foreign invest ment if you are big international company or more modest sized international company and you're looking far place to invest where there are opportunities for a large-scale reward. they are canada, the united states, the others are russia, iraq, and iran and that doesn't leave much room. so i think given the light of geopolitics recently that companies will find mexico with all of the difficulties of defining on a risk adjustment basis. the opportunities will be moving toward the acceptance of risk for potential reward just in terms of where else one can go. mexican supply is the third leg of a north american energy revolution. i think we can debate and we have to make assumptions on that debate about where mexican output can go, what's used -- kind of government general numbers, an increase in

production of a half million barrels a day by the tomb of president pena's end of term and then maybe a million dollars a day by 2025. so that's a conservative number in terms of the resource base and in terms of what might be possible. just looking across the divide where technically recoverable resources on the mexican side exceed those on the u.s. side and the eagleford would not take much if this were the united states to get on shore conventional -- non-conventional production up to a half million barrels a day let alone whatever might be happening on the conventional side. canadian production is likely to continue. these quasi-official numbers based on the cap. so current production in canada is roughly three and a half million barrels a day. and we can kind of readily project five million barrels a day adjusted for where the price

of oil may be but there's going to be an uplift as canadian oil reaches water borne markets in terms of the net back price to the well head, even if global prices falter. so in addition to the say, half a million or 700,000 barrels a day by 2020 for mexico there's another million and a half for from canada and on the u.s. supply our own view is that there's going to be around 4.3 million barrels a day, more production by 2020 in comparison to the end of last year. three and a half million of that is on shore. 800,000 offshore, mostly deep water. and in addition to that some two million barrels a day in natural gas liquids. so if you add all of those things up we see u.s. production having risen to a total of over 12.5 million barrels a day, maybe close to 19 million barrels a day actually if you

add all of these things together in terms of increments including ngl liquid. so this is a robust, probably the fastest-growing sustainable area of production growth in the world and it's north american. i actually is used these slides in this room before. we just on the u.s. side see the net balance going positive on the u.s. net oil side before the end of the decade. if you take into account where oil demand is going so we see the oil and gas parade balance combined becoming net positive by twen2020. i know guy talked about north american self-sufficiency as did jesus a little bit but i think the real issue is the atlantic basin versus the rest of the world because the atlantic basin is already a self-sufficient

environment. that's a result of decline in european refinery requirements and the growth of north american production, gret of western hemisphere production in general. any growth from now on is going to make the atlantic basin if you look at the supply/demand balances in the atlantic basin and that mean there is a lot of crude oil coming into the atlantic basin that is kind of trapped there. i'll talk about it very quickly. the atlantic basin focrude defit really is fading so fast that it's likely to end by the end of this year. the u.s. has pushed out almost completely imports from africa. we are pushing out imports from the middle east but the problem is not by enough because imports

from the middle east still are well above a million four hundred thousand barrels a day and by the time we get to the end of this year and have pipeline capacity to bring canadian crude to the u.s. gulf coast, that reliance on crude from outside of the atlantic basin is going to fade substantially. we can talk about u.s. export restraints loosening to the degree there is a loosening of u.s. export constraints. it will feed into a growing surplus in the atlantic basin and i've also used part of this slide in this room before indicating in our own view that under the current regime for oil exports the u.s. if not by the end of this year, certainly by this time next year without any change in policy will be exporting probably over a million barrels a day of crude oil and we'll see canadian crude coming into the u.s. through

increased pipeline capacity in the mid-continent of the u.s., bringing crude to the u.s. gulf coast where it will compete with crude oil from saudi arabia, kuwait, venezuela, colombia, mexico and iraq which practically sees no crude oil imports. already mexican crude oil exports to the u.s. is falling even more than production is falling because there's not enough room in the u.s. gulf refining system to refine all of the crude oil coming from mexico. we're seeing diversion of crude to europe and to the pacific basin where, again, the pipeline at salinas cruz has been exporting into the pacific basin, including the u.s. west coast and growing in numbers. the real place where crude oil exports are needed from the

americas is really asia where the deficit is currently around 21 million barrels a day is going to grow to probably 24 million barrels a day by the end of this decade if not more. and mexico is no exception, looking increasingly to asia and europe one of the other places that one can find incremental north american crude going into the pacific basin is from canada but pipeline politics in canada are very difficult and it looks as though we'll see significant amounts of crude oil from alberta moving east to the atlantic basin by pipe and rail an south to the gulf of mexico by pipe and rail and not taking advantage of the higher net facts that can be realized in the pacific basin. so mexican crude may be the only

north american crude to take advantage of that. but here's the summary of what i would say by 2020 the three north american producers could see combined incremental growth of liquids. 8.3 million barrels a day. the bulk of that coming out of the u.s. combined with new exports out of krg from iraq and from central asia the already crowded med is going to become more crowded. the self-sufficient north atlantic and south atlantic basin are going to become surplus. oil will want to get out of this area toward other countries. the problem is worsened by the fact that some of the exporters to the western hemisphere, saudi arabia and kuwait have their exports relatively sticky on the saud di side because they don't want to lose market share and a big market b and rely on east

asia and south asia for market growth and kuwait because they believe that exporting 330,000 a day to the u.s. gulf coast market no matter how remunerative it may be helps keep 15,000 u.s. troop there is. so there's a sticking amount of oil that won't leave the atlantic basin making it more difficult for the crude produce in both mexico and canada to achieve a fair market value in a global marketplace and even though canadian crude is likely to have the highest net backs it might have by exporting through the pacific that's not likely to be the case. any liberalization of u.s. crude oil exports is going to even make the atlantic basin market more crowded. so the challenge for mexico today exacerbated by growth of 500,000 a day maybe by 2018, 700

or 800 by 2020 and a minimum of a million by 2025 is where to maximize value, where to optimize the maximization of value of that crude oil and it looks like that won't be easy. anyway, thanks for the opportunity to share this little addendum to the other remarks [ applause ] >> well, thanks to all three of our speakers for a comprehensive overview of the reform by jesus and i think a very sobering realistic view of the challenges from -- faced by the implementation that pedro outlined and then ed's view of how these might affect the global market and i -- one thing

i can say about ed is i look at those numbers and i say it looks like it's going to be a challenge to get those into the market without causing downward pressure on price but when you think about all the uncertainties we're now facing, even though 2020 is still a ways out with uncertainty in iraq, iran, nigeria, et cetera i think -- i'm glad that we do have these potential new sources of supply because we're probably going need them. and with that i know we're getting tight on time so i want to go right to q&a so please identify yourself and your affiliation and keep your questions as concise as possible and i appreciate it. >> hi, i'm dr. donna wells, an expert in the russian language internet but i also happen to be a native texan. we're reading about mass graves

and heads on pikes down there. should private investors be concerned about cartel violence or possible growth in political power of the cartels? thank you. >> you're a cartel expert. >> i certainly -- i -- no, i think that there are parts of mexico where you will have to contend with these issues and some of the companies present there, halliburton, baker hughes, already are. i was told recently that control risk that manages the security risk frates northern mexico along -- on the same level as southern iraq. although that was before the situation we have right now in

iraq. so -- but i do think there's some issues that the companies are facing. when you talk to some of the players they tell you, well, you know, yemen, i'm in nigeria, i think i can deal with northern mexico. so it's not that they disregard the security issues but it's that oil companies are pretty hearty lot and some of them -- not all of them, interest. >> i -- i mean, if you're an operator in south texas or west texas and you're going to mexico for the first time ever it's going to be a little bit of an issue and you're going to need to find crews that are willing to go to mexico, et cetera, which you might not. on the other hand, if you're -- let's say an oxy, for example, i mean, oxyis in pretty rough

places. so are they going to feel comfortable there? not comfortable, but do they think they can manage it, i think they can. there's another dimension which everybody focuses on the security issue i think there's also big issues in terms of community relations. and this is a big issue that happened when we were talking about the gas reform because pemex has ways of dealing with this that are not necessarily open to the private sector. and in areas, for example, on shore in the south of mexico and tabasco, chiapas, you have a lot of community relations issues. i understand that there's one particular service contract that is operated by schlumberger where they haven't been able to operate the first day. they haven't been able to go in at all. so those are issues that are going to have to be dealt with, no doubt.

