bb:Cbp~~fo$cBJR.N't'l'f:Bo.1nJ.!tlfrat~ shown have c.~l ied for riling'"'""" oi the f«letal funds gt01~h. changing demogtaphk>, and 01he< shins in the role, btr1 the pa<eoi ughtening lhatihe rules prescribe ~ruclure ol the economj•. As a resul( estimales oi the has ''aried widel>'· ""'lr.l real interest rdle in the longet run made ioda)• may differ sub<!.lnliallj•lrorn estimates m.de late<. Uncertainty about Ih e neutral interest rate Academic lludies have <Siimated the Ienger· in the longer run run \'t~lueoi the neut.tJI real inte~est rate using Slahllic.!ltechniques 10 capture the '"nations among The Taylor (1993), balance<l-app<oach, adju<ted inflation, inlet<SI taleS, real gross donl<Siic produc( Taylor (1993), and po-ice-level rules p<ovide unem~loymen' and other data series. The tang. oi p<escriptions for the ~f!l oi the i«letal funds rate; estimates~ ll'ide but suggests that the newal real rate all require an <Siimateolthenewal real inlef<SI me has decline<! since the turn oi the """lury tfq;ure 0.' in the longet run ~.''l-that is, the level oi the real Thefe is substantial ~~~stical uncertainty sum)mding f«letal funds role lhal is ""peeled 10 be consiSien( in each es~imale oi the longet-nm \•alue oilhe netJtral the longet run, with maximum em~loyment and Sl>ble real rate, as evidence<! by the ll'i()th oi the 95 percent inllarion.' The neutral re~l interest r.are in the longer (conrinue<l on ,.,XI page! run is deietmine<l b)· wuclural features of the economy and is not ob<erloble. In addition, its _.lue may '"'Y 1. The"nse""""''""OOilljJW<I"'""puiJI;s~-«~ Ol'et time becaUle ol flOC1uations in trend productivity va~ or \a lues comjXf.ed using the met~· irom lhe foil&,, ing stud~ Marco Ott Negro, Domenico Ci.lnnone, •'"" P. Gu-i. and .WmT ambok>lli llOtll. •SJle<y, liqu~<y• ..0O le NaMal Ra:e ciln:«"'-' B•ocki'8' 6. The flrst·cfriietence 1U~ st.cr...n in l"igure Ad oes~ PapeN on Ccooonlic A<m·il)•, Spring. pp. m-94, "''~""' require .1n e!Aimatt d.1N! netJtril1re-.al in:ec~ r~e in the \\uw..bccd:ings.edu.lwp-<ort;enl.<'~l7i081 ion&e'rtW. HOWt\'tf, this ru1eh.Js itsQfl.\ll sbottcoolint>-for dtl"'%'«"1!j)t7bp<aj)di; li.ltlwyn Hoi•Ot>. Thoma<Uubac~ ~mple. restar<h sugses;s IN11hi:s sort U rufe will result in .and John C. \\~lli.Jms t201 n, •Me.asuring tile NatiJfal ye.r.e. ,OOtilit)· in tnlp1oo,'J'netlt ,dnd inii.Jtion rtbti\-e to \\hal Rate oi Interest: lr.::trnatklNI Trends atd lX>cermfnJA·s.: •ould be obl.Jii'Ofd uncle< Iii<T <yb (199l)and b.l~· /0<#"11 oilnt""'....,C cOI>OIIIi<s. SUW· I, ,'(li. t08 a funds ~ r.J:e r i u n l e th s e u ! n o l n e s s e t t h r e u n e! . f l i n m d a tA te e s r o . i J t : h e e o t f i ! u M M" t; m d p • l t o a •i l m ~ t' . n - l in 1 I •" M ' a " yt " , " pp (~ . 1 S 6 S ! < . )- 7 'T 5: h Se. E . > ~m p i « n W K R .io ., l l w ln " ; " < " - " " J ' R tl . d > te n m in a t r h e !he ~ nm ~t a1e illtluded in those rule$ are wfficiena~· long Rul'l: T~ Set~ [vidt.>oce with lht Eff«til'f: loo.,·E'f i~ from thei1 ltue ~·alues. Soond.' fl'DS No<es ~\'W>ing:oo; Boofd ol ""'"""" 187 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00191 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.24081717 40 PART2: ,\ION!TAAY 1'0\«:Y Monetary Policy Rules lcontinwdJ unc<rt.lin~· bands lor !he estimated \Oiues in the tlr~ C. R:.nge ofs ri~XItd ~tima!es fot' the-t~n~lral ml rrderal quarte< of 10181figure 0). funds 11te in tk lon,g~r run The longer-run fl()(mallewl oi the iedefal funds rate under appropriate monet.lry poliC)'4'J'IIto the sum of the neutrolreal inte<est rate in the longer - s run and the FOMC's 1 peroent inflation objectn..,._is _, one benchmark ior e\'JIUJting l.he current ~ance oi n)()fle(ary poli<y. Un<ertainty about the Ionge<· -) run value oi the neutral real interest rate leads to -! unc<rt.linty about how far the current federal funds rate is from i~ longer-run 110<maiiMI. For the Taylor -I n9 93), balan<ed-app«>ad>., adj~ed Taylor 11993). and price-1"'-el rules, different "'imates oi the neutralr<'al interest rate in the longer run tr<~nslate one·for·one to -I diffe<enctS in the prescribed setting oi the federal funds -! Idle. As a result !he subst.lntial s~ti~icll un<ertainty accompanying ~imates of the neutral rate in the longer run implies substantial uncertainty sunounding 1\on: llK'sblall:llirs~pmo.h()(~~uikfiMib) the r•escriptions of each poli<y rule. rollowing the e $ . ol; c l(1 ~ : r ~ ~ b 1 m R c rtc 4 't\( ~ ~w ~ fl c 't b ak . ll .~alo:oo;•illlrddtl).~ p:escriplioM oi a policy rure with an incorrect value oi lt!ltdilbo.\!Xkl !he neutral rate coold lead to poor economic ootcomes. If !he Ionge<- run 10lue oi !he llefJtral real interest rate is cunently at !he low end oi !he range oi estimates, b th j e ·l n h m e o lo n w et e a r ~ b · o p u o n li d c y o n is n m om or i e n . l 1 i l k i e n ly te < to e s b t e fd c t o es n s in tr a th in e e d future. Hi~ork<llly, the FOMC has cut •he federal oi the Ft'dftal1testl\~ S)irtm, ffbc'wlty 9J, https:/An\W. funds rate by 5 pe<cent.lge poin~. on a-,.-age, dur;ng ftde<olr""'~¢ec""'eld.>"''"""~<ds"""'<'<l0tr,l doll'nturn< in !he e<Ofl()(ll)'· Cutting the federal funds f t ' h \ e id -t e x n p c e e c - t w «J i _ th ,~ - . th ~I e - - i f ~ f! e e r c e t s r ~- .- r< e ~ -b t~ " t · D t! - f ( · h b e o - u lo 0 n 0 g . - 2 A 0 A 1 ' 6 Hi 0 m 1 e 0 -- 9 s .h er t t m es t ­ r.11e by !his much in nesponse 10 a lulure ecooomic MkhJ~T. KHeyQOtSI, "IW>.liC.nlheO.~T~IVsobovl downtum may no1 be feasible if !he ""'ual federal the Equilibrium R:t.al In~ R.\ltt?~ finance .and fCOtiOMics fun<~ rate is as low as most oi !he estimates suggest o D f i t s h cu e s r si m on S • e l r R ie e s s 2 e 0 n 1 ~ 5 s · 1 7 - 7 l\ . Va S sl q l > i < ~ tm on b : e S tl, o h .! l r r d p o ti l d G < o .d l. o " t t mM lconunwdJ O<Sf10.17016/FEili201l.071: Thom.lsuw.ch and lolln C. \\~Ui.lms fl015~. ~Me.awrirll; the Niluf11 Rate of ln1«tsl. Co--..nors of lhe fm•l Resen• Sr•<m, June>, ht:ps11 R 8roo ~ kifl · g s H ln o s t l < r h .U ln 1i s o C n. < ,N n '< iE Yi < 'f I t I l 'o lb r t l: f ; ) ng , P'l" ~ f I I H 'W I W I' . > b« sh d ; i " n & g ' s o . e . t d Cl o l i t .O i~ W ian I 0 M . ~ 1 t 7 t 0 h W 6 F (2 (I 0 ) 1 S > .1 •. 0 " 1 Q 1. k 05 u 9 b ; 1 T tn h g o m th .l e s N A J . : L 1u u r b .a il l < R a at n e d o i eduA''fXOI<<OO'~t~1liiii'PIS.ullb>ch·I~IH"""' IA:t'l't'Sl: A Comp.J~ oiT\\'OAI~etnari\-t Appc~.. .. natu~al-inll!feSI.·r.ltt·«'du~.pdi; Kurt r. Lev. is and ffal')(iSOO !<ooomic Bri<l 11·\0iRid>mond. Va.: fult<al ~.Ban\ Vazqutz·Crandet20171. 4o\1ea..suringthe N.ll\ltal Ra:eol of tUcl>mond, Oci<>l>o<), haps;IA'""'·rkhrnondit<!.~-lm<dial tnter~: Al:emali\-e Speciflcjli()ns.,"' fiMnce and EconomiC$ ri<Nnondiroof&~;oo,i"""'rd.:«oooo>~-bliA>V!Oill DiS<ussionSetiE's. 2017.059{\V.ashi~oo: Bo.udoi pdi'eb_IS·IO.pdi. 188 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00192 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.34081717 MONEIARYI'OUCYREI'ORT: JULYI018 41 D. Poin1es1imaoosand uno:nain1y bonds for neuoral real rJtc in the long<r run as of lOIS:Ql Stud)' PointCSiim:ue 95 pm.~t ui'!Cfftaint)' band Dcl N<gro and othm (2011) 1.3 (.i.2.1) Holston ond others (20 17) .6 (·l.U.l) Johannsen and Men ens (1016) .7 (·l.l.2.5) Kil<y(201)) .4 (·.6.1.6) l.auboch and Williams(2015) .I (·5.4. ).6) l.ewisan<l \'azquez.(;mndc(2017) 1.8 (5.3.1) lubi~ an<! Mauh<s(lO I)) 1.0 (·2J.4.5) As a result it may not be ie.~<ible to prcwide the iel-els In the). .~ foiJo<,·ing the llnancial crisis, with the ola<comrnodation !"<SCribed by many polity F\Jles, iederal iunds ra:eclost to ttro, the FOMC recosnized potentially leading to ele\o:ed unemployment and lhal il woufd ha\'e limited scope to res.pond to an infl.1tion il\oeraging below the Comminee's l percen1 une>pected weakening in the e<O<>om)' b)•lo<"!ting objecti1~.• Rules that t1y to oliset the cumulati1~ short·term inle<est rates. This risk has, in recent)~'"· short/all oi a<comrnoda!ion posed by the lower boond prcwided a sound ratiOMie f01 iollowing a more on nominal interest rates, such as the adjusted Taylor gradwl path oi rate increases than that prescribed b)• (199}1r ule, 0< make up the cumulalivt short/all in some policy rules. In lhese circumstooces, increasing the lewl oi p<ices. such as the pric. .J e..~l rule, ace lhe polity rate quick~· in O<der to ha1·e room to inten<led to mitigate the eliec~ of the lower boond cut roltes during an economic downturn could be on the econom)' by P'OI'iding 1110<e acconmlOdation counterprodudive bec.1use it might m.1ke a do\\ ntorn than P""ribed by rules that do not hill"e these more likely to happen. n~keup ieatures.' ·Rethinking t.licroeconomic Policy; .1 conft'ffOCe he$d at the """""'tn$!hute io< lo:..,.tioolt !cooomicl, ll'>lhingl<Cl. Ki 8 lt . y f a o n r d f 1 u o M M e t ' d l & R u ob ss e i n o > n l 2 o 0 i 1 th 7 e 1 s , e ' M iss o u n e e s c , s a e 'l e ' l l M >l i < <N r t i . n >l a T L . ~.­ O be o < o n l . > ln t< ke 1 2 2 0 - 1 1 7 3 t , O ht l t l p ! < " / ' . " ' ' J .p >~ d .c f o : ma.o~or • M e< k M h i 3 l < e 1 s ' l d l' o o c o u d m fO ef < l d i ( S t I 9 9!1), In:fff'!.t R.lte \\'otid.' Brooking> Plf>M on CcMOml(' AcrliiJy. 'C..Ill>en~a')' ~·Should "''""ryl\>licy B< Coo<loct<d Sp<i~ pp. ltl-n ilttpsllh"'w.il<oolings.edu"'JKOOt"" in.ln fla cl Ptice Slabilil)·~· in Nev.•C hJISMgt?s lot MOOfW)' uploj<W20t7100lcii<)~"1J1>tlilj>ta.pdf. Po/ky. p<Oeeeodifn"gs' "c"ia' S)mposium spoosclft'd bj•t l>e r.de"l 9. !cooomist< ""'~ fouoo oh.!t a 'mokcup' policy"" R.,.f\0 Bank City (Ka""' City, Mo.: federal bE'thebestr~inthoor)·v.henthepolicyinlerest R""'e Bank oiKansos City) pp.177-lt6. ilttpsl!h~,w. rcl:eisconstr<linedat;:eto.~BMS.Sffnal'lk.et2017J. kan$.1SCityf~ica1i~'n'SearcM'5Cp.$.~UillY '""100ttat)'Policyin.JNev.·Er.t•papet~esenled<!t t!Cp-t999. 