Prenotification plans, continuity programs, automatic renewals, free-to-pay conversions. They’re all variations on the negative option theme. Under the right circumstances, those marketing methods can be convenient for consumers. But as decades of FTC law enforcement makes clear, when negative options are tainted with untruths, half-truths, and hidden strings, the impact on consumers can be, well, negative. That’s why the FTC is asking for public comment on proposed amendments to its Negative Option Rule designed to combat unfairness and deception.

When the FTC takes a closer look at existing rules, it keeps an eye out for changes in the marketplace that suggest an update may be due. The Negative Option Rule is a good example of that. First, thanks to the burgeoning doorstep economy, consumers can buy just about anything – meals, clothes, household supplies, etc. – on a periodic schedule. However, the current Negative Option Rule applies only to prenotification plans, an older (and frankly, fading) business model. Under a prenotification plan, members of, say, a record club (remember record clubs?) get a notice in advance that the company intends to send them a certain album. If members don’t want that album, they have a limited time to return a postcard (remember postcards?). If they miss the deadline, they’re stuck with the album – and the bill. Given the narrow scope of the existing Negative Option Rule, the time seems right for a rethink.
A second reason why the FTC is asking for your feedback about proposed changes to the Rule is because problematic negative option practices continue to inflict consumer injury. Consumers tell us they’ve been being billed for stuff they never agreed to buy in the first place. Or they’ve made multiple cancellation attempts and yet products keeps coming at ‘em like clockwork. Others recount inconvenient hoops that companies make them jump through to cancel.
Because of the limited applicability of the Negative Option Rule, our approach to date has been to bring individual cases alleging violations of the FTC Act or – if applicable – the Telemarketing Sales Rule, the Restore Online Shoppers’ Confidence Act (ROSCA), and other laws. But the volume of complaints suggests that case-by-case enforcement may not protect consumers sufficiently.
So in 2019 the FTC published an Advance Notice of Proposed Rulemaking. Based on the comments we received, in 2021 the Commission issued an Enforcement Policy Statement Regarding Negative Option Marketing. The latest step is the just-announced proposal to amend the Rule. You’ll want to read the Federal Register Notice for details, but the FTC has a fact sheet with some highlights. And here is a summary of three of the proposals that are on the table:

Requiring companies to spell out the details of the deal. “They signed me up, but never told me what was involved!” It’s a common theme when consumers file reports about misleading negative option offers. To address that information deficit, the proposed amendment would require sellers to give people important information before getting their billing information: 1) that consumers’ payments will be recurring, if applicable, 2) the deadline for stopping charges, 3) what consumers will have to pay, 4) the date the charge will be submitted for payment, and 5) information about how consumers can cancel.

Ensuring companies get consumers’ express informed consent. “Why am I getting all this unwanted stuff and who said these people could bill my credit card?!” We hear that a lot from consumers, suggesting that additional provisions may be necessary to protect them from illegal practices. The proposed amendment is consistent with ROSCA’s “express informed consent” requirement, while providing more guidance for businesses on how to comply.

Requiring companies to implement click-to-cancel. “How the $%#& do I cancel?!” Online marketers have that frictionless enrollment thing down pat. But when consumers want to cancel, some of those same companies set up obstacle courses designed for frustration and failure. Two practices challenged in recent FTC cases illustrate this. One company required people to call a phone number to cancel and then left them on hold for ages. Another company ignored cancellation requests unless consumers sent them to one hard-to-find email address authorized to accept cancellations. The proposed amendment would require companies to make it easy to cancel and one way to further that goal is to mandate that businesses must let people cancel using the same method they used to enroll – in other words, click-to-cancel.

The FTC envisions that proposed changes would apply to all forms of negative option marketing and in all media. The proposed amendments also address other issues of interest to businesses and consumers: the use of “saves” (additional offers made before cancellation to keep the customer signed up), reminders and confirmations, penalties for violations, and the impact on existing state laws, to name just a few.
Another proposed change would change the name from the Negative Option Rule to the Rule Concerning Recurring Subscriptions and Other Negative Option Plans. It may seem like a small revision, but it would signal that “negative option” applies much more broadly than to your dad’s record club.
At this stage, the proposal is just that – a possible approach about which we would like your feedback. Once the Notice is published in the Federal Register, you can save a step by filing a public comment online.
Compliments of the Federal Trade Commission.
The post FTC | Negative reinforcement? FTC proposes amending Negative Option Rule to include click-to-cancel and other protections first appeared on European American Chamber of Commerce New York [EACCNY] | Your Partner for Transatlantic Business Resources.