>> maybe we could take a couple questions starting with here and then any over on this side and that would be second. >> steven donahoe. i'd like to pick up on something that mr. haas said and ask dr. reyes a question based on his experience as the director general of pemex. given that you have an entrenched bureaucracy in pemex that's used to doing things in a certain way and that now the rules are changing, it takes away a will the of that authority and power and ability to act as a monopoly and also in cfe, how do you think that transition is going to go and how long is it going to take before you reset the mind-set of these people that reason used to running things for so long? and what's the impact of that on retention of these mid-and senior level executives in those institutions? >> thank you and next question and then we'll answer them both. >> i'm the inter-american

development bank. i was just wondering, i didn't hear much about environmental assessment impacts. i noted in several other jurisdictions that you move one reform ahead but you also need all the environmental approvals to be able to move several projects ahead. how do you see that working out together with the community approval and so on for several of the projects? >> jesus, maybe you can answer that question about pemex and then whoever -- >> well, i think that pemex cannot be changed from within. i mean, i probably am living proof of that, no? so it needed a major shakeup and it had to come from outside. this does the trick, obviously, these reforms, because it really puts pemex in competition in

every aspect of the whole chain. now, the big issue is -- i think from within pemex, if you sort of -- obviously the top management, the top, top management is convince to have had reform and they are working for it. the issue is how successful they will be to implement the changes within the company so that pemex is able the cope with competition and at the same time by doing so allowing a significant and rapid expansion of the private sector in mexico. actually, a lot of companies really want to go to mexico partnering, but to -- i mean, you -- there are some -- there might raise -- arise some

questions within the capacity to be a good partner. so -- which in turn has to do with the regulations and with the treasury and the way the treasury is going to treat pemex. i think that the critical issue is that within pemex some of the most important layers of teches, the guys who are in the field, the supervisors, they accept the notion of eliminating the exclusivity of pemex. there was a very important discussion about this in relation with the reform of 2008. informs 2008 when the taboo of discussing these issues was eliminated. i mean, in 2006 when i entered into there it was a prohibition to actually talk about the opening of pemex or the opening of the sector.

this is only six years ago. it's a completely different ball game now and everybody's discussing that, every political party includes this topic in their agenda and so on. soy think my perception is this -- this layer of executives to accept the fact that the exclusivity had to go and that pemex had to compete with other companies. but -- and this is a very important but -- but in a level playing field. and it's there where the fact that they took pemex out of the budget and the -- i will say excessive intrusion of the treasury in many of the decisions of pemex creates a problem. because some of those middle layers and high layers are completely unhappy with that.

okay, you want and we want pemex to compete, let us compete. but do not put us in an unlevel playing field. if you're really making an assessment, it seems that the big loser of the reform as it is is pemex. paradoxically. because one would say that within the mind of the government strategically thinking they need to understand that they need pemex to be the dominant company for quite some time, some years, for the country and the sector to keep moving ahead. there is -- the other thing is impossible to imagine from day one to day two and the monopolies is gone and everything is dobey somebody else. so -- and that is not -- in my mind is not clear that they really get it. it's a complicated thing and they have to put a lot of attention to that so as not to become an impediment of the

reform. there are other aspects, the taxing aspects and other things but i leave it here. >> and answering annette's question, is the environmental protection regulations, are they part of this secondary legislation or different? >> well, actually constitutional reform did include the creation of a commission on a security issue -- not security, safety, labor safety issues and environmental aspects in the energy industry. it will become a new agency and the -- i would say pemex has made a lot of strides over the past years so i have no concern with that. actually, if you see the records of pemex compared to other international oil companies, pemex does very well.

the issue is the environmental, and the environmental has to do -- i'm not very concerned about current operations of pemex in regard to the environmental impact. there are some, as every company in the world has. but if you see the standards with which pemex operates currently, they're relatively high standards. the question has to do more with the issue of shell operations. how will all the discussion that is really going on in the u.s. and in other corners of the world in regard to shale permeate and be dealt with in mexico by the agency and by public opinion and by the government. that, i think, is a critical issue. now, there is an important difference. if you saw the map that they actually presented here, it's very interesting that some of the areas where there's potential for shale operations

in mexico are on the coastal areas. and this makes a big difference in regard to the issue of water because there are some in the -- not just bordering with the u.s. and very north, it's a dry area, but as soon as you move a little bit further south especially in veracruz there's a lot of water. it's a completely different thing. now, we are not going to pollute the water. the issue is what techniques to use to return the water in the same conditions that they were taken from nature. and that will -- the good thing is that there's a lot of ways that have been already -- a progress that has been made here and in the u.s. with technologies and with the know hows of how to do that. that mexico will benefit just by sort of receiving the know how with the investors that will be interested in doing that.

and the down side of that is that most probably there will be a contamination of the discussion because the discussions of these are transnationals and they will clearly raise the issues. it's already starting an interesting debate about those issues. but those are the ones that -- i'm not talking about the air, that's a different -- emissions of co 2 or something like that, that's different. i'm talking about more the water issues. >> we've got three more questions, i think that's going to have to wrap it up because i know two of our speakers have tight travel schedules. one and two more over here. >> thank you very much for your presentations. i'm from georgetown university. there have been many comments about the excess of optimism in the goals and benefits from the energy reform recently. the oxford incident which i

believe mr. haas is somewhat familiar because it was a paper recently released that was highlighting the lack of services for the water exploration, that the new fields would hardly offset the production in mature fields and one of the current ceo -- current pemex counselors said that the government should address in the secondary regulations and the secondary legislation whether the country should follow model of production with a dominant regulator or a dominant producer. and my question on the international aspect is that the discussion about international prices, self-sufficiency does not necessarily mean independence from markets because we recently saw the instability of prices with the iraq war. so in this context, how will the

mexican government will address and will try to attract and retain foreign investment? >> let me have two more and then we'll finish. >> hi, i'm jason finerman, a student at penn state university. i was wondering if the panel could elaborate more on the fiscal structure of the proposed exploration and production contracts. and also what are pemex's strategies relating to them diversifying their international trading partners and what role do u.s. and chinese firms play in this investment? >> good afternoon. i'm doing an internship here in a consulting company but i'm a mexican citizen so i'm going back to mexico and mr. haas mentioned that there are a lot of questions between mexican people about how these reforms are going to give me a benefit as a mexican citizen.