189 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00193 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.44081717 42 PART2: ,\ION!TAAY 1'0\«:Y In the first quarter, the Open Market Desk The implementation of the program has at the Federal Reserve Bank of New York, proceeded smoothly without causing disrupt ire as directed by the Committee, reinvested price movements in Treasury and MBS principal pa)~nents from ;he Federal Reserve's market& As the caps ha1•e increased gradually holdings of Treasury securities maturing and predictably, the Federal Resene's total during each calendar month in excess of assets have started to decrease. from about $12 billion. The Desk also reinvested in agency $4.4 trillion last October to about S4.3trillion mortgage-backed securities (M BS) the amount at present, with holdings ofTr easur)' securities of principal payments from the Federal at appro,,imately S2.4 trillion and holdings Resen·e' s holdings of agency debt and agency of agency and agency MBS at approximately MB S received during each calendar month in Sl.7trillion (figure 46). excess of SS billion. Over the second quarter. payments of principal from maturing Treasury The Federal Reserve's implementation of securities and from the Federal Reserve's monetary policy has continued smoothly holdings of agency debt and agency MBS 1vere reinvested tO the extent that they exceeded To implement the FOMC's decisions to raise SIS billion and Sl2 billion. respectirely. At the target range for the federal funds rate in its meeting in June. the FOMC increased the March and June of 2018, the Federal Reserve cap for Treasury securities to S24 billion and increased the rate of interest on e.1cess resen·es the cap for agency debt and agency MBS (IOER) along with the interest rate offered toSI6 billion, both elfecti,•e in July. The on overnight rererse repurchase agreements Conunittee has indicated that the caps for (ON RRPs). Specifically. the Federal Resen-c Treasury securities and for agencys ecurities increaS<.>d the IOER rate to 1¥. percent and will increase to $30 billion and S20 billion per theO N RRP oft'ering rate to I y, percent in month, respectively. in October. These terminal March. In June, the Federal Resen·e increased caps will remain in place ·until the Committee the IOER rate to 1.95 percent- S basis points judges that the Federal Reset~oe is holding no below the top of the target range-and the more securities than necessary to implement ON RRP offering rate to IY. percent. In monetary policy efficiently and elfecti1·ely. addition. the Board of Go1·ernors approved 46. F«l<r.ll Re<m'03SS<lS311d liabilili« m1 l!11l lOIO lOll ZOI2 2013 101~ ZOIS 2016 2017 2'01S NQw.*('f\'\Jil:aad~T)·f-.~M~(If~.9.\~,a/)lj~((~il;«'f"''Q*J(1jon~C\"'tta)ltW;!iquidir)$'o\-.,:iq,:«<(ct Milll.'fl ~. 8c.arSt.,"'"JJ!'M,.andAIG:ar4«btfet\"Jii f.xil~ incltJdinslh:Primar)• D:UrCrtdit f.lcibl). tb: Mio.1·Bad:cdCOC'WI'ICf~ Papo.'t~l(6.1 M~ ~IUiual r~ ~~ f~!i~;y. 0: c~ hp:r f\tlding faciliTy. -.1 UJc T;:nn Mct·lbdo.~ ~"l.liziesl,(qn Facitay. ~ asscu~ i!>:bht;CWOtti:tcdpr<tfli1,1:1'11Satld~boo~ONI!cldour.rtp..~Widodlcttiabi1iti.::i-eo.:W:s~~~a~'ITII."f'R.'41tU.S. Trta.olur)·~,.,.,UAc.."o))..ll,anda.:US. Tl't'~~-mr:1lllf)'Fu*"-...,AC'«!!CL tkdaUit\k"'OihrougbJifly-1..2018, Sol.-.«: fcdcft]Rc$cn.:Bo.v.i~lisi~Rd..'t5tii-4J.·f.1d011A~R<$m'tlb~- 190 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00194 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.54081717 MONETARY POLICY REPORT: JULY2018 43 a V. percentage point increase in the discount was trading near the top of the target range. rate (the primary credit rate) in both March At its June meeting, the Commiuee made a and June. Yields on a broad set of money small technical adjustment in its approach market instruments moved higher, roughly in to implementing monetary policy by selling line with the federal funds rate. in response the IOER rate modestly below the top of the to the FOMCs policy decisions in March target range for the federal funds rate. This and June. Usage of the ON RRP facility adjustment resulted in the elfectire federal has declined. on net. since the IUm of the funds rate running closer to the middle of the year, reflecting relatil>ely auractire yields on target range since mid-June. In an environment ahernati1·e investments. of large reserve balances, the IOER rate has been an essential policy tool for keeping the The elfec.tire federal funds rate mo1'ed up federal funds rate 11ithin the target range set by toward the IOER rate in the months before the FOMC(see the box '"Interest on Reserves the June FOMC meeting and, therefore, and Its Importance for Monetary Policy'"). 191 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00195 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.64081717 44 PART2: ,\ION!TAAY 1'0\«:Y Interest on Reserves and Its Importance for Monetary Policy The fin.Jncial crisis that began in 2007 uiggered the As the economic oxp.1nsioo continued and deepest rece«ioo in the United Sl<!tes since d10 Creal unemployment declined-.Jnd with labor markei ~ession. In re>j)(Nlst, the ~I Optn Markel coodilions projected 10 continue impt0\1ing-the Commillee lfOMO cut iu targe~ ior the fede<al funck FO.I\C de<i<Jed !hat it would scale bad policy rate to nea~)' zero by bte Z008. Oth« short-term support by increa>ing the l01·el oi short-term int"est interest rotes declined rooghl)' in line wilh the fede<al rates and b)• reducing the federal Re5el\·e·s securoies iunds rate. Addilional monetary ~imulus w"s neces_(,jjry holdings. To th.lt end, the Comminee began gr.1dually to a<!dre« the signifrc.1nt economic downturn and r(lising its urget r~nge for the fedefJl funds •ate in lhe .associated downward pressme on inllation. The December 101S.late<, in October 1017, il began FOMC undertook other nlOOelary policy adi ons to gradual!)' reducing holdingsoiTreasury and agencl' put dol'mvard plesS<Jte on looge<·term int""' ldt.,, securities; this gradual teduction rt»SU!ts in ad ecline in including la~S(.lle purchases oi longe<·term Treasu~· lhe supply oi rest<\oe balallCf>. The FQ.I1C judged that securiti" and agency-guaranteed mongage-baded removing monetary policy >timulus throogh this mix of securities. fir>t rai>ing the federal funds rate and then beginning These polk)' ae1ioos ma.de financial conditions more to shrink the baJcmce sheet would best conttibute 10 acoommodati1-e and helped spur an f(onomic recm-ery achi~·ing and maintaining maximum emplo)•ment and that has become a long·lming economic ex,.nsion. price stabilit)• without causing di~loc:~tioos in financial The unempfor"""t rate has decline<l from 10 percent matke~s or inslitutions that could put the economic tole« than 4 pere<nt "'"' the course of the rf((JI-ety expansion <~I risk. and expansion, and inflation has been !ow and iairly Interest on resen'eS_.he payment of interesl on Sl.lble. The FOMC's a<:tions """'critical to fostering balances held by banks in their accoun~atthe FOO..al progre« toward m.u<imum ,.mp!ormentand stable Rese~~ l,..na n e«enlial policy tool that has pric~he Sl<llutOI)' soals ior the conduct of rl10f'oelary permiHed the FQ,\IC to achiM a glddual increase in polic)' est.lbli>hed b)• the Congress. the fede<al fund> rate in combination ~~th a& lddual The FOO..al Reserve'> latge-scale a«el purchases reduclion int he fed's securities ho!ding.s and int he had the side efff(t of generating a ~,.ble increase in suppl)' of resen't balances.• ln!er~ on resenoes is a the supply oi """~ balaoces, ~~~ich are the balances tn011e1ary policy tool used br all oi the 11orld's ""'jor that banks main!41in in their accounts at the Fedet'al central banks. ResM-e.' From lhe onse1 of the financial ctisis in lnlerest on reserves is the principal tool the FOMC August 1007 until October 1014, ~~~ the FOMC uses to anchor the fede<al funds rate in the target range. ended the last oi i~ OS>elfJCJr<hase progroms,the The fede<al funds rate, in turn, e>tabli>hes an important supply of rest<\'t h.!Llnces rose from about SIS billion benchmark for the horrm1ing and lending deci;ions to about S2V: trillion.' R.,..~~ balances rose ~~~11 in the banking sector (figure A). When the federal abol-e the l01-el necessary to meet resen~ requiren10nu, Rese~~ increaststhe large~ range for the fede<al funds th<SS ~~·elling the quantity ol oxc ess rest<\~ held b)' the rate and the in:erest rate it 1"1' on rosen• balAnces, banking I)'Siem. banks bid up the rates in shon-t"m funding ""'rl:ets 10 le.,.els consi~ent with those increases; ra1es in Olher short-te<m funding markel>-00 as oommercial paper rates, Treosury bill rates, and rates on repurchose ban 1 k . s A , l t l l w de ih p o i > ~ i i to M r i r o ir M n , ti ! c u r r t i d oo il > u (( R (W ioM itr , n aO ef O < i m 41 o 1 s w t l U k . s S ,$ . 3 O \i O ng o s c hts fconUnuedl ar.d...,.il'sottore<snoonks)that""i""'inr""'•"''.li>CtS .Jre el~ 10 wn interest (ll'ltnose ba~nces. \\'e reiet-10 ).lheFinanc~ISe<v~esRosuto:oryReli«Aclof2(1()(, theseinstitutioosAS•banli,: .t!Ahotil!ed d~ feckfal Resent &lrtl:s l<l M' iM~es~ on R2".' "f"or l « a U dt r t i t li i e le > d h cf o is f c d :u ; s ~ si • o f o i< o c l t O tJ O >t . v f< th d e e < r• h l a Re n ~ t e r t - ~ in t' f s e der,d b fe a d \J e n ra c l e R s 1- " .1< " 1 ' b t y B o a r n o i$ o . w be b lla j N «t o 1 l 0 d r e e p g o u O \J t ti ~ o · o s ;l o l! l li t M he i o ll o o s .l ~ rd ol I b !K ab ig o , c l. e a s w he "" e ' t e a M nd iz « e < , t a t n r d ; o G l r t e l tt w .l U < .S n . C " . " W "" ri " n l b ) .K ;" h " t! ~ O n t < n , G ' o " l h " o " r " i " ~ ' · ..e.f s f c e h < .u t l , g ~ e O d c r to o b O e c r t o 1 b .1 e 0 r 1 1 1 ,1 . 0 T 0 h 6 e , f b f y i« ti t l i e \ • E d " a " : ' e S o " l l t 'Y hi s •Hf>vlloestl>e FOOAdi"" 11$ Sr!<OOtil's Hol<li~ ar.dl11>ols Economic l{ollil;,.tioo Act oll008.lhe Congress •'-""riled Aff«ted?" finaoce .1100 f<Onomics DOCussioo SeriE-s 2017· 1~ p.lyment cJ inttft>SI oo rt'Stf\~ to he:p minitnite the 099~V..,irrgton: llo.Jrd oiC..'"""'olllle f<deral R"'"' i"'enli-1-es for c:ostty restn-e 1\oidar-.ce schemes and 1<1 PfO'ide S)'Sttm, Sep!Mlbeft. httpS.:JAw.w.iedet<~f«>sMt.p.·reconrtY tl>t f«k<al Rtsm• with • pol<y tool rhat could be usdul io< f....Mit.YIOIIO<J'lt»p.pdf. """""'Y polK)•i ~,.,,~;oo more broodly. 192 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00196 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.74081717 MONEIARYI'OUCYREI'ORT: JULYI018 45 ~~~---------------------=~~~~ ~~~---------------------~~~~· - !SI) ·1~~ - L'O . . - - l011 201$ lOIO lOll lOIS ~·: nw~~((lht-brf-~~ii:thtWt'll<ort$«\c:;;.Dit Sm: 'Tht~l\).:l)dof6:"'-...