Speech by Fabio Panetta, Member of the Executive Board of the ECB, at a panel on “Global shocks, policy spillovers and geo-strategic risks: how to coordinate policies” at The ECB and its Watchers XXIII Conference | Frankfurt am Main, 22 March 2023 |
We are still going through a sequence of global shocks that are disrupting economies around the world. In just three years we have seen a pandemic, severe supply chain disruptions, a war, an energy crisis and now tensions in banking markets.
The resulting swings in activity and prices have presented policymakers with the challenge of identifying turning points in their underlying dynamics at a time of disruption in the economy and the financial sector. Inevitably, we need to navigate between the risk of underreacting – which could prolong the inflationary effects of these shocks – and that of overreacting, which could turn volatility into instability.
There are no simple solutions to these complex problems.
We need to adapt our policies to the overlapping effects of the shocks, to geopolitical developments, to the risk of financial amplification and to spillovers from other jurisdictions.
Three principles can help guide our monetary policy decisions in this context.
First, given the prevailing uncertainty and the ground we have already covered in tightening our policy, we must remain fully data-dependent and avoid pre-committing to any specific policy path. We should be guided by our reaction function, taking stock of inflation developments, underlying inflation dynamics and the strength of monetary policy transmission, also given the possible risks for the medium term outlook stemming from both the real economy and the financial sector.[1] This way we can ensure that we calibrate our measures in the light of the incoming information.[2]
Second, we need to monitor the effects of our measures and the way our different instruments interact with each other. In particular, we should continuously assess the combined effect of raising rates and reducing the size of our balance sheet.[3] The experience of other jurisdictions suggests that abrupt adjustments could make it more difficult for investors to adapt to evolving market conditions.
We need to maintain our disinflationary stance until we see convincing signs that inflation is returning to our target, in line with the “separation principle”: delivering the appropriate policy stance should not come at the cost of impairing its transmission.
And third: given the global nature of the shocks we are facing, we need to consider how they are transmitted across markets and economies as well as the potential spillovers from policies adopted abroad. But we should remain focused on our primary mandate of ensuring price stability in the euro area, without being overly conditioned by other jurisdictions.[4]
I will start by illustrating the global shocks and the uncertainty they create. I will then turn to the policy response to these shocks and their spillovers across jurisdictions. And I will outline what this means for our monetary policy in the current environment.
Global shocks and uncertainty
Over the past three years we have faced considerable uncertainty from both domestic and global shocks, complicating the policy diagnosis and increasing the risks of either underreacting or overreacting.
Global shocks, their pass-through and their unwinding
A major source of uncertainty surrounding both inflation and economic activity relates to the pass-through of global shocks and their unwinding. For example, the unprecedented sequence of domestic and global shocks makes it difficult to distinguish supply-demand imbalances triggered by the pandemic and the energy crisis from persistent, self-sustained inflationary dynamics.
Pandemic-related shocks
The reopening of the economy after the pandemic gave a sudden boost to demand (Chart 1) at a time when supply disruptions had not yet been resolved, leading to persistent bottlenecks. Firms reacted by building up inventories and hoarding labour, fuelling inflationary pressures. As a result, both demand and supply contributed to inflation in 2022.

Chart 1
Evolution of real GDP and private consumption in the euro area and the United States

(index: Q4 2019 = 100)

Sources: Eurostat, FRED and ECB staff calculations.
Note: NPISH stands for “non-profit institutions serving households”.

The boost to activity from the reopening is now fading. Supply bottlenecks have largely faded out[5] (Chart 2) and firms are starting to run down their inventories (Chart 3). This should dampen price pressures.

Chart 2
Easing of supply chain bottlenecks

(diffusion indices)

Sources: S&P Global, Markit and ECB staff calculations.
Notes: The Global Supply Shortage Index measures how many selected items have been in short supply against their long-run average for each month. The long-run average refers to value 1 of the index. The shaded area refers to the 5th-95th percentile range across 20 items (e.g. chemicals, electrical items, packaging, steel and textiles). The latest observations are for February 2023.