as far as i know the taxes that pemex paid, it's about a 44 cent annually for the mexican budget so i think that if we bring new companies that are going to actually sell this same product that pemex sells, i think, so pemex sales are going to drop and if mexico is inviting other companies to invest in mexico, i think mexico needs to offer something that is attractive. so my question is whether these companies are going to pay the same amount of taxes that pemex paid or if not where is this money coming -- this money that pemex is going to stop producing, how mexico is going to produce this money or where is this money coming from? >> and maybe you can answer the global -- do you have time? >> let me start with the fourth

and then we'll go backwards if that's okay. because i think the fourth is very important. the guidelines that are in the legislation about how the contracts will be are very similar to international -- the international guidelines. there are a couple of issues. but there are like four variables that the government will actually move when craft canning contracts with the private parties in terms of granting them a permit or license to exploit some areas. the -- i think the bottom line of all these discussions is the followi following. mexico will have to have a competitive contract scheme. because the -- otherwise it will be an absurdity in the context

of reform. you make the reform because you want more investment, both private and public into the hydrocarbon sector. it's not bringing private investment instead of pemex's investment, because that would then -- it would be a -- sum-zero game. you need to keep pemex investing and bring other players in competition or in partnership with pemex to bring additional resources so that you can multiply the number of wealthy drills and the installations and the facilities being constructed and so on. so the contract, the taxing aspect of those contracts will have at the end of the day to be kpetive to international -- wkpr nati -- international standards so that is the basic point.

it doesn't matter which one of those four variables they move. that depends a lot of if the government is eager to get some resources sooner than later or if they are willing to sacrifice some resources, some income from those contracts in the short term for the future. and then you can do all sorts of plays with that and models and all that. but bottom line is the number at the end that the government takes that mexico's government is going to take from the contracts that will be negotiated with private parties and with pemex will have to be internationally competitive. and the clarity is there. there are some other issues that maybe the scheme is a little bit too complex because the treasury wants to have an opinion in each contract, things like that is

bureaucracy and is in my view not needed and should be done in a more systemic way. but those are secondized. the issue is the mexican -- i don't know if i responded to your question. >> i have a complementary take on this. i think that one of the issues that the government faces is the selection of the assets that it wants to put on the block and the sequencing. that's really important. let me just give you an example to stop speaking conceptually. let's say that you start the auction with deep water offshore in areas where pemex has actually -- you know it says it has found something, it's uncertain how much and there's no reserves and the prospect is

kind of doubtful. well, you know, you have a ten to 12-year span between discovery and first oil, you have very low prospectivity. you have some seismic data but not really a lot. so you're taking a lot of risk and if you want to go into that -- if you want to start your auctioning of acreage that way you're going to get very few players because there's not too many people who play in that. that's very ultra deep water and there's low prospectivity and there's a lot of risk and very long life cycle to first oil. now if you start on the other hand with -- and nobody knows what the energy reform is going to look like and what are the issues, all of that remains to be tested so you're starting

with very high-risk stuff and with a very uncertain practical application of the reform. now, let's say that you do it otherwise, you say "i'm going go to shallow waters offshore. i'm going the auction the block that's between two sites. those blocks right there." prospectivity is very high. there's a lot of hydrocarbons and, you know, if you're an oil man, where do you look for oil? where there's already oil. and so you have shallow waters which are very easy to operate in. it's 150 feet of draft, you have a lot of undersea infrastructure because the pipelines are designed for 3.5 million barrels a day and you're now at 2.5 million barrels. and you know it's relatively low risk in comparison to ultra deep water. so the amount of money that

people are willing to pay for that acreage, the enthusiasm that you're going to have for that acreage is a lot higher. so it doesn't only depend. i mean, i agree with what jesus was saying but it doesn't only depend on the marginal tax rate and the royalty rate, et cetera. it also depends on how you want to start and i know that pemex gets ulcers when thinking that the mexican government could auction blocks in shallow waters offsho offshore because that's their turf and where they think they have the chance but the question is if you're thinking about the development of the mexican oil sector and you're thinking of attracting foreign investors, if it was my money i would start with shallow waters. and then you improve the concept, you bring in people with low-risk issues and you're going to have a lot of

competition. you have many more companies that can operate in that environment and once you prove the concept and you start filing the -- sending the rough edges then you get a much sturdier legal infrastructure and regulatory infrastructure. you're proven the concept and then you can move on to more complicated areas. so there's a big decision on the part -- i have no idea what they're going to decide. i'm not privy to those discussions but they have to make design discussions, they have to make sequencing discussion discussions. they have to make decisions based on sequencing, based on how much they're going to give to pemex of that request that jesus was talking about and all of that is going to be having an impact of the unfolding of the

refo reform. >> does the changing situation in north america have a -- change the policy goals or targets about where mexico would send that oil now? i think one question that was asked is whether new oil will be going to china or -- just going go with the market? >> i spent 12 years in international trade and then i consulted for many companies worldwide on international trade issues. crude oil is cash. >> i remember that hedging. >> yes. there is no problem with selling crude oil. the only question is at what price are you going to sell it? and that has two dimensions to it. one is the efficiency, are you getting the market price? you're not going to get more than the market price. you have to be careful not to get less than the market price and the second is whether you're maximizing the net back because

you're going to the right market. that's all there is. now, pmi, i think, has the international trade subsidiary of pemex as the capability, analytical and commercial, to market the crude oil wherever it makes the most money. it's the question of whether mexican energy policy will give it the freedom to execute whatever sales strategy is needed to maximize the return. but that's all there is. i don't think there's any particular mystery in it. >> did your question get answered? [ inaudible question ] >> i don't think they're going to meet -- i mean, the government has a three million barrel a day goal by the end of

this administration. the number is not two million and a half current production, it's two million, three hundred fifty thousand as i mentioned. and plus you have the decline and to make up for that i just don't think that they're going to be able to reach two million barrels a day. now, i think there's another issue which is that one of the problems we have is that the government, i believe, from the very beginning, because it had all these political constraints and it had to make sure that the whole legislation would pass, etc., has been making a lot of commitments and promises. you know, volumes of production, declining prices to the public, et cetera. i just don't think those are tenable. and i don't think people believe them. and i think the government can get in trouble because it promises things that it's going to have a hard time delivering. does that mean that it invalidates the reform?

i don't think it invalidates the reform. this is a very ambitious, complicated reform. it's going to take some years to get done and polished and executed in a way that, you know, has never been done in mexico. and so it's normal that we're going to have bumps in the road. the problem is if you promise that there's not going to be any bumps and then there are bumps people are going to say "he lied to me." come on. i mean -- >> the exceeded expectations is part of the process of selling the reforms. every government tries to push for a reform, regretfully falls into promising things that are too optimistic. and that happened also with the energy reform in mexico. and it has different implications in mexico and outside. so the issue here is managing the expectations because the reform is a very serious, very profound reform. you already -- the government

finally after 70 years of discussion in mexico actually made the woulder to the top of the mountain and the ball is rolling and it's going to a huge ball when it gets down so let's not hope -- let's not lose hope -- not hope but perspective of that. that is true now. bombs and non-bombs, expectations of short term and changes and so on. that will happen but it's a reality. i want to add one element in regard to that and along with that because one also has to be confident about the capacity of mexico. just think about the changes in the energy and gas reform of '94, '96, whatever. at the end of the day it did work. it took time. the regulations were there. nafta before that nafta, institutions are there. i mean, the country has been able to build up the

institutions that are needed to implement big changes like that so -- and the country an open country. so there are many questions the mexican economy will have the capacity to respond to a very demanding -- a high demand for labor and you talked about that for labor and supplies and companies and engineering capacities and so on and the responses "mexico by itself?" no, but it's an open economy and just -- it's enough to remember you have to u.s. and canada right there. so with that the capacity of mexico -- i'm not concerned about the capacity of mexico in that aspect of it. regulations you can have regulations of ten, nine, eight, five, you can read them but it's there. >> i have a problem there and this is a discussion we might

