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Speech – Global Financial Stability – the Road Ahead

William C. Dudley, President and Chief Executive Officer, Remarks at the Tenth Asia-Pacific High Level Meeting on Banking Supervision, Auckland, New Zealand.

“Today, I am going to talk about the challenges that face us in ensuring stability in the global financial system.  While we have made considerable progress in strengthening the financial system—for example, large global banks have considerably more capital and liquidity resources than prior to the financial crisis—there is still a significant amount of hard work ahead for all of us.  For example, we need to develop resolution mechanisms that will work on a global basis and we need to ensure that the clearing of standardized over-the-counter (OTC) derivatives through central counterparties (CCPs) is done safely.  We also need to improve our ability to aggregate and share data.  We need to do this in order to develop a coherent view of the global financial system so that we can deal with emerging vulnerabilities in a timely and effective way…Global, systemically important financial institutions (G-SIFIs) pose a significant challenge to financial stability on two fronts.  First, due to their size, complexity and central role in financial markets, a disorderly failure of a G-SIFI would directly cause major disruptions in markets, adversely affecting credit flows and real economic activity.  Second, such a disorderly failure would also indirectly place significant negative strains on other financial firms due not only to direct credit exposures to the failed institution, but also due to the fire sale dynamics that would ensue.  The lack of transparency in markets as to which firms would be most affected could result in a general pull-back by investors, which, in turn, could lead to additional deleveraging and further downward pressure on asset prices.  As we saw during the financial crisis, this amplification mechanism could quickly spread the strains throughout the global financial system.”

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