-ot~i:li~~«<~'($n:l.: dJtD: U. illltaflao •b.X'bilu SMisp.'tGl$hipr. Th: kd:nl flllds rdll~l3.101talltn,!lidoit~Sbl11:1poilltl:bipKf. ~E'«\\oobrrxtsrloJc-l)'cnctoatwc!x'l.o\ttlb(~W.11.0Cfis Scutt: f« US. TrM:I)' toil.~ {'{Chc Ttta9.1). kc AA G.....niCollt.mlf'~JUDX. (moriala.D.'fNIA"o'f.IDfnt)t on ~n..-.i ~ ~· fNml Sou:o: F«TfC1;S;t)GCftcp>.DT((~I.l.C'.o~lb<oflb: R=•Bori ~10t)'TN$1~(.lurina:C~f«fcltt.tlfu:t.h.Fcdml~t Sri:of~YM.-:bfx.c'1.'4Jib.Bb.la:lh1~f«ilmn4«1~'tSao! ~~~.r~R~'C'BcG.'\1. agt.......,IS-all tend to 100\" higher as welllfigure 8). is highe< than the interest il pays on rese~.., balances. This ill(rease in lhe gtne<OIIe-~1 of sho<t·term Idles. Each )'eor,the FOOetal Rosen-e remil> i1> earning> togelhe< with the expea.ed future l"th ol sholt·tetm that is, i~ income net of expenses-to the Treaw~· Idles, !hen intluen<es the 1.\-el of olhet tinall(~l asset Department in 2017, remiii.Jil(e51()1.tied more than p•kes and 0\'etallfinancial conditions in the economy. SBO billion. Thu;, changing the inte<oest rate on resents has prOI'etl Had the fede<•l Resen" not been ;ble to pa)' to be an eifec1ivetool fO< ~ansmil1ing changes in the interest on resen'e balances Cll the same time that FOMC's t.lrg.'l ldnge fO< the fede<al fund< rate to 01her excess resM-es in lhe banking system wete large, it inter~ rJtes in the economy. 11oold n01 ""'"been able to gradually raise the fede<al The rate ol interest the Fede<al Resen• pays on iunck rate ando;hef short-term int~eu rates while banks' resen•e balall(es is iar I0\1'et than the rate that """'"b alall(es were abundant the F0.\1C 1100ld banks c~o earn on alternative safe assets, including "'"" had to take a different 3J>proach 10 scaling back most U.S. g&.'ffnmem Of agency securities, municipal monel-try polic)' acconmtO<idtion. This approach likely securities, and loans to b~inesses .and COO'SumetS.~ 11oold ha1-e inl<>l~td a rapid and sizable redue1ion Indeed, the b.tnk prime ratHhe base rate that banks in the r.deral Resen-e's securities holding< in order use lor loans to man)' of their cus.t()lllefS-is current!)' 10 put sufficient upwt~rd preswre on intetest rates. around 300 bas~ poin~ abol" the le--el of interest on (continued on neKI page! resen'eS. Banks continue to find lending attt<~cti\'e$ and bank lending 11.1s been expanding at a solid pace ll<$ulatioo0d«1noss!Joo1{...,,int('r<$1r•tesfo<ihe(lllrposes since 2012. Households hal'e begun to see interest oi th~ authotify M '""rdtts on oblig,llions. \\ilhm .uurities ci rates on relail deposics rising as well. MOI'OO'I.W,Ihe no mote than one }'E'.11, soch ~ lhe pim.Jry ctt'dil tillle .1nd configuration oi interest rates im1>lits that the return ra:esonte<mf«tE<aliU!Idl.t«<nrepu<Chale•~. the f«letal Resen.., earns on its holdings ol securities COOVI~i.ll pdpf't letm Eurodolbr deposas. And other simil.a.~ instrumeats ... The r~te oi intef('St on resm't'S has betnv.-ell 1\~hin .1 ra~oi $1'1oc't-leftn itltetesl M!es.<'sdtt'it!edin BoJ«f ~. The (oogr<ss'> autlloriz~ioo alk'"' tlte fed«a I 1egutatioos. for cutfffit wes oo i number ot shoo~enn mont)' R~e IOPJ)' intE«'SSondrposits rNintaiN!d by~Clr)' JNrltt i~ruments.. see BNrd oi C.O..'tri'IOfS of lhe Ft"der~l insliMions at a rate not 10 cxct>OO Ih e ...g tnerAIIe\tl oi Resm• S)"""· St.lt;,i<.tl Rolt..,.H.IS, 'Sel«t<d In""" ~·tfflll interesl r.Jtts..•lhe reclfnl Resm-e Boofd's btes,"' \\\m~ft>def.llrestn."t.goo.·!rele.JSeSih1~1ctmt'fl{. 193 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00197 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.84081717 46 PART2: ,\ION!TAAY 1'0\«:Y lntere.st on Reserves (c(Jftlinuedi ~ing the pace of as>e~!al" just right for a<hieving yetknOI\0, thatlt~fl is likely to be much 101,-er than il the fe<teral Rt!lef\~·, objeaives would have been i> today, though ;ppreci;bly high« than it was before e.u. ....ty challenging. Such an apptoach to rerno,;ng the crisi>' In addition, the amount of U.S. currency accommodation would ha'-e run the risk of disrupling fe<teral Rt!lef\-e notes--dl.11 people in the United Sl<ltes financial markds, with '"'""" eliec~ on the eoooomy. and else\\ here want to hold ha> incteosed substantial~· Indeed, as obsen'ed during the early summer of sin<:e the crisis.li ban~ wJnt to hold more resen-e 2013, markd reactions to<hanges in the outlool: for balances and the public"""~ to hold more U.S. the fe<teral R...,..~·s holdings of long·tMn securities currency than before lhecri<is, the fe<teral Rt!lef\e will <an h,..,. oul>ized elfoos in bond marke~. At that time, ne«i to >upplyI he rese<Ves and currency, so lhe fe<teral F0~1C communications lhat pointed to !he e\'entual Resen'e's securities holdings also will ha\-eto be larger cessalion oi asset purchases seemed to alarm in~tstors than before the financial crisis.' and 1<p011edly contributed to a rise in longef-le<m rates Interest on reset\'es will remain an important f>Oiicy of ISO basi> points ove< just a fe.v months. Thar rise in tool for keeping the i«<eral iunds ,.te within the l<l<gtl rates quickly pu>hed up the cost of rnoc1gage cre<fit and rang< set ill' the FOMC and thus managing thel.-.-el of rates oo other forms of borrowing tor households and short-renn interest rare-s, e\'M as the ongoing reduc1ion OO.ines>e>. in the Fe<leral Rt!lef\-e'>s ecuritie> holdings g<neratesa Thus, Fede<al Rt!lef\~ policymake<s judged tha< gr;dual decline in the amount of resel\-e ba~nces on thebe>! >Ualeg)' tor arf)usting the >lanceoi mondary which the fe<ter•l Resen•e MS inlenest. In June 2018, policy "oold be grad11<1l inmases in the l<lrget range the fe<teral Resene m.1de a smalltechni<al adjustment tor the iede<al funds rate, supplement«! late< on ill• to de-link the Idle of in:ere>t oo ,.,.,..., irom the top gradual r«iuctions in the federal Resene's >e<Urities of the Committee's l<lrgel range for the iede<al full(~ holding$. The ongoing. gradual r«<uction in the fe<teral ldtf. At the June 1018 FOMC meeting. the Committee Rt!lef\'O's securities holdings that the fOMC set in increased the fede<al funds l<lrg<l range by 15 b<si• m do o w ti n o n su in bs 2 t. 0 ln 1 t 7 ia w ll) i ' l O l b I r 'O in f g th t e h e ne l x e t v f e e l \ V of ) ' J O e a s r e s r . \ T '0 h b e a ~ la z n e c es p w o a i s n t in s 1 c w re f o li s le ed th b e y r 1 a 0 te b o a f s i is n p t o e i f n ~ ~ o . n T h re i• s c M ha -e n O ge O i i a s n ces of rt!lef\-es that banks 0\-entu.llly want to hold will inlended to enwre th.ltthe federal iunds rate continues ret1ect balances held to me<?l resen'O requiremen~ and to trade well within the Comminte's t11rget range. The pa)'n>en~ ~as "~II as balances held to address spread beM.,.n the effecti,•e fede<al funds rate and the regul•tory and swctural c~anges in the banking system rate oi in1erest on reserves could continue to narrQ\Y since lhe fin<~.ndal aisi5.> A[though the le\'CI of r(.>$ef\1!' OI'Oftime as the Federal Resen-e's securitie> holding> balances that banks will e.-entually want to hold is not and the supply of resen'e balances graduall)• decline. S. fO< ad"'"''"" ol the chang<> in tl>e bon~ns >)stem 6. Unc..UOl(yal>outthe"'""'"''"-flolr""'tbo~nces sillre IDe iinanci.'!l crisis .and !heir poc~lillf eii«ts oo the i< """"" r"~tlh.it the fO.\lC II.!< boer> rt'dvcmg the o.m.nd lor r""'• ba~nc.,,,.. Ra~l K. ~,., 120181, r<dor,IR«<n•>holrl~olseo.~i<s.andtheoupplyol ·tiquidil)· Rogulatioo •11<1 Ill< Si;e olthe !<d's 8abnce~~>e«: """'' ..,~.,. gr"""ltr s 8 p a e ~ « " h '" d ' el A io. l ' \ t ) f l e ; d c y • I C "( o u n rr f t e rK r i e ts n , cCe~:o-~"t'' . " m '" d< " : " tn " lr " .J S I . B .n .a f n o k r d ~ 7. Cu ic r r p e r n o c d y o g c r l o , w In s O ro e o c g tm hf b y e in r 1 lt 0 o 0 e 3 w . i c t u h r o r o t m ne i y n i a n l < g i r r o c s u s k ltion Un • .,,;~l SW>fo<d, C.M, M•y 4,1\ttpsi.lmwl<dcral..-e. was around S3i0 billioo. COfi"'P<''~ wiU't S1 .6 ttillion At lhe goo,Jnewse\~'s.peech.'quarft520180SOb.hlm. rodol)me2018. 194 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00198 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.94081717 47 3 PART SUMMARY OF ECONOMIC PROJEOIONS The following materia{ appeared as an addendum to the minutes oft he June 12-13, 2018, meeting oft he Federal Open Market Committee. In conjunction 11ith the Federal Open All participanls who submitted longer-run Market Commiuee (FOMq meeting held projections expected thai. throughoullhe on June 12-13,2018. meeting participants projection period, the unemployment rate submiued their projections of the most likely would run below their estimales of i1s longer outcomes for real gross domestic product run level. All participants projected that (GDP) growth.the unemployment rate, and inflation. as measured by the four-quarter inflation for each year from 2018to 2020 percentage change in the price index for and O\'er the longer nm." Each participant's personal consumption expenditures (PCE), projections were based on information would run at or slightly above the Committee's available at the time of the meeting. together 2 percem objecti\'e by the end of 2018 and with his or her assessment of appropriate remain roughly ftat through 2020. Compared monetary policy- including a path lor the with the Summary of Economic Projections federal funds rate and its longer-run \'lliue (SEP) from March, most participants slightly and assumptions about other factors likely marked up their projections of real GOP to affect economic outcomes. The longer- growth in 2018 and somewhat lowered their run projections represent each participam's projections for the unemployment rate from assessmem of the value to which each variable 2018through 2020: participants indicaled would be expected to con\'erge. over time. that these revisions reflected. in large part, under appropriate monetary policy and in the strength in incoming data. A large majority of absence of further shocks to the economy." participants made slight upward adjustments "Appropriate monetary policy" is defined as to their projections of inflation in 2018. the future path of policy that each participant Table I and figure I provide summary statistics deems most likely to foster outcomes for for the projections. economic acti\'ity and inftation that best satisfy his or her individual interpretation of As shown in figure 2. participants generally the statutory mandate to promote ma.ximum continued to expect that the evolution of employment and price stability. the economy relati\'e to their objecti"es of maximum employment and 2 percent All participants who submiued longer-run inflation would likely warrant further gradual projections expected that, in 2018. real GOP increases in the federal funds rate. The central would expand at a pace exceeding their tendencies of participants' projections of the individual estimates of the longer-run gro111h federal funds rate for both 2018 and 2019 rate of real GOP. Participants generally saw were roughly unchanged. but the medians real GOP growth moderating somewhat in for both years were 2S basis points higher each of the following two years but remaining relative to March_ Nearly all participants who above their estimates of the longer-run rate. submitted longer-run projections expected that, during part of the projection period, 17. 