Chart 3
Inventory-to-GDP ratio and related survey indicators in the euro area

(standard deviation from historical (1999-2019) mean)

Sources: Eurostat (inventory investment-to-GDP ratio), S&P Global (PMI stocks of purchases and finished goods), European Commission (adequacy of stocks) and ECB calculations.
Note: The latest observations are for the fourth quarter of 2022 for the inventory investment-to-GDP ratio and the first quarter of 2023 for PMI stocks and adequacy of stocks.

The energy crisis
The energy crisis has had similar effects.[6] The sharp increase in wholesale energy and commodity prices has raised not only energy and food inflation but also – indirectly – core goods and services inflation (Chart 4).

Chart 4
Contributions of energy-sensitive components to goods and services inflation in the euro area

(annual percentage changes and percentage point contributions)

Sources: Eurostat and ECB staff calculations.
Notes: The term “energy-sensitive component” reflects items with a share of energy in direct costs above the average share of energy across services items (panel a) and non-energy industrial goods (NEIG) items (panel b). The latest observations are for February 2023.

These effects are starting to be reabsorbed. Lower energy and commodity prices have translated into lower energy inflation (Chart 5). And they should eventually pass through to food and core inflation – consistent with the easing in pipeline price pressures (Chart 6). This is compressing medium-term consumer inflation expectations[7], and might temper catch-up wage demands. But how quickly these effects will be reflected in the inflation data is uncertain. And concerns about inflation persistence[8] make projecting core inflation particularly challenging.

Chart 5
Headline inflation and components in the euro area and the United States

(annual percentage changes and percentage point contributions)

Sources: Eurostat, US Bureau of Labor Statistics and ECB calculations.
Note: The latest observations are for February 2023.

Chart 6
Pipeline pressures and input/output prices

(panel a): annual percentage changes; panel b): diffusion index)

Sources: panel a): Eurostat and Refinitiv and Hamburg Institute of International Economics (HWWI), panel b): Markit.
Notes: Panel a): For Brent crude oil in euro, the monthly value represents the average of the data available (working days up to the day of the update). The latest observations are for 15 March 2023 for Brent crude oil in euro, February 2023 for euro area farm gate prices and international food commodity prices and January 2023 for the other items. Panel b): The latest observations are for February 2023.

The risk of inflation becoming entrenched
The unwinding of inflationary pressures has triggered concerns about the risk of second-round effects in the form of a de-anchoring of inflation expectations or a wage-price spiral, especially in view of the tight labour market conditions in advanced economies (Chart 7).[9]

Chart 7
Labour markets are still tight

(panel a): percent; panel b): annual percentage changes)

Sources: OECD, Haver and ECB calculations.
Notes: Panel a): the OECD aggregate for the vacancy ratio is based on the United States, United Kingdom, Japan, South Korea, euro area (excluding Italy), Canada, Sweden, Switzerland, Poland, Romania, Czech Republic, and Hungary. The dashed lines refer to long-term averages (2010-2019). The latest observations are for the third quarter of 2022 for the vacancy ratio and the fourth quarter of 2022 for the unemployment rate. Panel b): wage growth series are not harmonised, so comparability across country data is limited. Wages refer to average hourly wages for the United States and Canada and to average weekly regular earnings (excluding bonuses) for the United Kingdom. For the euro area and Japan, wage data track negotiated and scheduled wages respectively. The long-term average refers to 2010-2019. The latest observations are for February 2023 for the United States and Canada, January 2023 for Japan and the United Kingdom and December 2022 for the euro area.

In the euro area, medium-term inflation expectations remain anchored at our target. This reflects the ECB’s clear commitment to stamp out inflation. As President Lagarde stated this morning, “the public can be certain about one thing: we will deliver price stability, and bringing inflation back to 2% over the medium term is non-negotiable.”[10]
Robust wage growth over the next three years is also consistent with our projections, which indicate that inflation will gradually fall to around 3% by the end of 2023 and around 2% by the middle of 2025.
The risk is rather that wage and price-setting dynamics could make high inflation stickier and eventually feed into inflation expectations. Wages are still accelerating, and we cannot rule out a scenario in which stronger and persistent wage increases take hold. This risk needs to be closely monitored.
Opportunistic behaviour by firms could also delay the fall in core inflation. In fact, unit profits contributed to more than half of domestic price pressures in the last quarter of 2022 (Chart 8).[11] In some industries, profits are increasing strongly (Chart 9) and retail prices are rising rapidly, in spite of the fact that wholesale prices have been decreasing for some time. This suggests that some producers have been exploiting the uncertainty created by high and volatile inflation[12] and supply-demand mismatches[13] to increase their margins, raising prices beyond what was necessary to absorb cost increases. We should monitor the risk that a profit-price spiral could make core inflation stickier.