need to have at a later date but i think the gas regulation to me -- and i will see with pemex gas when it happened -- was exactly example we had to avoid. we had constitutional reform, we had regulatory reform, we created the cre. we had all the bells and whistles and i think the reform failed. and the proof that the reform failed is that the economy has had gas alerts, gas supply alerts, and that it has been impossible to build the infrastructure to supply mexico with the gas. and that's the thing that we have to avoid. we have to avoid a regulatory -- a legal and regulatory environment that does 95% of the work and then falls short of the last 5% that you need to actually execute the point. and there is that risk. i think it's going to be -- i think it's going to work, but i think it's going to be

complicated and i think there is the risk in this particular case that we also fall short because of x, y, or z, just like we did at the time of the gas reform. i hope it's not the case, but it's a complicated issue and i think that unless we're very, very aware that it may happen to us again, i think we run the risk that it will. if we are aware that it happened to us and that we are able to go back and see what went wrong and we avoid the same mistakes i think then we have a better chance. but it's not that easy. it's not -- you know, a piece of cake. >> well, thank you all for a very realistic assessment. [ applause ] thank you, ambassador, for coming and joining us and thank you all for joining us.

>> the senate homeland security committee holds a hearing wednesday on security along the u.s./mexico border where there's been a recent influx of unaccompanied minors crossing into u.s. territory. the heads of fema and u.s. customs and border protection will join other government officials to testify. that will be live wednesday at 10:00 a.m. eastern here on c-span 3. and on thursday, homeland security secretary jay johnson and health and human services secretary sylvia burwell will be on capitol hill. they'll be before the senate appropriations committee to discuss the president's request for additional funding to deal with the situation along the border. that's thursday at 2:30 p.m. eastern, live coverage here on c-span 3.

>> tune into book tv this weekend for the harlem book fair with discussions on the state of african-american literature, multicultural publishing and the arts movement. live coverage starts at 11:45 eastern on c-span 2's book tv. >> next, federal reserve chair janet yellen talking about monetary policy and the economy at a recent lecture series hosted by the international monetary fund. the event begins with opening remarks from imf managing director christine lagarde and michelle camdasue who served as director from 1987 to 2000. this is an hour and a half. >> it is a tremendous privilege to open the lecture series in the actual presence of the person to whom this series is

actually dedicated. thank you, michelle, for being with us. [ applause ] and it is indeed a momentous occasion to welcome here at the imf the chair of the u.s. federal reserve, the distinguished janet yellen. [ applause ] and, indeed, all of your distinguished guests are also recognized collectively and very much welcome. and i applaud you. [ applause ] now, this lecture is at the heart of what we do. the fund has a core mandate of overseeing the global financial system and over the years the mandate has evolved with changing global conditions. we initiated this lecture series to meet two important goals -- the first one is to reflect on

the current crisis, what we have learned from it. the second goal 1 to build stronger bridges among those preoccupied central banking. and that includes central bankers indeed, but it goes beyond that circle. let me start with why we need to reflect on the recent crisis period and take stock of lessons learned. the global financial crisis has been a bit like an earthquake. it has shakened the financial system, swayed many of our assumption and traditional policy prescriptions. it has changed the policy landscape, diverted streams usual in the central banking world. that world that was formally rather flat with little blips now and again except in times of high crisis, little blips of about 25 basis points at a time but otherwise no major changes.

well, on this new terrain, central bankers are quickly learning to be mountainous and they've been busily developing new ideas and new tools. central banking has suddenly become a very exciting sport. so much so as to attract a global audience. not as much, probably, as what the world cup is attracting at the moment, but still. and janet, you would be very surprised to hear that actually wherever you give a press conference in this institution you have a group of total aficionados who get together in front of the screen, watch with you with great impatience, and i'm even told they bring coffee and popcorn. monetary policy and central banking have come to the forefront of the policy landscape because of the role they have played in fighting this crisis and returning us to stability. and because of the role they

continue to play today and the role that they will probably continue to play in the future because it will not be business as it was. the fund's global membership, 188 countries recognize this. they recognize this and they question us more and more regularly on those issues. and the questions are getting more and more technical and sophisticated. so we need to provide answers. we need to provide directions on paths yet untrodden. which brings me to the second objective of this lecture -- the need to build stronger bridges between all those with a stake in the important issues of central banking. we need to reexamine, refine, and modernize our policy advice on monetary policy and central banking. yet this is a task that is too large for one single institution to undertake alone and this applies as well to the imf, not

withstanding the fact that we have those 188 members. the knowledge on these issues does not exclusively reside in one central bank, however big it is. it is. it doesn't reside in any one single institution. it resides in multiple, multiple conference rooms, in multiple rooms altogether, and it is all those with knowledge about it that need to be together. >> certainly we can bring our cross-country expertise to bear. our experience in collaborative international efforts and our expertise in looking at the big picture of economy policy. at the same time, our goal is clearly to join hands with mechanics, with central bankers, to think together, to explore together, to compare notes and to move forward together. to build stronger bridges.

the lecture is strded to be a pillar on which these bridges will rest. by creating space for this policy, a meeting that would bring the central banking community and the fund closer together year after year. now, before i leave you to the wisdom of our speakers, allow me to highlight three of the main questions on the future of monetary policy. first question, the crisis was a stark reminder that price stability is not always sufficient for greater economic stability. so, should central banks put more weight on growth and employment? should central banks mandates be enlarged to also cover, not just price stability, but also financial stability? what role should monetary policy play in preserving financial stability? and how to make sure that central bank independence as

regard monetary policy is preserved. second, with increasingly complex financial interconnections, many small open and emerging market economies have found it challenging to deal with large swings in capital flows, asset prices and exchange rates. how can these economies retain monetary policy independence in such a policy setting? and what tools should they use? finally, a crisis has galvanized a brad effort to reframe the regulatory framework. there has been progress, but much still remains to be done. how will financial regulations and the new structures of the financial system affect the functioning of monetary policy domestically and abroad? to all these questions, i'm sure that some of you have the beginning of the answers. i know that our speakers will offer their proposals, but i

hope that it begins here. now, before i give the floor to chair yellen, it is my real pleasure to introduce the person to whom this lecture series is dedicated and who has kindly agreed to be with us today and has traveled from paris yesterday, michel camdessus. [ applause ] his legacy is well known to us all. michel, you presided over the fund for 13 years. you were its longest serving manager director and your stewardship was transformational for this institution. soon after you took the helm, in 1987, the world as you knew it, as we all knew it, suddenly went into shamble.

and it was undone radically and unexpectedly. you managed the fund through the fall of the berlin wall, the unraveling of the soviet union, the mexican crisis, the asian crisis, and the russian crisis. yet, when you announced your intention to retire and some frivolous porter asked you what's your successor should have as a main attribute, you said immediately without even thinking about it, solid sense of humor. [ laughter ] now, throughout these difficult and dynamic times, you steered the fund with remarkable vision, with vigor, and with tenacity and also with humanity. your interactions with country authorities were characterizes by a unique skill in galvanizing favorable outcomes. you became a household name from

moscow to warsaw to bish kek, providing an element of continuity amid continuous turnover of political and public figures. your untiring efforts also brought a more human face to the fund. indeed it was your compassion for the poor that took the fund in his most important direction toward poverty reduction through the establishment of concessional lending through the enhanced structural adjustment facility its now successor, the prgt. and your compassion extended well beyond the fund. i'm supposed now to show you something which some of you will recognize. it is the seven pledges of michel camdessus, and i have to pay tribute to mr. keekins who i see somewhere in the back, who was kind enough to let me have his card of the seven pledges.