1lm.-e-meml>ersofthc BoardofGO'\nnors"wt in e\·olving economic conditions would make it offi« at the tim< of the Juno 201$ meeting. t8. On< panicipant <lid llOt .ubmit tonser-run appropriate for the federal funds rate to mo\'e proje<1io"' for real GOPgroll'th. theu"""piO)~><nt rate. somewhat above their eslimates of its longer or the ftdml full<ls r.u~ run le,-el. 195 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00199 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.05081717 48 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Table I. Eoonomk proj«tions of Feder.!l R"""' Board m<mborsa!ld Federal~"' llan~ presid<n" u!lderthcir indhidu~ assessments of proj«lro appropriate moneta!)' policy. June lOIS ""'"" \'.uiabk illI S ~inrdiGOP .... . u ;\bl\'b~j:t."4ioo. .. . ll l:o..~mcol~---·· u lS J.(d.1 .UlS >.H! ll3..8 :\11n,:b~"''tioo ...... ).$ )~ lH! J..4J.7 J.6.-t0 -~.ll PC£-........ . u ll 2.0!1 1.0 !J Z.O!J U•li Mat~:b~,ioo. .... . 1.9 2.0 1.820 !OU 1.8!.1 1_92.) Cm M P a~ C ii E iE in "o l > l } M :1\ i . o ~ o1 . .• . • . • . •. 2 " .0 l l l l 1 U .9 .l 1 . 0 O l l O O U U U U l !. l l ! 1. 0 92 l .3 l \lt!JI0:~'\.1.1.-d ·~ti'"'.1(U!ll ~~~(~~ ....... loi 3.1 u !.9 2.1 ! ~ l~ M 11 3~ !.S....).O U !.6 1.9 3.6 1.9-4.1 lJ l.S MatiOhE"0,'.\"410e.... ll 2.9 ,l,.l !.9 Z.l !.- .U ).~ U 1/J !.S ).0 1.~!.6 1.6 .l.9 I!J ~9 !.) J.$ Sqh:~-..-.fl~•raiPJ~~(GDf'lae.l~""~~PI~m~~rl\W~"-t!!quMottllri'""'._)GI""> tllrb:t!kqu~«<ltM)GII'.tneatfC£~-'""'K'l..._a.::l:k~rlk!.dcbttil.~:tiul).lh£roor~'~~~C\.~~ lfCa:MtJUor:-~~""'l'((~ko.'IJ,;aJ<O:I'f).Pr.~~lk~*CirMa.-(""lbc~CI'.._~_.r~•lkkw111i'\"Wf~~)l'*l ~~r.,..,..,..·~~l>'i:~OIIb#otbrf~((~~P*).l.OIIfll'«a~~adlip...~·~~t:(~nk L>. ...ii Ur."iii~ ........ ~~'\CISLq~CII5tr~~p:o;s.'!ao,i•'l)r~o((~~-\)IQrJx~~~""'i,hcf.odcfa!f­ I'JW~Jlltl*('itk~cfC)(!"-,o;W~Uip:lflfll(~ik~fOOribfa6:C'I(k~~WJ'CCIMi""'6tWmafdf.nk•**cftilt ~~P"«cwrlk•ra Th:,\l~~1)(0-.c"clli&a~1io.-.. .i :JI6c-a.cft~tcr~~:\bM:c-.iiiiii'IIC'~Im~I.:O!ItC);:I( ~ *~ 4 ~1 1 1« d * a -i . l. . :o ' l 4 t. ~ ir . l .. f . ' . ( .. ' , < . l " ) . ,, . , , . _., ."t.M ~ . W:t....t. .X i ~ lo • e mi k ( h ;D o f :' ' lt . l th ~ c i :~ m 'I l W ~ II '*.«IX~alf..,.r*•~•Otb:!Wdi:O,!I.:xlll~d lforadl~lko."dulla~IW4k~•kt0t~a.:'~f:«a~IO~'Abcltlk~«~~&f\o\'IIL!k0o.\lo»8e.tao~ol lkcwoDW!c~1Jo.lW. lTh:""*'*ll~~lbi:lk.:t. ...... M4~a..-..~'Ut.'ttibfdi~•'*")CW J.lb:rlllfl'l"'ll~ila~)nf~·SW'I~-"'·"tio:e.6. ... ~1011is.\N,b'~NI•·w~:W•tl!Dt)GI' 4 I«!Pf.,.."""'1icG!;I«norcl'([.a.o.:.*K.ocn&.~.N. In general, participanlscontinued 10 view memioned accommodati,·e mone1ary policy the uncenainty attached 10 their economic and financial conditions, strenglh in the global projections as broadlys imilar 10 1he outlook, cominued momentum in 1he labor average of I he past 20 years. As in March. market. or positive readings on business and most participants judged the risks around consumer sentiment as imponanl factors their projections for real GDP growl h. the shaping lhe economic oullook. Compared "i1h unemployment me. and infla1ion 10 be the March SEP, I he median of participanls· broadly balanced. projeclions for I he rale of real GOP gr0111h was 0.1 percenlage poinl higher for 1his year The Outlook for EcQnomic Activity and unchanged for the next 1wo years. The median of participants· projec.tions for Almosl all parlicipams ex peeled the thegrowlh rate of real GOP, conditional on unemployment rate to decline somewhat 1heir individual assessmemts of appropriate further Ol'er the projection period. The monelary policy. was 2.8 percent for I his year median of parlicipants' projec1ions for the and 2.4 percent for next )'ear. The median unemployment rate was 3.6 percent for 1he was 2.0 percenl for 2020, a touch above the final quaner of this year and 35 percenl median projec1ion of longer· run gro"1h. Mosl for 1he final quarters of 2019 and 2020. The participanls continued 10 cite fiscal policya s median of participants' eslimates of lhe a driver of strong economic aclivity over I he longer-run unemployment rate was unchanged nexl couple of years. Many panicipants also at 4.5 percent 196 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00200 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.15081717 MONEIARYI'OUCYREI'ORT: JULYI018 49 figure I. Medians. «nt ral tendencks. and ranges of «<nomic pro~i ons. 201S -20 and mn the longer run """' Cll3ngcinf<a!GOP - Maiwt(l(~o,.,~ BCCt~tnlsc.J...,.,")(!(p'*'-'ti."CCS -!~«'".;.- ~ w -) ~ ~ c:c -l ~ -1 W13 lOI~ lOIS 1016 lOll lOIS 1019 lOlO Lon!'• run """" Unrnl~tl'k."n11'3tc - 7 ~ -6 -l ~ -' """" ~ ~ -) !013 1014 lOIS lOI! lOll lOIS 1019 lOlO lon!l'~ ""' """' PCEi:nlhtion -) == ~ §§ - l ~ - 1 2013 1014 lOIS l016 lOll llliS 1019 llllO Lon!'• run """' C~PCEi:nftation -) == iiiii 9§ -l ~ - I l'OI3 l\)14 lOIS l016 1017 lOIS l019 llllO Lons-,-r ""' 1\'on~ D.:finitioi1Sof\'lrill.llbandotllcr~phn.tlioos:a.rein the notcslola.bk l.Tkdltaforlbcartual,'Jll).."$o( tl'.:-\'3~:llt3Mwl. 197 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00201 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.25081717 50 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S f F o ig r u o r h e e 2 f« . k F r O a M lfu C n p d a s r r t a k t i e p .1nts' assessments of appropriate m0Jl(l31)' polky: Midpoint of target range or ta~-t lew! -------------------.,..--------l.O .............................................................................. ~. ............................., ,,_ ~,j -------------.- --....: . •. . . .•.; _ . ···- _ ---- _ - - _ - .. - _ i'''' _ '''''' _ '''''' _ ''''' _ '''' _ ''''' _ ''- <.0 . __ . _ ••••• _ •••• _ ••••. _ • . • .. • . •• . _ . • . • . • . . _ • . • . • . • . • . _ • . • . • . • . _ • . • . • . • . • . • .. • . • •. • .. • . •• . • .. • . • . • •.. • . • . • . • . • . • . • • . . . • . • . • . .• . • . • . • . • . • .. • . • . • . • . • •. • . • . ••. .• . . , •. .• . • .•• .•• •••••••• , ••. . • . • . • . •. . • . • . • . • . • . • . • . • ... • . • . • . • . •• .. • . • . . . • . •• . , , . . . ,__ J ..S ...•';. ...•:...•.;_·~-----·~-----~-...-..+..-...-....-.. -_-~ . • , .. ••••••• • -~---·········-J. . ········•···············- 2.5 .......•....•...•....•...•... ................ ....................................................1 . .............................- --··-···-···-···- . .. .- .... . . - ..... - ..... - ...... - ..... - ..... - ..... - ..... - ..... - ..... - ..... - ..... - ..... - ..... - ..... - ...... ~ ... . . - ..... - ...... - ..... - ..... - ..... - ... -1.0 ,,,_ l.l _,,,,,. .............................................................................................1 "'''''''"''"'''"''''''''"'''- ----------------------T-------- •.• ········-O.l -----------------------------0.0 1018 10t9 l..otl£1-'ftun Noll: E3dl shado..-d rin:k iodM:.l!cs. tbl \;tli.X (rovDCkJ tot~ rK'3rcs.!IIS IX'n.'tnl~ point) o( a.n indi\id~ ['Jf1i.ip;1n1$ jud$fl'ltR1 of I~ mKipoinl of ttbt appropriatr 13~1 r3Jl~ for I~ ftdtt31 i'und$1'tllt'Ot tb.:-3J'IIKOPri31e tatg-.'t il,'!l\'1 for Ilk' fedtra/ fund~ t.ttr: a1 tbr tnd of ttK-S"().'-iiW c-JIMdar ynr or O'o'tf I be long« run. On<: pilrticipant did not submit k>tl~'l.."f·nll'l proj(\1k>ns for ol<fol:Ql fvndsral< Figure'S J.A and 3.8 show the distributions of The Outlook for Inflation participants" projections lor real GDP growth and the unemployment rate from 2018to 2020 The medians of participants' projections for and over the longer run. The distribution of total and core PCE price inflation in 2018 were indil'idual projections for real GOP growth 2.1p ercent and 2.0 percem, respectil'ely, and this year shifted up noticeably from that in the the median for each measure was 2.1 percent March SEP. Byc omrast, the distributions of in 2019 and 2020. Compared with the March projected real GDP growlh in 2019 and 2020 SEP. the medians of participants' projections and over the longer run were linlechanged. for total PCE price inflation for this year and The distributions of individual projections for next were revised up slightly. Some participants the unemployment rate in 2018to 2020 pointed to incoming data on energy prices shifted down relative to t~e distributions as a reason for their upward l"e\1sions. The in March, while the downward shift in the median of participants· forecaSts for core PCE distribution of longer-run projections was price in6ation was up a touch for this year and wry modest. unchanged for subsequent years. 198 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00202 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.35081717 MONEIARYI'OLICYREI'ORT: tULYIOIS 51 Figures 3.C and 3.D provide information on funds rate over the next few years would the distributions of participants' vie11~ about likely im•olve gradual increases. This view the outlook for inHati()n. The distributions was predicated on several fa"ors. induding a of both total and core PCE price inflation judgment that a gradual p.1th of policy firming for 2018 shilied to the right relative to the likely would appropriately l>alance the risks distributions in Ma~th. The distributions of associated with, among other consideration~ projected inflation in 2.019, 2020. and over the possibilities that U.S. fiscal policy could the longer run were roughly unchanged. have larger or more persistent positi1-e elfocts Participants generally expected each measure on real acti1•ity and that shifts in trade policy to be at or slightly abo1•c 2 pe~tent in or de1-elopments abroad could weigh on 2019 and 2020. the e.