Chart 8
GDP deflator at market prices

(annual percentage changes; percentage point contributions)

Sources: Eurostat and ECB calculations.
Note: The latest observations are for the fourth quarter of 2022.

Chart 9
Sectoral wage and profit developments

(left-hand panel: percentage change from Q4 2019 to Q4 2022; right-hand panel: gross operating surplus over real value added, level)

Sources: Eurostat and ECB calculations.
Notes: Wages refer to compensation of employees, and profits to gross operating surplus. Income for self-employed people is included in wages. The latest observations are for the fourth quarter of 2022.

Looking ahead, a normalisation of profits would help bring down core inflation and reduce the risk of second-round effects, as wage demands could be accommodated without leading to an increase in prices in response.
Global supply-demand mismatches
Uncertainty about global supply and demand conditions is still high – and is now exacerbated by the financial tensions that have recently emerged.
Demand is showing signs of weakness in both the United States and the euro area.[14]
In China, the end of zero-COVID policies has been followed by a downturn and then a rebound, which could still be slowed down by headwinds emanating from the property market. The reopening will have an ambiguous overall effect on global inflation: it could dampen prices in sectors where China is a net exporter – such as goods – and increase prices in sectors where it is a net importer, such as commodities.[15]

The global policy response and its spillovers
A second source of uncertainty relates to the global policy responses to the shocks, and the spillovers from these responses.
We have already seen clear examples of these spillovers. For instance, the outsized fiscal stimulus implemented in the United States in response to the pandemic boosted the demand for durable goods (Chart 10) but led to a negative supply shock in other countries.[16] In the euro area, this supply shock contributed to pushing up inflation and hit the economy at an early stage of its recovery.[17]

Chart 10
Individual consumption – durables and services

(panel a): index: Q1 2018 = 100; panel b): January 2018 = 100)

Sources: ECB and Federal Reserve System.
Notes: Dotted lines denote the linear trend (from the first quarter of 2018 to the fourth quarter of 2019). Durables and services for the euro area are approximated using a bottom-up aggregation of available country-level data.

We are now facing a simultaneous and rapid global tightening of financing conditions (Charts 11), which is creating financial and policy spillovers (Chart 12). For example, monetary tightening in the United States is also resulting in tighter financing conditions[18] in other jurisdictions, including the euro area.[19] This adds to the risk of overtightening if central banks do not factor in the feedback loops they create.[20]

Chart 11
Global tightening of financing conditions

(panel a): standardised indices; panel b): percentages of countries)

Sources: Panel a) Refinitiv Datastream and ECB staff calculations; Panel b): Haver and ECB staff calculations.
Notes: Panel a): Country-level indices are aggregated as a weighted average using GDP purchasing power parity percentage shares. An increase reflects loosening financial conditions. A decrease reflects tightening financial conditions. The latest observations are for 17 March 2023.
Panel b): The global “inflation surges” index shows the share of countries which, at time t, are experiencing contemporaneously (1) year-on-year inflation that is higher than the time t-1 and (2) year-on-year inflation that is above a certain threshold. In this case, the threshold is given by the average of the year-on-year inflation in the post-Volcker period, from the first quarter of 1984 to the fourth quarter of 2022. The global “rate hikes synchronisation” index is constructed using BIS data on policy rates set by central banks and shows the share of countries that are tightening at time t. Both the indices cover 30 countries across advanced economies and emerging market economies. Global recessions are periods with (1) an annual world GDP per capita that is negative or close to zero, and (2) a high share of countries in a technical recession. The latest observations are for the fourth quarter of 2022.

Chart 12
Global component in yields

(correlation coefficients)

Sources: Datastream and Haver Analytics.
Notes: The sample consists of ten advanced economies (Australia, Canada, Denmark, euro area, Japan, New Zealand, Sweden, Switzerland, United Kingdom and United States). The bilateral correlation coefficients are averaged across these countries and time periods. The term premia and expectations components are the average of estimates from three models (dynamic Nelson-Siegel, rotated dynamic Nelson-Siegel and dynamic Svensson-Soderlind). The latest observations are for 9 March 2023.