seven pledges on sustainable development that became part of the 15 principles of the u.n. millennium development goals. michel, you were, and still were a staunch supporter of corporation, upon openness and friendship between nations. under your leadership effort was made to exchange restrictions under article 8. as a result, by the mid '90s, making a public commitment to openness was no longer controversial in many countries. and with openness came the need to better integrate. you witnessed the globalization of financial markets and and as a central banker yourself, you had the foresight to recognize they needed better integration of its work in monetary and exchange rate policies. you saw the financial stability assessment program evolve from a

pilot to become a key activity and major output of the fund and the bank, because it's one of those products which we cooperate very well. in fact, thanks to your efforts, the imf was able to transform the moniker of it's mostly fiscal, to it's also monetary and financial. thank you, michel. finally, you and your wife bridgit always harbored a genuine affection for the staff of this institution, you were deeply concerned with their well-being and stood up for their cause and so did your wife. staff reciprocated with their trust, respect, and abiding affection for you too which is as clear from the audience here today, remains powerful. the staff admire you personally and what you've achieved for this institution and the membership. we thank you for it. as a music lover, you referred

to the staffs as the strat various of the world orchestra. [ applause ] it was, indeed a string orchestra in the main so there were plenty of strat various who made up this orchestra which today you have another opportunity to engage with and we cannot wait to be part of one of your encore. thank you. [ applause ] >> well, friends, you could imagine that i am a little bit overwhelmed by what i have just heard. i had the impression that you were talking about somebody else. [ laughter ] but let me tell you thank you

for the kind introduction and also for the pleasure of being here, back in the fund. well, it's a little bit like coming back home, a very warm and welcome home. of course i could talk about ulysses going back or something like that, but the story stops there because there is no penelope here waiting for me. [ laughter ] yes, it's true that the time which i have spent in the imf, 13 years, is exactly the same as the time which went from today

when i am back here, but it's my great pleasure to see many familiar faces, and not only in the first row, but many more in this huge audience, and of course i will be happy if i could see, but those who are over there, if i could say hello sometime later. [ applause ] well, and what i perceive also is plenty of moments coming to my mind, all these moments of very high pressure, and you have mentioned a few of them, but moments of high pressure but higher excitement, i should say.

and all of that contributing to create this very special atmosphere of this institution, dynamic, professional, focused, with people never satisfied with what they have just done, and looking forward for finding the ways of doing better. this is to my judgment the imf. so thank you, thank you again for this great pleasure and for the great honor, totally undeserved honor of giving my name to this lecture. totally undeserved. but this is something between you and i we will have to discuss further later on. [ laughter ] i am proud of that and the presence with us today of the

chair of the federal reserve, add her prestige to the event and to the series of lecture. i will have to get used to seeing my name on that. okay. but, but, it makes great sense to devote further efforts to the issues around central banking. even if many of you know here that i have not been all my life a central banker, as i even started in the minister of finance in my country. at the time, it wthe bank of fr was not independent and we had to say the bank must be in the hands of the state, but not too much. and be sure that i made

everything i could to comply with the second part of the sentence. then, but, okay, the bank of france finally got independence in 1993, and many other institution made this change, a change which is certainly one of the most profound changes in central banking during the last decade. today, perhaps even more than in the past, everybody recognize that the economic well-being of nations depends on the quality of the monetary policies. so one couldn't imagine a more important topic for new lectures here in the imf. but why, why central banking finally is so crucial? obviously because the monetary

stability is a key component of the common good, global common, as they say in new york. yes, and by stability, we mean low and stable inflation, and we know from bitter experience, so many bitter experiences in the archives of the imf, about the damage that high and volatile inflation can do. and we know much better now also the pernicious effect of inflation. we also understand clearly now that in order to achieve price stability, we need some policy framework directed to other financial sector. something we which was not that

familiar when i join the imf. financial sector was an area where we were not allowed to go. and i remember tremendous conversation with mrs. thatcher about that when i went to see her and we started discussing about suggestions i wanted to make to the banking community. and then she told me, never lecture the bankers! never! [ laughter ] and of course we continued lecturing a little bit the banks, but, but nevertheless, we were in difficult grounds. yes, but more reasons for the centrality of central banking and something which is very unique. their ability to respond quickly

to the shock. fiscal policy is fundamentally important, but they are not able to change course as quickly as monetary policy. and of course we've just had very good demonstration of that with the crisis that erupted. without the timely and decisive actions of the united states federal reserve and other central banks around the world, the crisis would have been much, much worse. well, suffice to justify not the name of the lecture, but the principle of the lectures. and if we go back to the history, you are already help us to revisit, christine, we see

many examples of the changes which have had to be introduced in the central banking universe. we had this huge transformation of eastern europe and former soviet republics. and there, of course, the imf staff had to do an extraordinary job being there and providing technical assistance. coordinating efforts to create central banking in a universe where money -- monetary policy had not the same meaning. as a matter of fact, they had no meaning at all. and all of that had to be created from scratch, creating the central banks, along with the supporting banking,

payments, accounting, and other financial infrastructures. the work was enormous, and here i must have mistake of my heart to the exceptional dedication of the staff working in this field. and then we had the asian crisis. it was a very different kind of episode. we had central banks there, and they were severely tested in the affected countries. we had a few false starts in some cases, and stan remembers pretty well. but also took decisive stabilization measures, but more important probably are the lessons which were learned from them, by them, and by the imf in that occasion.

one was that financial vulnerabilities can be even when microeconomic fundamentals appear sound. this was the surprise of that moment -- one of them. another was that the risk from large and volatile capital flows equal large, larger foreign exchange buffers. and we had some difficulties in convincing our membership that you had to add a zero to the numbers of our loans in several countries. we had some problems with that. but we did. and then we had the changes in central banking policy framewor

frameworks, introduce here with enormous effort from the staff, and they have paid off. and we had a demonstration of this pay-off in the fact that all these countries have been extremely quick in weathering the recent global crisis. of course one could regret that the advanced economies have not realized deeply enough after the asian crisis, that their own financial system too might be vulnerabl vulnerable. and other kind of surprises in this world. but we paid a certain price for that. a very certain price. but after expressing that, i must say in the positive side, that in europe, to say the world

about europe, we challenge the experience of creating a new currency. in europe, we have seen the central banks, and more broadly, the governments draw two important lessons from this crises. one, the importance of adhering to fiscal rules. intellectually, to say that the adherence is changing the landscape is another thing. but this is a lesson which has been well received. and another one, the importance of common arrangements for banking visions and crisis resolution, an issue for which my predecessor, our predecessor,

has made a very superb job over the last few years. okay, i know that the change in the years was the inflation. an invention at the end of the '90s which was finally, well, it went around during my last stay here, and this was an enormous transition to which continues running its course. all of that to say, and i see the time is running, that one of the features of the central banking finally, we chose for so long, an arc type of immobility, superb immobility, is always changing. the definition of central bank is changed now.