~pansioo. As always. the appropriate path of the federal funds rate would depend Appropriate Mo11etary Policy on el'olving economic conditions and their implications for participants' economic Figure 3.E provides the distribution of outlooks and assessments of rish participants'judgments regarding the appropriate target- or midpoint of the target Uncertai11ty and Risks range-for the federal funds rate at the end of each year from 2018 to 2020 and om the In assessing the path for the federal funds rate longer run. The distributions of projected that, in their view, is likely to be appropriate. policy rates through 2020 shifted modestly FOMC participants take actOunt of the range higher, consistent with the re1•isions to of possible economic outcomes, the likelihood participants' projections of real GOP gro111h. of those outcomes, and the potential benefits the unemployment rate, and inflation. As and costs should they oo:ur. As a reference, in their Ma~th projections, a large majority table 2 provides measures of forecast of participants anticipated that evolving uncertainty. based on the forecast errors of economic conditions wotlld likely warrant l'arious pril'atc and gol'ernment forecasts the equivalent of a total of either three or over the past 20 years. for real GDP growth. four increases of 25 basis points in the target the unempiO)~nent rate, and total PCE price range for the federal funds rate orer 2018. inflation. Those measures are represented There was a slight reduction in the dispersion of participants'views, "ith no participant Table: 1. A\trage hi:>torical proj«tione rror ranges regarding the appropriate target at the end of the year to be below 1.:88 pe~tent. For each ~"1'1~~ subsequent year, the dispersion of participants' \'Wbk :IllS ))19 i))ll) year- end projections was somewhat smaller a...,;.~""Gt>r. ... H) !lO ~1.1 than that in the March. SEP. UQo.~l'lle'QC!lt:' ... .o.• !1.2 !I.S iOIIIIOO(NIITXfrft,"tS1 •• 1~1 !1.0 .ti.O The medians of participants' projections ~·tHCilllitl'ltft':ilral.CS~. .0.1 !1.0 ;u of the federal funds rate rose gradually to ~r.~R=#'. .' ~M't~b,.,.ft-~I\"'OICO;II!<F"~ 2.4 pe~tent at the end of this year. 3.1p ercent G - f ~1 « k { . J . ( . ~ . , ,~ 1 - i - o . ; r e t , ii ~ " l ' m U ; > ~ I ; ." o " t A 1 • t i l b l cf l i l k - . t d l i l t. b O d . i : lo M t · l f . ,~ .: ~ -- t ~ '" \ '- ) .: f t• ' at the end of 2019, and 3.4 pe~tent at the end u ~. . b e ~G ~ D · f' . . , ~ . 'O , . . 'M e . t . n .. . . r -- . , ~ ' t 1~ k . t ao t 4 a 1 ~ ix ~ W ~ tt ~ . ~ 1 W 1' t - l '* ~ of 2020. The median of participants' longer ~ilh:-ll~~~*""'•jq(«~motiMk••lltJ'. ru-~~«INo-.jJPd~USPMJ.r.,(~i)."''nPP: run estimates, at 2.9 pe~tent. was unchanged l r .b ~ rL ~ '~ o c s f n O ~· o · c ~ ~ ' O l d . . - ' r d ~ l . . .. - . l l l~ d t f ;. ~ " ~ nt S. . ~.l . i , l : 1 . « q \l ~ ~ relatil~ to the March SEP. { . ' / ll o o~ . h k ;J r (i a ( k .. ~ ol ~ c 1 rr M ~t f J . nd l iX ) f l td i m ' iR ( N ~ M l S ~ ). ~ .u c.l'mwy\," "' I ~cf~·u:til*l*f.IIIDOC<:LO~I. In discussing their projection~ many . ! U ~ • " U t : t t tk ) t - i ' " • C ~ !1 I i I ~ I , X n I ." I Y I . ~ .. f .. r i i . . b ~~ t ~ t ~ m ~ ~~ ~ ~~ participants continued to express the view ~- ~- ~ r <e « a r br w i . qa ~ a ~ na .) l t o . ) l b f f h t w . 6J I . I . Q ~ W " ~ ' C e J . t W - ml . f . l iDI1.•. ., ~"( that the appropriate trajectory of the federal <dirr:t~~&•IIGi:C~G~J.a.J.U'J'~t.iktt...,.....ucamM.ut ~""'~.),:<.~-~-~)(~~ 199 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00203 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.45081717 52 PARTJ: SUM\~RYOf ECONO~IIC PROitCTIO:<S Figure J.A. Dislribu1ion orp anicipants proj<ction.for 111< chan~ in rtal GOP. 201S-20aoo om <he longer run ~IS ~.~~ - -_1 IS 1, - ll -10 ~---,n =! .. .. ~---'...---,~~n~=: u .. 2» u ! c=z=., =J L_,' _ ·,' _ _j - " ~ J.O ' I u 1.1 2.1 l.J !J ~· ll Ptrmlt rang.:- -IS -_1,6 -12 -tO -s -_,6 ... ... .. 11 .,..,. u 1.9 ! 2. I 0 U u ! .!. ~ S l~·l " P'M.\'fltr.ltl~ -IS -_16, - - ll -10 - I = "=='In -~- ---· -_6, I = rr=:J..!!....__!_ c=JI - I l 1 I . J .& l 1 . .7 t • I I J ' l 2. l lt U U " '"' ~ ~ .1 ! a 9 l J.O l PtR.\'fltran~ '\~<{~~ ~'fru.n -IS -_16, -I~ -tO -_,8 _, _, U· 1.6 1-' !b U ,, , , . , .. ",, ... I IJ 11 IJ U U ~· ll P\'f\'\>fltrang.: 200 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00204 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.55081717 MONEIARYI'OUCYREI'ORT: JULYI018 53 Figure 3.8. Distribution of panidpants" projections for 1hc ua.entplo)1ntnt r.ue. l01S-203nd O\W the long_ec run lUIS _,, ~-~~r,i~~ -II -I• A -I~ I-----: - 10 -I -_6, -,l r:-1_ .. H ~ u l.J 1 ~ 5 1 ~ .1 t= ~ }9 'L - u AI - I u U " ._. _ • " • u • < • I P\'fl.'\-ntran~ '~clpwb.'1(*1t• lUI9 -II - 16 -i' -ll -10 - I --6· . -,2 .. .. ... .. ... ,_, ~., " N~d~ lUlU -IS - 16 -i' - I! - 10 -I Br--~--~ -- ·6 .. .. .. .. I " ~ l ~· l I . '" .. ' . n . ~ . 1 .. l7 " '9 1c:: " :: ::J u •J r: , - _, - I ., . u . , H . -ll P~m'lltl1ln~ ~~cl~ loagernm - IS -16 -1• -12 -10 --s· - 6 ,. Jj. ,._ ,. u = •• f u l . .n . . . h ... ~- •• - ~ ,. _ I , . )I " '"' 11 " " " " u " PM\.'fltran~ Nou.:: Ddinilions of":;sri3bb 3nd Olbcr txp1an31ions 3rt in Ih e notes 10 13bk I. 201 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00205 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.65081717 54 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figure J.C. DiSiribulion ofp3nicip3n1s projections for PCE inll.alion.lOIS-20 and owr the lollE'r run ltliS ~. ~:::~~~ - -_I,S 1.6 I -·~ - IQ ~-------~. l -s =r-------l -_6, l -;2 I I ,, L ----- , ,, IJ lJ. u !I '~tlpm'lf'Cb ltll9 - IS -16 -I' -n --w· -s _, I - I - I 2 I u J " 10 1u.1 l H J . S.-Mtl~'lPflb lt)}l) - IS -16 - I' r1------ - ll -~: -w --s· - 6 jl . I . _ .... F-----3,-~ 1 I . J 1- "I~ l 1.. l 2 ! !J J .- -IS -16 '-----c-;---..!l...IJ._~;---LI --7."""----~----'~1 L! I IJ J u~ u ~ l :. J ~ . 202 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00206 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.75081717 MONEIARYI'OUCYREI'ORT: JULYIOIS 55 Figure3.0. Oistribtltion of participanl$. projections roroore PCE inftation. 2018-20 lOIS -IS -16 -I· -u r -10 I - s I -_,6 - ,--------J - I -! .,., ,. " " lJ " '-' lOI? -18 -_1,6, - 11 -10 --------·f j - s : I 1- ----- ~I --6· I~-/ ,. " OJ ·~ " u ' l - • ' PM"Ctllr.l~ ;\~~(lllb.~ lOlO -18 -16 -I' -11 -10 - s j-1 -_,6 11 ,, ~I ... I I I~~! ,. " lJ oJ " '-' P<m1li1'3Jlgc 203 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00207 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.85081717 56 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figure 1 E. Distribution of panieipants' judgmmts of tile midpoint of the appropriate t<n:gtt mnge for the fedcrol furuJs r.lle or the appropriate l3~ttlevd for the ftdtral funds ratr~ 2018-20 and Oh.'f tile longe-r run 1018 -nl In I =- --- r - I I tCJt r=n uIU;- :11..5:$ ! u ! ~ ). . !!..6~! :~.frt.\- J~..l: . . t U i.J i .- U ~ l M U '$ ! - . U fJ J. l - t ' J$ ~ - 1\-f\'tl'ltl'llllgt 1019 -IS -ll -I~ -I! -10 -s -_l, tnJ~D-)E lrl:c==tr -, r - ,C=Jit=., .... W IJj l B !I S ~ :· U W l - !!.6~: W W Z )I l ~ $ I U J .J ' . - W l..'S J M $1 .l » ~I S ! - a A l) ) . i . . U .&.U ! Ul w '" Pcf\'tfltr.lllgc -IS -ll -t.: -ll -10 --s· riDs. _, _, r IA - l 'r I - .S - S 1 w !~ 1A\- l# JU US ;.6..t )A " ,., ' c-1 I. U7 tu :J1 2.6: !Jj )12 J.J1 l6.! U'l 4,1! P~I\W~tmg.: _,, -IS -IJ -IZ -10 -s -l L-~~~K"==T~Dr=J~~~r=~Ir=l~~~~Uc=J~lli~~~~~~~~~__J~~ ImM lm.fi l ~ B w'~ 1w..6. J. wUS . u ~. U : w us lm.M w},& . ~ u B 4w3$ u!M m uS P~r«ntran~ 204 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00208 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.95081717 M().\EIAAYPOlO~EPORT: MYl018 57 graphical~· in the -ran cbans-shown in participants 5311 the risks to I heir projct1ions the top panels of figures4.A. 4.8. and 4.C. as broadly balanced. Specifical~·. for GDP The fan chans display the median SEP growth. only one participant 1iewed the risks projections for the three l'ariables surrounded as tilted to the downside, and the number of by symmetric confidence intcrmls deri1'Cd participants who viewed lhe risks as tilled from the forecast error:s reported in table 2. to the upside dropped from four to 1wo. If the degree of uncertainty attending these For the unemplo)menl rate. the number of projcttions is similar to the typical magnitude panicipanls 11ho sa11 the risks as lihed toward of past forecast errors and the risks around the loo readings dropped from fourto 1wo. For projeclions are broadly balanctd. then future intla1ion. all but one panicipant judged the outcomes of these 1'3riables 11ould ha1e about risks 10 either lola! or core PCE price inftation a 70 percent probability of being within these as broadly balanced. confidence intervals. For all three variables, this measure of uncertainty is substantial and In discussing the uncertainty and risks generally increases as the forecast horizon surrounding their projections, se1·eral lengthens. panicipants continued to point to fiscal dewlopmenls as a source of upside risk. Panicipants' assessmmtsof the leld of many participants cited de.dopments related unttrtainty surrounding their indnidual to trade polic) as posing downside risks to economic projeclions are sh011 n in the !heir gr011th forecasts, and a fell' participanls bottom-left panels of figures 4.A, 4.8. also pointed to political di!