The WFE 2020 Series: Sam Schulhofer-Wohl, Senior Vice President and Director of Financial Policy, Federal Reserve Bank of Chicago

Published by: Sam Schulhofer-Wohl, Senior Vice President and Director of Financial Policy, Federal Reserve Bank of Chicago Jan 2020

1. Some of the most significant pieces of regulation for financial services have been implemented in the past ten years (e.g. Dodd Frank, EMIR, MiFID I & II etc.), primarily as a result of the post-crisis G20 mandate. Do you feel the market infrastructure regulatory landscape will experience more major shifts in the coming years, or has the pace of change settled down for the foreseeable future?

In the economic research department and the financial markets group at the Chicago Fed, our day-to-day work is not to enact regulations, but rather to advance knowledge so that regulators and industry practitioners can make informed decisions about how best to promote a stable, efficient financial system. From that perspective, I see two key trends in the regulatory landscape. First, with the passage of time, we can now learn from our experience with the practical effects of post-crisis regulations. For example, our team is studying the consequences of providing Federal Reserve accounts to systemically important central counterparties – an authority granted under the Dodd-Frank Act. Second, circumstances change, and the financial system must change with them. We are paying particularly attention to the consequences of climate change. New weather patterns pose potentially devastating risks to people’s lives and assets, as we are witnessing with historic floods, wildfires and other natural disasters around the world. Who will bear those risks? Will financial markets continue to help transfer risk to those best able to bear it, or – as may already be happening in some insurance markets – will abrupt changes in risk exposures be more than markets can handle? The research literature on these issues is small but growing. Further deepening our knowledge will be crucial to maintaining a strong and efficient financial system in the U.S. and around the world.

2. What approach is your organisation taking to emerging technology and digital assets?

We are intensely interested in how technology is changing the financial system. These changes can take the form of new assets, such as virtual currencies and derivatives referencing them. But perhaps more important, the technical underpinnings of the financial system are evolving rapidly. To take one example, cloud computing lets firms massively scale up their IT resources, potentially enabling better risk modeling, among other benefits. Yet the growing use of cloud service providers could also create a new form of interconnectedness between financial market participants. What is the net effect on the stability of the financial system? To advance understanding of the role of new technology in financial stability, we are making these issues a focus of discussions at our research conferences, as well as investing in the technological expertise of our research staff.

3. Entering a new decade is not just about looking ahead; it’s also a good time for reflecting on the past. What’s the most important lesson you’ve learned from the past ten years?

An important lesson from the crisis is that the connections between parts of the financial system, and the ways these connections transmit shocks, are just as important to stability as the individual components of the system. Connections can take many forms. Financial institutions have monetary exposures to each other, of course, but beyond that, there is a complex ecosystem of marketplaces, technology, business relationships, and data links. Firms are engaged in a vast range of businesses and are affected by a variety of national and international regulations. Changes in one part of that ecosystem can have important, and sometimes unexpected, effects elsewhere. My colleague Anna Paulson has spoken about how fears of financial frictions from the 2016 money market mutual fund regulatory reform turned out to be overblown, because the Federal Home Loan Banks rapidly adapted to the new regulatory environment by expanding funding channels that can help connect money funds and banks. As the financial ecosystem continues to evolve, we will need to keep its interconnectedness in mind so that we can better prepare for the changes ahead.

Please Note: The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.