changes are at time small. although they are deep and widespread, change is often induced by outside pressures, but can also happen by design. we know all of that. in any case, it is important that the implications of such changes be carefully considered. if i had time for that, i would take that time. when i was appointed central bank governor, i went immediately to see my predecessor, to have his instructions. and he tell me only one. only one, remember, my friend, in central banking, nothing is urgent. nothing is urgent. take always all the time needed

to carefully think about and then finally either the crisis will be over -- [ laughter ] -- either you will make the right decision. well, i was not 100% sure that he was right, but nevertheless, i keep that in my mind, and i -- what the conclusion i draw -- i did draw, okay, what to think. well, two things. one, invest in capacity, talent, applied research, analysis, to try to stay in the cutting edge. and remain open to new ideas and perspectives. we are now in a new period of

questioning. usual with global financial crisis of course. and of course i couldn't agree more with what the managing director just said. the crisis has taught us that rules, principles, practices, where in the past years, a little bit too simple, that monetary policy can creatively, the word creatively was not very popular in central banking several years ago -- can creatively deploy temporarily non-standard and conventional measures when necessary. new tools such as policies and the eternal lesson that

preventing crises is substantially less costly than managing and containing them. but this crisis has left us also with major unanswered questions. in the immense uncharted field that central banks have in common, the international monetary system. here i couldn't do better than to echo the words of my elder brother in central banking, paul volcker, who in his remarks at the annual meeting one month ago, of course in that speech, paul, you raise plenty of interesting points. you alluded to the dilemma, the

so-called -- and the invention of the sdr, of which you are helping yourself a kind of missionary around the world at the beginning of the '70s, should keep that on record. well, but what i wanted to say is that like to repeat your plea for attention to the need for developing a whole base cooperatively managed monetary system worthy of our time. i look forward with high expectations to the measures the central banking community will adopt to face this challenge in their continuing quest for

global frameworks and policies that would lead us to greater global stability and prosperity. i have no doubt that the imf, faithful to its purpose, to promote international monetary cooperation and to provide the machinery for consultation and collaboration on international monetary problems, will contribute -- and these are your own words, paul -- to provide the necessities and well conceived approaches that could command attention and support in this long journey toward a better system. may our new lectures contribute to it. thank you, thank you all very much. [ applause ]

>> thank you very, very much, michel, and listening to you, i was actually going to revisit our traditional thinking about central bankers. no, they are not boring men in gray suits. they're capable of changing and they're even capable of not being men. [ laughter ] which is why i'm not going to spend any more time -- [ applause ] -- introducing to you and living with you an extraordinary woman whom i greatly admire, i have about five pages of compliments and reminders of all her achievements and how much she has done, but i will spare you that because you're all convinced as well as i am, as first woman to take the chair of the federal reserve board last february this year, janet, we all look to you and your deep experience and everything that you bring to the table to guide us in those difficult times. i know you're going to navigate

us between price stability, financial stability, and many other issues. the floor is yours and we're all expecting. [ applause ] >> thank you, christine. it's an honor to deliver the inaugural michel camdessus central banking lecture. michel camdessus served with distinction as governor of the bank defrance and was one of the longest serving managing directors of the international monetary fund. in these roles, he was well aware of the challenges central banks face in their pursuit of price stability and full employment. and of the interconnections between macro economic stability and financial stability. those interconnections were apparent in the latin american

debt crisis, the mexican paceo crisis, and the east asian financial crisis, to which the imf responded under camdessus' leadership. these episodes took place in emerging markets economies. but since then the global financial crisis and more recently the euro crisis, have reminded us that no economy is immune from financial instability and the adverse effects on employment, economic activity, and price stability that financial crises cause. the recent crises have appropriately increased the focus on financial stability at central banks around the world. at the federal reserve, we've devoted substantially increased resources to monitoring financial stability, and have

refocused our regulatory and supervisory efforts to limit the build-up of systemic risks. there have also been calls from some quarters for a fundamental reconsideration of the goals and strategy of monetary policy. today i will focus on a key question spurred by this debate. how should monetary and other policy makers balance macro prudential approaches and monetary policy in the pursuit of financial stability. in my remarks, i will argue that monetary policy faces significant limitations as a tool to promote financial stability. its effects on financial vulnerabilities such as excessive leverage and maturity transformation are not well understood and are less direct in a regulatory or supervisory

approach. in addition, efforts to promote financial stability through adjustments in interest rates would increase the volatility of inflation and employment. as a result, i believe a macro prudential approach to supervision and regulation needs to play the primary role. such an approach should focus on, through the cycle standards, that increase the resilience of the financial system to adverse shocks, and on efforts to ensure that the regulatory umbrella will cover previously uncovered systemically important institutions and activities. these efforts should be complemented by the use of countercyclical macro prude eeshl tools, a few of which i will describe. but experience with such tools remains limited and we have much to learn to use these measures

effectively. i'm also mindful of the potential for low interest rates to heighten the incentives of financial market participants to reach for yield and take on risks. and of the limits of macro prudential measures to address these and other financial stability concerns. accordingly, there may be times when an adjustment in monetary policy may be appropriate to ameliorate emerging risks to financial stability. because of this possibility and because transparency enhances the effectiveness of monetary policy, it's crucial that policy makers communicate their views clearly on the risks to financial stability, and how such risks influence the appropriate monetary policy stance. i'll conclude by briefly laying

out how financial stability concerns affect my current assessment of the appropriate stance of monetary policy. when considering the connections between financial stability, price stability, and full employment, the discussion often focuses on the potential for conflicts among objectives. such situations are important since it's only when conflicts arise that policy makers need to weigh the trade-offs among multiple objectives. but it's important to note that in many ways, the pursuit of financial stability is complementary to the goals of price stability and full employment. a smoothly operating financial system promotes investment, facilitating economic growth and employment. a strong labor market contributes to healthy household and business balance sheets. thereby contributing to

financial stability. and price stability contributes not only to the efficient allocation of resources in the real economy, but also to reduce uncertainty and efficient pricing in financial markets, which in turn, supports financial stability. despite these complimentarities, it has powerful effects on risk taking. indeed the policy stance of recent years has supported the recovery in part by providing increased incentives for households and businesses to take on the risk of potentially productive investments. but such risk-taking can go too far. thereby contributing to fragility in the financial system. this possibility does not obviate at the need for monetary policy to focus primarily on price stability and full employment. the cost to society in terms of

deviations from price stability and full employment that would arise, would likely be significant. i'll highlight these potential costs and the clear need for a macro prudential policy approach by looking back at the vulnerabilities in the u.s. economy before the crisis. i'll also discuss how these vulnerabilities might have been affected had the federal reserve tightened monetary policy in the mid 2000s to promote financial stability. although it was not recognized at the time, risk to financial stability within the united states escalated to a dangerous level in the mid 2000s. during that period, policy makers, myself included, were aware that homes seem overvalued by a number of sensible metrics. and that home prices might

decline. although there was disagreement about how likely such a decline was and how large it might be. what was not appreciated was how serious the fall-out from such a decline would be for the financial sector and the macro economy. policy makers failed to anticipate that the reversal of the house price bubble would trigger the most significant financial crisis in the united states since the great depression. because that reversal interacted with critical vulnerabilities in the financial system and in government regulation. in the private sector, key vulnerabilities included high levels of leverage, excessive dependence on unstable, short-term funding, weak underwriting of loans, deficiencies in risk measurement and risk management, and the use