\-elopments in and 4.C. Nearly all panicipants 1ie11td Europe or the global otulook more generally the degree of uncenaint)' attached to their as downside-risk factors. A few participanls economic projections for real GDPg rowth, noted that the appn.'Ciation of the dollar the unempi0)1nent rate. and inflation as posed downside risks 10 the inflation ou1look. broadly similar to the 31-erage of the past A fi:\1' participants also noted the risk of 20 )ears. a 1ie11 that was essentiall) unchanged inftation m01ing higher than anticipated as I he from March'' unemployment rate fall~ Because the fan chans are constructed to be Participanls' asses>ments of 1he appropriate symmetric around the median projection~ future path of the federal funds rate were also they do not reflect any asymmetries in the subject to considerable uncertainty. Because balance of risks that participants may see the Committee adjus1s the federal funds in their economic projections. Panicipants' rate in response to actual and prospective assessments of the balance of risks to their de1-elopmen1s 01er time in real GOP gr011 lh. economic projcttions are shown in the 1he unen1plO)ment rate. and inftation. bottom-right panels of figures 4.A. 4.8. and uncenainl) sum>unding I he projected path 4.C. Most participants judged the risks to for the federal funds ra1e importanlly rell«ts their projcttions of real GOP gr0111h,the 1he uncertainties about the paths for 1hose unemployment rate, total inflation. and core key economic l'ariables. Figure 5 pro1·ides a inflation as broadly balanced- in other words, graphical representation of this uncertainty. as broadly consistent "ith a symmetric fan plotting the median SEP projection for the chan. Compared with March. e1·en more federal funds rate surrounded by confidence intervalsderi1'Cd from 1he resuhs presented 19. Atlh:rndoftllisSUilllllat).thcbo\"Fo"''all in table 2. As with 1he macroeconomic o ~I r K u ' o < c N n l u DI io ) t · d > i . s . c , u .. s , s ., e . s . j l i h Q < : s o lh u < r . m ... a ., n _ d ; I . D , b tc tc r o p S m t> tio a a n d 111riables, forecast unttrtainty sum>unding I he npbJo;th: opproodl us.d 10 *""" th: ""'""""'> :ud appropriate palh of the federal funds ra1e is n>l:uurndll& lh< panicipaAI>' projcruonl. substantial and increases for longer horizon~ 205 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00209 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.06081717 58 PARTJ: SUM\~RYOf ECONO~IIC PROitCTJO:<S Figure4.A. Ull(<nainl)'aoo risl<sin projo:tiOliSofGDPgrowJh - Med~n projection and ronfiMnre inttl'\'31 based on historical for«a~t trrorS Chan~c in rt31 GOP -M~i#lcl~ll~'ticwts _, ~~;,.,ol -) -I -· 2(l]J l(IIS 2(116 2(111 2(118 2(11? FO~iC panicipants' assessmenlS of unccrtainl)' and risks around 1beircwnomic projections n·~. .. 1 /(f\1(\.>.~' _ n UBt.~nainl~'3 'o¢ut GDP ~·1h Risl:<toGDP.gt0\11ll 0 ~ · l M r 3 :o ! : 1 lM ." \ b 'i ~ ;\ P '1 , . ' . t -o i s od ~ - - I 1 S ~ • 0 • J ~ \ b l t t r i l C l ' p ~ r j o < j \ . ' ' 1 \~ ioM - -I 1 S 0 -tJ I -ll -·l I -10 --- 1 =-1:0 I I - I I I - ~ _ I I I - ' - I L.. - - - - 1- ~ ~r:==-=:'1]2 [=~r===l·l $ B: m N~ i d b l} r H1gh<r \\ d < o ig! o nc ._ ll!o b B . r m o n o < d \ ll ~ · \\< u is p< )lt i « « l!o NQJf:T he bl~.t: :mJ n:d liocs in the lop p;md shCM :x!u:\1 \':lltxS 3r.d m.:"ian ~1N ''Jlucs..I'\'Sf>.'\."'ti\tfy. o( lk p:Tl..\'111 cfttnp: in n.".ll ~domeslic prodLtrt.'1 (GOP) rn'Kill~ fourth Qlllrtn t:i I~Jlft\ious >t3r 1o 1~fQtlnb qlllttcr of the )'C3:r iOOiclt\"d.'J'h:o l-onf'lli"aCtinttr\'a!3rooOO 1bt l'Do."diatl ~'ltd \'af\Ksis~~lotltsymR'l('tricaOO 6NSI..'doo tool ~nsquarcdttTOtSof \"Jriou:s pm'iUt and p.l'tlUTICilt fom:asts 1034: 0\Yr the f!C\"!olo~ ~ )'C3J'\: mort information 3boulll'...~dat3 i:$3\-:u"bbk in 13.tk l. lko~C1lrrtntro00iliMSmaydifftr [n,xn ~ th3l p«''likd.on :r.tragc.O\\'t'ID:pm·ic)us21))'t31'S.I~\\idlb!od~ Oftbt coo~irttm'3leslimau·doa thc~oflhc hlil<lrir.ll fo~ error& flU)' 001 reB.'-.'1 FOMC p;li'1Xir4.nts' cut'mll ib.~"!'nmts olthcui)..'WUinty3ndri..J:s:tl'\)l)r.dthrirproj.'\.1iol'l5;the$c('lJrn.TJt8SSI.'S....m..."ttU3.reSummaM-dintho.:-lo'.lwpaD."k~· sp:akin-g. ~rtiti~nts\\floP fgllx' ui'IC('fUjnt)'aboutll!tir ~'tionsas"~.sinUiar~lo the:-&\~ k\'dsoil~~ lO)(OlfSV.Wld\icv. Lhc wi.Jthof tbc<'OOfkim.~ iDI«\"JI~l' in l.bc-hislorical (~l'ld'lar13S la~~·ronsiskclt wilh thcira~'if!X'rt1$ of lhc tlnctftail'll)'aboutthcit(M'oj.'-.'lions.li1'('4ist_('1ni..;t-atlt$111'1\ojudSf the ~SIO lb..'ir pro_ic\'lioi'Ji>U~btood~·babflctdR V.'OWd'icu.' t,hc('()O;f~" intm31arooadlhrir ~'tions:asapproximatd) S)mmctric. Ford.:tiRltioosof ~ntyand risk.sia «vnomic projc<1ioo< S« Jhc bl11 ·fon'!'3!1 Uno:ruioJy.· 206 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00210 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.16081717 MONEIARYI'OUCYREI'ORT: JULYI018 59 Figure 4.8. Uncertaint)' and risks in projel.~ions of tbe unempfoyment rate MM~n projt'clion and oon~cnct inte"'31 baSr."d on hi!lotOrieal fon.'ClSI errors UI'IC'tnploym•,tn r:uc - - ~kdt.Ulof('(llj_'\'t'iCi - 10 810Cia.~iotm:;tl - ! -8 -- ·I -_5, -) - l -1 201) 2014 lOll 2016 Wll WIS l019 WlO FOMCp anicipams·a~nts of unctruinty and risks around their coonomk pro;.'ttions :...~ot~ -- ; D' _,. U~inl) about the Utl(11)plo)mrnt rate RL4:s to the uncm(\lo)TOO!t me : • 0 • h ~l z u n d . l :p rn r . o i j - a " .1 -" io t r i b oo s - -1 I 0 S : 0 - - J ~b u n n :b . J : i ~ ro " P t , i 'n o t c i b o ns - - _ 1 1,0 1 . I 1 - - u 10 -- - 1 1.2 0 I I - I - I -s I I -- '' - - r----1 1 I -' I I = r====:' I J l rlr------,_1= Jl \\'cigt'I!OOto u..,;d< Non::Th:'bhxandn:dlil'IC'$inthctop(Xlndslw.Y,.,.:.«ull,'ai~XSandtl'IC'dianrroj«1cJ,~I\."SJ).'\"tiw{)~oftl!cll\~ ci,ifun unemplormcnt r.uc iD the-fourtbqua.rh:fof tbc )"tar ir)(Ht'3ted. TbcoCOJI&kw.: inur.-aJ arl.)\ltld 1~ m.'di:ln pro~"-"ted \'J.h.h."S is 3..~ to b-.:' ~ymmctrii: and is Nscd on root m..~ squal\"d etl'l)N.Of \3rioUS pri\':l!e and gO\'tml't'l('tll fol'(\"'3.S1Sf~Ud..:' 0 th \ o < s tr e - th t o h : a P t f P '. J ' I \i . o "~ u i s k \ Z 1 O . o )' n ( 3 3 \ ~ 't. ' m r.l o g r \' e . 0 in \T ro r o t n ~ a t p io m n a i® bo s o 2 t 0 tb ) c " s t t a d . a ~ l I : b 1 e i s v < .i r d L t - b ;a a ib n b d k i 4 n \ t a a p b : l o e r 2 . t b 8 c ." r C on J. f U ld s .. t . i - . o 'U o. t · M in lt t o (' o r. n 'J d ) 1 c t - i ; o :! n im s n 3 u t« y < d 0 i 1 i 1 T t cr ~ f r o o o. m ..t ~ ofthcllistorid(oi\'\"'3$1.CrrorsmayDOII'dl«tfm.ICp3RK-ip;tniS'C111'rtn.t1_~1Softhtlllk'tnairnyandrisksarou.OO dx1r proj:~tions I~CUm'ftt :aSSI.'S:!mcnts ar.:SI.LJJlm:IM:d in the lov.yr raocl'\ Gmc1al~· ~r-:-~in~ JQniri~nts v.-l'lo jOO~ 1~ Un..'\'ft3int) J.boutthtirpl'Oj..'\1io13$3S ybrc.'d~·$imi1ar''tothca..~ k\tl$00thcptSt 20 }\'31'$ would ,'i(y, thc,'idthoftht oonf~ inlm"J:I sbov.·o in lbc hi51oriraJ (an chan :LS br&'Cl}'~"'nsistrnl 'Aith their :15<ii."SSmefllS of the U!k'CI13.iiUy aboottbc:ir proj..~ion.." LikC'II·i:st. ~rliriJl3nlS\\1'tojudg(' the ~k'i 10 their pt!)j<\1iori(3'S ""br«ld~· lxlh!X\.'d-v.I)!Jkl \~the@~ iml"\'llarouDd thtir p."Oj.."dions asapproMmatrly S.)mmctril.'. For d~finitioMor LLnctnaint)' and risk~ in crot~omio:-pro~tlons. ~-.:the bo.\ •foM."l)t UIK'>.'>fUinl)~- 207 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00211 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.26081717 60 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Figur( 4.C. U11cwta.inty ;md risks in proje\:l.ions of PCE inflation PCEinllalion - Molilncfpcj.\"li.., •ro'..o~intcnll -l -l -I -o lll4 lOIS 2!116 2!117 lOIS 2019 l)ll) FOMC partkipams· a~nlS of unttnainty arK! risks around their ~!\~nnomic proj«tions _, ~~~~ Unocrtainl)";about PCEinfla.~ioo Rl4s to PCE infl3.1ioo 0 · · J M IJ a ntr l ro. \ J(\ ' 'tiQ h M ~ - -_1 IS ,6 D •• J ~l u a n r t rl ~ l ' p t r i o o ; M x ~ - -1 I 6 I ~n----: -1! I I - - 1 I 0 I ~'I -_ " 1 8 0 I I -- '6 I L I .----. - &#45;&#45;&#45; 6 : := J' I [ ~,]2 8roodh· \\tiglnoloo Simibi •r;i<k n _,. Ull(Xnainl)'aboutC'Cirt PCE inftation Risks to tore rcE il'lllation 0 .. . J ~ l h: l J ! \ I 'h C f ' l ~ ll " l ' 1- " \ i ' o ti m o tb -_ - 1 I ,6 S 0 • • J Ma u l n \ c tp ~ r ~ ~ " ' t t )o i m or b - - _1 1 ,6 1 ~n----: -ll ~, I I - -10 s I I =1 : I I - 6 I I - 6 : :c===:? j; I L.----.-~ [ c===?', .. Hi!M Kou:Tf'x' btuc:md mlliibt$ in l.bc toppanri ~ 3<1ual'lo~3-nd rM.Iian proj.\"t~'\1 \altJ<S. t'\"Sf'.\1i,\iy.olt~~l\'\"ffl<'lta.n~ in tb: rri:c indc-\ for (I('I'SO!Ukoasump~)oa C.'\P.,'Oditi!KS(PC'E) from the fotlnb ctW11et of till: pmiollS )W1 0 liM' founh \l~n.Cf ol'thc )~rind~t~. Tbt\vnfl&n.x intm';l]:uound I~ medial! r~\'t«< \"J;!ucsis3S:Sl.lm.'!J to be ~mJ'l\.1rioalld is ~Ofl r004 mc3n squa.i\'1:1 mors of \-arious pri\'3tt' and $('\'C't'IUilCQ\ foi'(\"3S!Smadc 0\\'1' Ih e pmiou..:20 }\'a~ mort information about th<'sc dau isa'\'J.ilaJ:kint3bk l.lk'\"3118«Jmtltc:ooditlons~'dilfc-rrromthosc tlu\ (lm~il.:d. OIU\~ 0\'tf tl\t:pmioi.IS 20 )'tJI). t~ •'XIth and sb.l~of t~ C'OO:fl'lk"IIIX iottn-al ¢SLima.tOO Ofllhc b.l$iiQ( the historil:all'om."'.l)l crron l'll3fi'IOI rtfk.."1 FO~IC rarticirarltS' ~rm:JI3~'71K1llso( tlx' Wli."(rl3int)' :~00 risks aro\Jod their projroioos.: these-~mnt a:sscssmrnts arc SllmmarUOO in 1~ ltM'tr pane-b. Gcctr.a!l)• ~3kirt,g. J"lrticlp.Jnts v.ho jud~ the IIIK\'f13illt) 3bo'Uithcir proj•,"1ioas 3$ -broad~· simibr~to t~a\'tf"lg(' lt\'t'l~<lftlkop3S120 ~\"!N v.\)uld\·~·tht 1o1iodth oftMoonli~irum::alsbmm in tlt.:: lti)lorit.tl f:ao clu11 a.s I;~~A>ci)'C'OnAA(tlt •itb thdr a..~'lltmts oft~ UI'IC('rtaint)'31xxlttlk-ir proj.,'tion!<.l.imi.;c. p:~l1iripotr:t1$ who jud~ ~~ ri~s to thtir rrojt\.'1ions a~ -brood~· NlltK·t~rw oold \'icv. t~oo-1lf.xi..."''Kt inttn"ll3routld tt.:ir proj«tioM.a:s :tppro~m:ncl) S)mm.mic. For d:titlitioo$ of UIK\'f13itlty and ri.J:s in trofiOmil: pro~'tiol\-;.. sc.: the bo~ ~Fortcasl UDC.\'ft3int).~ 208 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00212 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.36081717 MONEIARYI'OUCYREI'ORT: JULYI018 61 Figure 5. Uncertainty in projections or the federal funds rate Median proje<oion and .;onfidenc. in<er\'al based on histori<al forecast errors r.. " Ckralfuodsr.llc -)l~t<i>loiWJ<tl1!ll< - 6 - -M~\I~ol~'1- •N'-•~iri1C'f'-af• - s _, -J -l - I -o :!014 21116 lOll lOIS 2019 Non;:Thc-bi\X'nd 1\-d li!b..'$3rc b.l...-doo :K1U3I ,:lf'ues:and IJ'IC'diln prot-'1.1«1 l'3!Uo.'S. n.-.:p.."Cli\~·,of the Commiu«-'SI;tfld for the fcdcralfur.ds rate at tile: end of the )'Cal iDd.icaltd. Theac1ua! ''J.tucs:utth<' midpoint of tbela~'t ran~-: tllc ITIC'diao proj.'l.'tcd ,3J~"Sar( N..