Fed’s Powell emphasizes ongoing need for transparency in system supervision

Fed Chairman Jerome Powell speaks before central bankers May 25 in Stockholm.

Federal Reserve Board Chairman Jerome Powell, speaking Friday before a conference of central bankers in Stockholm, Sweden, emphasized the importance of transparency and accountability as policy makers seek to keep up with the pace of innovation in the financial system.

In his speech (Financial Stability and Central Bank Transparency), Powell recounted the measures taken by the central bank and policymakers since the global financial crisis that have transformed the supervisory framework from reactive to preventive. This shift has placed demands on transparency and accountability, he said, and these features will remain important as the policy framework continues to evolve.

“There is … an important policy effectiveness argument in favor of transparency. In the financial stability arena, there is no better example of this than the role that the first round of stress tests played during the crisis in restoring confidence in the U.S. banking system,” Powell said. “So in the financial stability realm, the case for enhanced transparency is not just about being accountable; it is also about providing credible information that can help restore and sustain public confidence in the financial system.”

Powell said stress test scenarios, portfolio-level projected losses for participating firms and stress results are now disclosed to the public, offering transparency that “both enhances public confidence and holds banking regulators accountable for their judgments.” He also noted the recent proposal for comment on enhanced disclosures regarding stress-test models (the comment period closed in January).

Powell noted the complex nature of the post-crisis framework and the attendant challenges that transparency and accountability present. He also pointed to the challenges that future innovations in the financial system will bring, adding these will possibly also “contain the seeds of potential future systemic vulnerabilities.”

“We will need to keep up with the pace of innovation, which will doubtless require changes to our approach to financial stability,” he said. “As we consider such changes, it will remain critically important to provide transparency and accountability.”

Speech by Fed Board Chairman Powell