of exotic financial instruments that redistributed risks in non-transparent ways. in the public sector, vulnerabilities included gaps in the regular tore structure that allows some systemically important financial institutions and markets to escape comprehensive supervision, failures of supervisors to effectively use their existing powers, and insufficient attention to threats to the stability of the system as a whole. it's not uncommon to hear it suggested that the crisis could have been prevented, or significantly mitigated by substantially tighter monetary policy in the mid 2000s. at the very least, however, such an approach would have been insufficient to address the full range of critical vulnerabilities i've just described. a tighter monetary policy would

not have closed the gaps in the regulatory structure that allows some markets to escape comprehensive supervision. a tighter monetary policy would not have shifted supervisory attention to a macro prudential perspective, and a tighter monetary policied not have increased the transparency of exotic financial instruments or ameliorated deficiencies in risk management within the private sector. some have the view that a substantially tighter monetary policy may have helped prevent the crisis, might acknowledge these points, but they might also argue that a tighter monetary policy could have limited the rise in house prices, the use of leverage within the private sector, and the excessive reliance on short-term funding, and that each of these channels would have contained, or perhaps even

prevented the worst effects of the crisis. a review of the empir cal literature suggests that the level of interest rates does flungs house prices, leverage and maturity transformation. but it's also clear that a tighter monetary policy would have been a very blunt tool. substantially mitigating the emerging financial vulnerabilities through higher rates would have had sizeable adverse effects in terms of higher unemployment. in particular, a range of studies conclude that tighter monetary policy during the mid 2000s, might have contributed to a slower rate of house price appreciation. but the magnitude of this effect would likely have been modest, relative to the substantial momentum in the prices over the period. hence, a very significant tightening with large increases

in unemployment would have been necessary to halt the housing bubble. such a slowing in the housing market might have constrained the rise in household leverage, as mortgage debt growth would have been slower, but the job losses and higher interest payments associated with higher interest rates would have weakened household stability to repay previous debts. suggesting that a sizeable tightening may have mitigated vulnerabilities in household balance sheets only modestly. similar mixed results would have been likely with regard to the effects of tighter monetary policy on leverage, and reliance on short-term financing within the financial sector. in particular, the evidence that low interest rates contribute to increased leverage and reliance on short-term funding, points to some ability of higher interest

rates to lessen these vulnerabilities. but that evidence is typically consistent with a sizeable range of quantitative effects where altative views regarding the causal channels at work. furthermore, vulnerabilities from excessive leverage and reliance on short-term funding in the financial sector grew rapidly through the middle of 2007. well after monetary policy had already tightened significantly relative to the accommodative policy stance of 2003 and early 2004. in my assessment, macro prudential policies such as regulatory limits on leverage and short-term funding, as well as stronger underwriting standards, represent far more direct and likely more effective methods to address these vulnerabilities.

turning to recent experience outside the united states, a number of foreign economies have seen rapidly rising real estate prices, which has raised financial stability concerns, despite in some cases, high unemployment and short falls in inflation relative to the central bank's target. these developments have prompted debate on how to best balance the use of monetary policy and macro prudential tools in promoting financial stability. for example, canada, switzerland, and the united kingdom have expressed a willingness to use monetary policy to address financial stability concerns in unusual circumstances. but they've similarly concluded that macro prudential policies should serve as the primary tool to pursue financial stability. in canada, with inflation below

target and output growth quite subdued, the bank of canada has kept the policy rate at or below 1%. but limits on mortgage lending were tightened in each of the years from 2009 through 2012, including changes in loan to value and debt-to-income caps, among other measures. in contrast, in norway and sweden, monetary policy decisions have been influenced somewhat by financial stability concerns. but the steps taken have been limited. in norway, policy makers increased the policy interest rate in mid 2010, when they were facing escalating household debt, despite inflation below target and output below capacity, in part, as a way of guarding against the use of future imbalances, end quote.

similarly sweden's bank held its policy rate, quote, slightly higher than we would have done otherwise because of financial stability concerns. in both cases, macro prudential actions were also either taken or under consideration. in reviewing these experiences, it seems clear that monetary policy makers have perceived significant hurdles to using sizeable adjustments in monetary policy to contain financial stability risks. some proponents of a larger monetary policy response to financial stability concerns might argue that these perceived hurdles have been overblown, and that financial stability concerns should be elevated significantly in monetary policy discussions. a more balanced assessment in my view would be the increased

focus on financial stability risks, as appropriate in monetary policy discussions, but the potential cost, in terms of diminished macro economic performance is likely to be too great to give financial stability risks a central role in monetary policy decisions, at least most of the time. if monetary policy is not to play a central role in addressing financial stability issues, this task must rely on macro prudential policies. in this regard, i would note that here too policy makers abroad have made important strides, and not just those in the advanced economies. emerging market economies have in many ways been leaders, employing in recent years, a variety of restrictions on real estate lending or other

activities that were perceived to create vulnerabilities. although it's probably too soon to draw clear conclusions, these experiences will help inform our understanding of these policies and their efficacy. if macro prudential tools are to play the primary role in the pursuit of financial stability, questions remain on which macro prudential tools are likely to be most effective, what the limits of such tools may be, and when, because of such limits, it may be appropriate to adjust monetary policy to get in the cracks that persist in the macro prudential framework. in weighing these questions, i find it helpful to distinguish between tools that primarily build through the cycle resistance against adverse financial developments, and

those primarily intended to lean against financial excesses. tools that build resillience aim to make the financial system bedroom able to withstand adverse developments. for example, to hold loss absorbing capital make financial institutions more resilient in the face of unexpected losses. such requirements take on a macro prudential dimension when they are most stringent for the largest, most systemically important firms, thereby minimizing the risks that losses at such firms will reverberate throughout the financial system. resilience against runs can be enhanced by stronger capital positions and requirements for sufficient liquidity buffers among the most interconnected firms. an effective resolution regime

can also enhance resilience by better protecting the financial system from contagion in the event of a siffy collapse. further, the stability of the financial system can be enhanced through measures that address interconnectedness between financial firms such as margin and central clearing requirements for derivatives transactions. finally, a regulatory umbrella wide enough to cover previous gaps in the regulation and supervision of systemically important firms and markets, can help prevent risks from mi migrating to areas where they're difficult to address. in the united states considerable progress has been made on each of these fronts. changes in bank capital regulations which will include a surcharge for systemically important institutions, have

significantly increased requirements for loss absorbing capital at the largest banking firms. the federal reserve stress test and comprehensive analysis and review process require that the large financial institutions maintain sufficient capital to weather severe shocks, in that they demonstrate their internal capital planning processes are effective, while providing perspective on the loss absorbing capacity across a large swath of the financial system. the bozel 3 framework includes liquidity requirements designed to mitigate excessive reliance by global banks on short-term wholesale funding. oversight of the u.s. shadow banking system has also been strengthened. the new financial stability oversight council has designated some non-bank financial firms as

systemically important institutions that are subject to consolidated supervision by the federal reserve. in addition, measures are being undertaken to address some of the potential sources of instability in short-term, wholesale funding markets, including reforms to triparty repoe market, and money market mutual funds. although progress in these areas has, at times, been frustratingly slow. additional measures should be taken to address residual risks in the short-term wholesale funding markets. some of these measures, such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding would likely apply only to the largest, most complex organizations. other measures, such as minimum