~'domcit"'ftllc midpoint of th-:13.1\'(1 rnn~orthcta~~ k\\'l. Th:('OJ!r».-nreiPim'JI;uound thcfl'll."d1<<r:~ pr()~'fOO ''3ll.li:S~b.1..\l'donr001 n'K'3.nsqu.li\'CI.~"frot'Sof,lrious pri'..ucandg<n'l.'f(ll,'l'l('ll:t fo~m:tdcoo.ttlhc p!\'\io\1$ :'0)'1.~ l'l:h: l-onfldm.'C intm'al is 001 :.tMtyro:Nstrnt OJ.ith the rro;:cioos for tb: fcdml fu.nds r.ne. primari~· lx'\"3~ t~ pro~i ons ut OO{(orc\"'3stsofthc5kcl~(H,It('QR)("i((wthcf«k~fundsratc.b.Jt~t..:Jpro;.'\-tionsofp.,~t.ip;ult,'indi,iduaJa..~.;m:nts.of 3Pf1C0priatc mooct31')' pol).."): Still, hi:storic3.1 fon'\"J)I crrorspn)\idc i btt»d SIC'n..;o: of~ ur.."'!dainl)' :around L1lc future path o( the f~ fWlds:ratc ~'fl("r.tb:d b) tbruiX\-rtaintyabout the macroo."'OOO!lk,"Jfilbksa.s OJ.~Ias.~Jdition:lladjlbtn._>fltslomOOI:tar)' pol~'}· that ma)·bc :~ppropri.llc 1oo1T~ thcdTC\:t,~or ~..:~tolho:ct\XIOill): "fll.: ronftdc~Kt in1~r.<tl is ;nslJmed to be S)'ll'lmctric ti'<CXJI'I Men it is tru1K'31cd at wo-thc bottom of the~~ t3~t rany for the ftdcratfur'll.kr.11~tba1 has b«nadoptlid in tho.-Jm~ b)' tMCommincc This tnJIIC3tion '>'ould not ~intrndcd to indk.OlC' the likdi!\ood Of tbc U$C O( IICgJtii'C iniCJ'C)I talC$ tO prO\i de additional ll'!Otll.13~' J»!icy 3C('(Immod31iOn if dOing $0 \\'3$ jlldsc<f 3pJ)ropriatc. In s:Lll.il situatiion5.1bc Com mitt~ rouldalsoc:mplo)•o ttk.'f toot' induding fOt\\-atd gtOOanct and brgc«aac: ~ ~1\ilas<'\ to pfO\idc addi1io~ 3t\'Ommodltion. lk\;JuS~: '""rftflt N!Dditioa~ ~· dilfcr (rom t~ th31 pl\"l'likd. on 3\mgc. <»<tr t~ pre\ious 20 )~3rt\ the 'Aidth :1~ ltl~ of th¢ tontidctle'C in tena ! estimatt'd oo the-b;lsis ort ht historical fur('('l:~-t crnm rrAy-not 1'1.'11«1 fOMC JKir1~;p;~nu:'amtn1 015'S(').""'l\(f(1Sof tM U!Ktrtainl)' a~ risks :m~u~ thcir projections.. 'Th:~'Onf'xf..-nreintcn~ is&.-.m\"dfromfofl.\4stsofthc-r.mg<~dof~·t«min[('ri."St~atcsinthtfounh~~olthcrear iOOi.:lttd! roorc il'lfomwion :ab<nn thc!.r clau is 61'3ibblr in ublt 2. Tht shaded 1~ cnootnp.usd ~than 1 7IJ pM't'l'lt tooflddh."t irum-aliftbt-oo~in1tn~haslx'\'nlnJIX"Jlcd:atw\\ 209 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00213 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.46081717 62 PARTJ: SUM\~RY Of ECONO~IIC PROitCTIO:<S Forecast Uncertainty The «onomic proj«tions provided by the mernboo of in the bottom-left J"nels of those rlgur~ Pa~icipants the Boord of Go"ernors and the presiden~of the r.deral also ptO\ide judgment> as to whether the risks to their Res«ve 8an~s infO<m discussions of monet.l')' policy projections are weighted to the upside, are 1\eighted to among policyma~e<s and can oid public unde<standing the down~de. or are bro.dl)•b alanced. That i~ while the of the basis f01 policy actioo~ Considerdble uncettainty symmetric historical fan ch.l~s """' n in the top panels of attends these projection<, howe.1'<.lhe «onomic and figures 4.A through 4.( imply that the risl<s to pa~icipants' statistical models and re~tion>hips used to help I~OOU<e projections are oolanced, participants mar judge that «onomi< iO<~IIS are n«ess.lrily imperi«t descriptions there is a greater rislt that a gi'-en variable will be abO\-e of the real world, and the future path of the e<onom)' rather than below their projections. These judgment> can be affected b)• myriad unfo!eseen developmen~ and are sun1marized in tt'.t lrnveNight pallets oi tigures 4.A e.-ents. Thus. in setting the stan(e of monet.l')' policy, through 4.(. participan~ coosic:lef not on~~ what appeMs to be the As with realacti\'ity and intlatioo, the outlool; for most likely«onomicoutcome as embodied in their the future path of the federal funds rale is subj«t to projections. bulalso the range of altemato-e possibilities, considerable uncert.linty. This uncert.lin~· arises primarily the likelihood of their occuiTing. and the potE<ltial cOilS to b«ause each participant's assessment of the appropriate the «onomy should they occur. stonce of mone~ry policy depends importJntly on Table 1 sumnl.lrizes the "''"&e hiiiOricalaccuracy the e.-olution of realactivi~· and iniLltion 0\-er time. II of a "nge of fo<ecasts, including those r<iJ011ed in pall econornic conditions e'\'01\'e in an unexpected mannec, Monelary Policy (lppottsand those prepared by the then aSSll<ments of the appropriate se<ting of the federal r.deral Restn'O Boord's staff in advance of meetings of the funds rate would ch.lnge from that point forward. The Federal Open ,\Iarke~ Committee (FOMQ. The proj«tion final line in lab!e 2 shows the error ranges kw ioreca~ oi error ranges shown in the table illustrate the conside,.ble short·term interest rates. They suggest that the histO<ical uncertainty associated with eoonomic focec.cnts. For confodence intervals associated with projections of the mmple, suppose a l"~icipanl projects that real groo federal funds rate are quite wide. It should be noted, don1<1<tic product (GOP! and wt.JI consumer prices will howe\'Cr, that these confidence intefvals are not strictly rise steadily at annual rates of, resp«ti\'ely, 3 percent and consilient 1rith the projections for the federal funds 1 percent. lithe uncert.lin~· attending those projection~ rate, as these projections are not forecasts ol the most is similar to ihat experienced in the past and the risM likely qua~erly outcomes but rather are projections around the projections are broodly balanced, the numboo of pa~icipan~· ind'l\'idualassessmen~ of appropriate r<iJ011ed in table 2 would impl)' a probability of about mooetary policy and are on an en<f.of·]'Oar oosi~ 70 percenithat actual COP 1\0Uid expand within a range H0\1'0"er, the forecast errors should prOI'ide a sense of the of 1.7to 4.3 percent in the current )'Oar, 1.0 to 5.0 percent unc~inty around the future path of the federal funds rate in the second 1-ear, and 0.9 10 5.1 percent inthe third generated by the uncettainty about the macroeconomic )'Oar. The corresponding 70 percent confodence inte<v.ols variables as "•II as additional adjustments to moneta')' fO< 0\'0!all iniLltion would be 1.3 to 1.7 per<E<lt in the policy that would be appropriate to offselthe effects ol current 1-ear and 1.0 to 3.0 percent in the second and third shocks to the economy. )~ars. ~gures 4.A through 4.C illustrate these cooodence If at some point in the future the confidence interval bounds in •f.n cha~!" that >re symmetric and centered on around the federal funds rate 1\•re to extE<ld below zero, the me<lians of fOMC pa~iciP"nts' projec1ions for GOP it would be truncated at zero fO< purposes of the fan chart groMh, the unemplo) ment r.ne. and inilation. Howe,~. """'" in frgure 5; zero~ the bottom of the 10\,·est target in some instances, the risl:s around the projedions. may ra.nge for the federal funds rate th.lt has been adopted not be srmrneuic. In l"~icular. the unemployment rate by the Committee in the past. This approach to the cannot be negath~; fu~hermore, the risM around a construction of the federal funds rate fJn cha~ "oold be pa~icular p<Oj«tion might be tilted to either the upside or tneftlr a C::M\'elllioni it \\ould not ha\'e an)' implications t~ w,,·ns~, in 1\lti~h em the ~orresj)Qil(ling ian cha~ for pofiible fvt\Jie polity deci~QOI regarding~~ u~ ol 1\oold be asymmetrical!)' positiooed around the median negati\-e intertslta:es to ptovide .!dditional mone1ary projectioo. policy accom~tion if doing so""'" appropriate. In Because curreot conditions ma)' differ from those th.lt such situations, the Committee could also en1ploy Olher prevailed, on "-erage, 0\'01 history, participants prOI'ide tools, including forward guidance and asset pmch.1ses, to judgments as to whether the uoc~inty auached to prOI'ide additional acconm10dation. their projections of each «onomic variable is sreater While frgures 4.At luough 4.C prOI'ide infomnation on th.ln, smaller than, or bro.dly >imilar to typic.lle.~ls the uncert.lint)' around the economic projections, figtJre 1 of forecast uncertainty seen in the I"~ 20 )'Oa~, as prOI'ides infornl.ltion on the range of vie"' across FO.\\C presE<lted in ~ble 2 and reflected in the widths of the participants. Ac on1parison of figure I with figures 4.A conodence inten~ls shown in the top panels of figures through 4.C """'' that the dilpersion of the p<oj«tions 4.A through 4.C. Participants' currE<lt assessments of the across participants is much smaller than lhe Cl\-er.age uncertJlm)' surrounding their projections are sumrnarh;ed forecast errors"'"' the !"It 20 rea~. 210 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00214 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.56081717 63 ABBREVIATIONS AFE ad\'anced foreign economy BBA Bip.1nisan Budget Act of2018 BLS Bureau of Labor Statistics C&l commercial and industrial Desk Open Market Desk at the Federal Resen·e Bank of New York DPI disposable personal income ECB European Central Bank EME emerging market economy FOMC Federal Open Market Committee; also. the Committee GDP gross domestic product IOER interest on e.1cess reserws JOLTS Job Openings and Labor Turnover Survey LFPR labor force part icip.1tion rate MBS mortgage-backed securities Michigan survey University of Michigan Sun·eys of Consumers OIS O\'ernight index swap ONRRP overnight reverse repurchase agreement PCE personal consumption expenditures SEP Summary of Economic Projections SLOOS Senior Loan Officer Opinion Sun'C)' on Bank Lending Practices S&P Standard & Poor's TCJA Tax Cuts and Jobs Act TIPS Tn.>asury lnflation-l'rotected Securities VIX implied volatility for the S&P 500 index 211 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00215 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.66081717 212 ARTICLE SUBMITTED BY SENATOR BROWN VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00216 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.76081717 Paychecks Lag as Profits Soar, and Prices Erode Wage Gains Julyl3,2018 Corporateprofits have rarely swept up a bigger share of the nation's wealth, and . workers have rarely shared a smaller one. The lopsided split is especially pronounced given how low the official unemployment rate has sunk. Throughout the recession and much of its aftermath, when many Americans were grateful to receive a paycheck instead of a pink slip, jobs and raises were in short supply. Now, complaints of labor shortages are·a s common as tweets. For the first time in a long while, workers have some leverage to push for more. Yet many are far from making up all the lost ground. Hourly earnings have moved forward at a crawl, with higher prices giving workers less buying power than they had last summer. Last-minute scheduling, no-poaching and noncompete clauses, and the use of independent contractors are popular tactics that put workers at a disadvantage. Threats to move operations overseas, where labor is cheaper, continue to loom. And in the background, the nation's central bankers stand poised to raise interest rates and deliberately rein in growth if wages climb too rapidly. Workers, understandably, are asking whether they are getting a raw deal. "Sure, you can get a job slinging hamburgers somewhere or working in a warehouse," said Christina Jones, 53, of Mobile, Ala Ms. Jones spent eight months searching for a job with living wages and benefits, after being laid off from a paper company where she had worked for nearly 13 years: Dozens of interviews later, she land~d work last month at a concrete crushing company as an accounts payable clerk for 514 an hour-two-thirds her previous salary. 213 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00217 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.86081717 "You hear, 'Oh, the unemployment rate is as low as it's ever been,'" Ms. Jones said, but "it was discouraging." Businesses have been more successful at regaining losses from the downturn. Since the recession ended in 20G9, corporate profits have grown at an annualized rate of 6.5 percent. Several sectorsh ave done much better. On Friday, for example, banks like JPMorgan Chase and Citigroup reported outsize double-digit earnings in the second quarter. Yearly wage growth has yet to ltit 3 percent And when it does, the Federal Reserve - which has a mandate to keep inflation under control even as it is supposed to maximize employment- can be expected to tap the brakes. Labor's Declining Share Workers' paychecks account for much less of the nation's total income since the last recession, and the profits of businesses account for more. Employee pay as a share of national income 68% 67 66 65 64 63 62 61 60 1970 ·so '90 2000 '10 '18 Corporate profits as a share of nalionaf income 15% 14 13 12 11 10 9 8 ·so 1970 '90 2000 '10 '18 214 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00218 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.96081717 SOurce: Bureau o!Eoonomic Statistics I By The New York Times As Fed policymakers have explained, allowing the economy to run too hot "could lead eventually to a significant economic downturn." And persistent wage increases, unlike growing profit margins, are considered a signal that the heat is on. The bank's primary method of cooling the economy is to dampen spending and investing by raising interest rates and making it more expensive to borrow money - an antidote that could hurt profits in some sectors as well as trim payrolls. The thinking goes like this: Better to inflict some pain now, in the form of higher joblessness and sluggish wage growth, than to allow more pain later. After keeping benchmark interest rates at near-zero levels during the recession, the Fed has been gradually nudging them up. So far this year, it has raised rates twice. With tariffs piling up and potentially pushing prices higher, odds are that the Fed will push through two more increases before 2018 ends. The Labor Department reported this week that one inflation measure, the Consumer Price Index, had increased 2.9 percent in 12 months - the highest level in six years. Discomfort with a tight labor market and growing worker bargaining power is to some degree baked into the Fed's makeup. Pressure to raise wages during expansions will inevitably be seen as precursors to insidious inflationary pressure. The conventional wisdom that higher wages inevitably lead to higher prices, however, is flimsy, some economists argue. "It theoretically makes sense," Michael R. Strain, an economist at the conservative American Enterprise Institute, said of the link between wage increases and inflation, "but empirically, it's increasingly difficult to find a real strong link." As tudy by the Federal Reserve Bank of Cleveland, for example, concluded that "the connections among wages, prices, and economic activity are more akin to a tangled web than a straight line," and that "the ability of wages to help predict future inflation is limited." 215 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00219 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.07081717 At ight labor market shoulod give workers some leverage to push for higher wages, but hourly earnings have moved forward at a crawl. Olristie Hemm Klol< ror'l11e New YorS< Tunes Regardless, there is plenty of evidence that workers have yet to receive their fair share of this most recent expansion-or even the previous one. Since the century's start, labor's share of the nation's income has sunk to the lowest levels in decades. In 2000, when the jobless rate last fell below 4p ercent, corporations pulled in 8.3 percent of the nation's total income in the form of profits; wages and salaries across the entire work force accounted for roughly 66 percent Now, the jobless rate is again fluttering below 4p ercent. But corporate profits account for 13.2 percent of the nation's income. Workers' compensation has fallen to 62 percent. 216 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00220 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.17081717 If workers' share had not shrunk, they would have had an additional $532 billion, or about $3,400 each, said Jared Bernstein, an economic adviser to former Vice President Joseph R Biden Jr. And at this point in the recovery, shifting some of those corporate profits to workers would have no effect on inflation, he noted. In the tug of war between workers and irtvestors, Americans livirtg on a paycheck have seldom been left with a shorter end of the rope. Fredy Amador has spent years working for various temporary help agencies, packing boxes of baby clothes, quality-checking packages of popcorn and doing other work at warehouses across the Chicago area Despite what he says are frequent promises of permanent work, he has never been able to escape temp status. Recently, his situation got worse. He used to receive holidays and paid vacations, he said, but the agency that offered them lost its contract to another firm that did not "They want to avoid all the benefits,• said Mr. Amador. Mr. Amador, 34, said he earns $12 an hour, far less than the $20 an hour or more earned by permanent employees doing similar work. For extra money, he drives for the ride hailing service Lyft on the weekends. "Even if you have really good skills, you have to start as a temp,• said Mr. Amador, who moved to the United States from Honduras 12 years ago. "They never give you an opportunity to move on.• Economists have offered various explanations for why workers are not doing better: the steady weakening of labor unions, the ability of American companies to find cheaper labor abroad or automate further, piddling productivity growth and the rise of superstar companies that are extremely efficient with a relatively small labor force. The recent tax overhaul has further pumped up corporate earnings. Promises that lower tax bills for businesses would translate into higher wages have yet to materialize. Higher gas and medical care costs have eaten away at whatever gains most workers have made. 217 VerDate Nov 24 2008 14:11 Dec 18, 2018 Jkt 046629 PO 00000 Frm 00221 Fmt 6621 Sfmt 6621 L:\HEARINGS 2018\07-17 ZZDISTILL\71718.TXT JASON spe.27081717 Nor are those extra profits going into business expansion. Since the first of the year, American companies including Apple, Wells Fargo and McDonald's have announced nearly S680 billion in buybacks of their own stock, according to the research firm TrimTabs. In essence, they are directing a majority of the windfall to investors and chief executives, who tend to have large stock-based compensation packages. Profits are also financing foreign mergers and acquisitions."A l ot of U.S. businesses are looking abroad to see what they can buy," said Jason Gerlis, managing director ofTMF Group U.S.A., a global consulting firm, "because it's easier to finance or capitalize offshore." The reason is a change in the tax law that limited interest deductibility on domestic investments, but not on those abroad. International deals in the first half of 2018 nearly doubled compared with the same period last year. The United States may be leading other big industrialized countries in economic growth, but its labor force does not fare well in comparison. American workers' share of their country's total output fell much sharper and faster than the average reported by the Organization for Economic Cooperation and Development The United States also had a larger proportion of low-wage workers than nearly every other member. When the economy was struggling, employers became accustomed to inboxes flooded with resumes and snaking lines of eager applicants. Many may have forgotten, or never learned how, to compete for workers. When it comes to complaints of a labor shortage, as Nee! Kashkari, president of the Minneapolis Fed, has said: "If you're not raising wages, then it just sounds like whining." Follow Patricia Cohen on Twitter: @_i>cJtcohenN'(T. Ben Casselman contributed reporting. A\'eBionolthisorticle"""""~prilllcoMy 14, 2018,on PqoAI ollheNewYor1<ecilionlli1ti lheheadlint: Prolltss..11,8ut Labo<!I$SeeNo Re:ief

Jerome H. Powell (2018, July 16). Congressional Testimony. Testimony, Federal Reserve. https://whenthefedspeaks.com/doc/testimony_20180717_chair_federal_reserves_second_monetary_policy

@misc{wtfs_testimony_20180717_chair_federal_reserves_second_monetary_policy,
  author = {Jerome H. Powell},
  title = {Congressional Testimony},
  year = {2018},
  month = {Jul},
  howpublished = {Testimony, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/testimony_20180717_chair_federal_reserves_second_monetary_policy},
  note = {Retrieved via When the Fed Speaks corpus}
}