margin requirements for repurchase agreements and other securities financing transactions, could at least in principle, apply on a market wide basis. to the extent that minimum margin requirements lead to more conservative margin levels during normal and exuberant times, they could help avoid potentially destabilizing procyclical margin increases in short-term wholesale funding markets during times of stress. at this point, it should be clear that i think efforts to build resilience in the financial sector are critical to minimizing the chance of financial instability and the potential damage from it. this focus on resilience differs from much of the public discussion. concerns whether some particular asset class is experiencing a

bubble and whether policy makers should attempt to pop the bubble. because the resilient financial system with withstand unexpected developments, identification of bubbles is less critical. nonetheless, some macro prudential tools can be adjusted in a manner that may further enhance resilience as risks emerge. in addition, macro prudential tools can, in some cases, be targeted at areas was concern. for example, the new bozel 3 regulatory capital framework includes countercyclical capital buffer, which may help build additional loss-absorbing capacity within the financial sector during periods of rapid credit creation, while also leaning against emerging excesses. the stress tests include a

scenario design process in which the macro economic stresses in the scenario become more severe during buoyant economic expansions and they incorporate the possibility of highlighting salient risk scenarios, both of which may contribute to increasing resilience during periods in which risks are rising. similarly, minimum margin requirements for securities financing transactions could potentially vary on a counter cyclical basis so that they're higher in normal times than in times of stress. in light of the considerable efforts under way to implement a macro prudential approach to enhance financial stability and the increased focus of policy makers on monitoring emerging financial stability risks, i see three key principles that should guide the interaction of

monetary policy and macro prudential policy in the united states. first, it's critical for regulators to complete their efforts at implementing a macro prudential approach to enhance resilience between the financial system, which will minimize the likelihood that monetary policy will need to focus on financial stability issues, rather than on price stability and full employment. key steps along this path include completion of the transition to full implementation of bozl 3, including new liquidity requirements, enhanced standards, for systemical allal and tighter prudential buffers for firms heavily reliant on short-term wholesale funding. expansion of the regulatory umbrella to incorporate all systemically important firms,

the institution of an effective cross-border resolution regime for systemically important financial institutions, and consideration of regulations such as minimum margin requirements for securities financing transactions, to limit leverage in sectors beyond the banking sector in siffys. second, policy makers must carefully monitor evolving risk to the financial system and be realistic about the ability of macro prudential tools to influence these developments. the limitations of macro prudential policies reflect the potential for risks to emerge outside sectors subject to regulation. the potential for supervision and regulation to miss emerging risks, the uncertain efficacy of new macro prudential tools, such as counter cyclical capital buffer, and the potential for

such policy steps to be delayed, or to lack public support. given such limitations, adjustments in monetary policy may at times be needed to curb risks to financial stability. these first two principles will be more effective in helping to address financial stability risks when the public understands how monetary policy makers are weighing such risks in the setting of monetary policy. because these issues are both new and complex, there is no simple rule that can prescribe, even in a general sense, how monetary policy should adjust in response to shifts in the outlook for financial stability. as a result, policy makers should clearly and consistently communicate their views on the stability of the financial system and how those views are

influencing the stance of monetary policy. to that end, i'll briefly lay out my current assessment of financial stability risks and their relevance at this time to the stance of monetary policy in the united states. in recent years, accommodative monetary policy has contributed to low interest rates, a flat-yield curve, improved financial conditions more broadly and a stronger labor market. these effects have contributed to balance sheet repair among households, improved financial conditions among businesses, enhanced the strengthening of the health of the financial sector. moreover, the improvements in household and business balance sheets have been accompanied by the increased safety of the financial sector associated with the macro prudential efforts i've outlined. overall, non-financial credit growth remains moderate.

while leverage in the financial system on balance is much reduced. reliance on short-term wholesale funding funding is also significantly lower than immediately before the crisis. although important structural vulnerabilities remain in short term funding markets. taking all of these factors into condition, i do not presently see a feed or monetary policy to deviate from a primary focus

may under appreciate the potential for losses and volatility going forward. in addition, terms and conditions in the leverage loan market which provides credit to lower rated companies have eased significantly reported rily as a result for reef for yield. the federal resever, the office of the controller of the currency and the federal deposit corporations issued guidance regarding leverage lending practices in 2013 and followed up on this guidance late last yearment to date, we do not see a systemic threat from leverage lending since broad measures of credit outstanding do not suggest that nonfinancial

borrows in the aggregate are taking on excessive debt and the improved capitol and liquidity should ensure resilience of potential losses due to their exposures. though we are mindful that it could accelerate. borerers could rise unexpectedly and leverage of liquidity in the financial system could deteriora deteriorate. it is important that we monitor the degree that the steps we've taken have built resilience as conditions change in potentially upexpected ways.

these changes have also had a significant effect on our monetary policy discussions. an important contributor to the progress made in the united states has been the lessons we learned from the experienced gain by central banks and regulatory authorities all around the world. the imf plays an important roll role in this process as a form of representatives from the world's economies and as a institution charged with with promoting stability globally. i expect to contribute to and learn from ongoing discussions on these issues. thank you very much. [ applause ]

oh, my goodness, madam chair woman you have impressed us with a rich, dense, very informative and candid read of the occurrence situation and how monetary and mock row prudential tools could be used in sequence, parallel parallel. different circumstance. i would like to stay loyal to our man today. what would you say? would you say that is mack re

prudential fails our monetary policy or would you say is that depending on circumstances, macro prudential tools have to deal with it as the first line of defense. >> i think my first thing here today is that macro prudential policy should be the main line of defense and i think the efforts that we're engaged in in the united states but all countries coordinating through bossel, through the financial stability boards. the efforts that we are taking to strengthen the resilience of the system. more capital, higher quality capital. higher liquidity buffers.

stronger arrangements for central clearing of derivatives that reduce interconnectiveness among systemically importance financial institutions. strengthening of the arc te architectures and payment system. all of these efforts. particularly focusing on the systemically most important firms through higher leverage ratios. i see this as the core step that we need to take in the united states and globally to create a safer and found r sounder financial system. if we're able to do that, reducing also the relielance on

whole sale funding. if the system does experience shocks, it will be better able to deal with it. i would also put resolution planning which we're engaging in actively as among those measures. i think cyclical policy and sector specific policies that we're seeing many emerging markets take. steps that can be used particularly when we see problems in housing or a particular sector. these are really promises. i think we yet understand how they work when they can be effective. how we should use them. i hope this will be an area and the ifm with active research so question better deploy those tools. i think importantly not taking

monetary totally off the table as a measure to be used when financial sifting her developing. i think we have to recognize that michad monetary policy doet need to be adjusted or leaned against the wind. to me it's not a first line of defense but it is something that has to be actively in the mix. >> if you're using your first line of defense, do you think that this is likely -- not now but sort of in more calm possibly and more medium term times. would that help us get away from zero lower bond environment in which monetary policy is a bit stuck but whether it's here or

it is in the uk or in the euro area. we are all faced of issue. the exploring the negative interest rates is the case now by the cb. do you believe that the tools are likely to move us out of the direction. it is rooremarkable how many countries are that have been effected. often it has been the case that these episodes have occurred in the aftermath of a crisis that impacted the financial system. i think it will be helpful that we can strengthen the financial system. such huge adverse shocks are

less likely. it is a real possibility. for example, the work that we've done with the standard of micro economic mod tells we use inside the reserve. looking at the incidents of shocks that have occurred. there remains a real possibility that we could be hit by the zero lower bound. recently we've had many discussions of secular or whether demographic trends that so called equilibrium real interest rates may be at a lower level than we've seen historically. that's one of the factors that i think will be important in