In the euro area, the effects of monetary tightening are already visible, although they are only expected to fully materialise in the coming months due to the usual lag in the transmission of monetary policy. The monetary aggregates M1 and M3 are slowing down rapidly. In real terms their growth rates are in negative territory and at historic lows, below the levels of 2008 and 2011 (Chart 13).[21] Bank credit is also decelerating rapidly (Chart 14). As a result, it is declining as a share of GDP – faster, in fact, than in previous tightening episodes – and markets expect it to decline significantly further this year (Chart 15). These developments are largely related to our policy normalisation. But the size and the speed of the adjustment indicate that the transmission of our monetary policy to the economy may have become stronger.

Chart 13
Growth of monetary aggregates M1 and M3 in the euro area and the United States

(annual growth rates, percentages)

Sources: Panel a): ECB (BSI); panel b): ECB (BSI and ICP).
Notes: Solid lines show the annual growth rates of the index of notional stocks, i.e. a measure of flows normalised by outstanding amounts in the previous month. With this method, valuation changes and reclassifications are excluded from the computation of annual growth rates, and thus jumps in the annual growth series are avoided. Dotted lines show the annual growth rates of outstanding amounts. This method avoids the risk of distortion in the ratio of the money stock over price index that is implicit in the calculation of the real rates. In panel b), M3 and M1 are deflated by the HICP index. The latest observations are for January 2023.

Chart 14
Credit growth in the euro area

(three-month annualised percentage changes, seasonally adjusted)

Source: ECB (BSI).
Notes: In panel a), MFI loans are adjusted for sales, securitisation and cash pooling activities. In panel b), MFI loans are adjusted for sales and securitisation. The latest observations are for January 2023.

Chart 15
Bank loans to the non-financial private sector in the euro area

(percentages of GDP)

Sources: ECB (BSI, MNA), Refinitiv (I/B/E/S), ECB projections, individual banks’ financial statements and ECB calculations.
Notes: The orange marker shows the median forecast for year-end 2023, and the whiskers represent values within one standard deviation around the median (10th and 90th percentiles), as reported by market analysts and sourced through I/B/E/S. The distribution is weighted by realised loan volume for each bank as of year-end 2022 and based on an underlying sample of 143 forecasts covering 44 banks, submitted between 20 January and 10 March 2023. In each quarter, GDP is calculated by multiplying quarterly, seasonally adjusted flows by four; the figure for 2023 is based on the March 2023 ECB staff macroeconomic projections for the euro area. The latest observations are for the fourth quarter of 2022 for BSI and MNA, while market expectations refer to the fourth quarter of 2023.

The global tightening may also be amplified by the recent financial tensions in global banking markets. Aside from their impact on confidence, these tensions will make banks more sensitive to deposit outflows, inducing them to transfer the rate hikes more rapidly – and to a greater extent – to their customers on both sides of the balance sheet. For a while, banks may also become more prudent about lending and decide to retain cash as a precautionary measure. In the euro area, our bank lending survey[22] was already pointing to a tightening of lending standards for firms and households before the recent tensions, and this tightening may aggravate the drop in credit growth in the coming months.
In addition, major central banks have been simultaneously raising rates and reducing the supply of liquidity through quantitative tightening policies. This could make the policy adjustment bumpier. There is no reliable experience we can draw on to examine the combined effects of rate hikes and quantitative tightening. It is hard to assess how a contraction of the balance sheet of the central bank affects financial markets – especially if it happens in conjunction with an abrupt increase in interest rates.[23] The liability-driven investment crisis in the United Kingdom and the crisis of Silicon Valley Bank in the United States suggest that sudden adjustments may have an impact on the transmission of monetary policy and even give rise to severe financial tensions.[24]
In the current context, weakening growth prospects and heightened uncertainty may lead investors to move from risky assets to risk-free assets. And when the supply of liquidity is contracting quickly, this may spur a “dash for cash”, reinforcing the effects of the sharp increase in policy rates and exacerbating financial vulnerabilities. In fact, in the United States, high quality liquid assets are unusually offering higher returns than risky assets (Chart 16) at a time when liquidity is being withdrawn from the system.

Chart 16
Inverse price/earnings ratio, six-month risk-free rate and excess reserves in the euro area and the United States

(left-hand scale: percentage points, right-hand scale: EUR trillions)

Sources: Panel a): Refinitiv and ECB calculations; panel b): Refinitiv, Federal Reserve, and ECB calculations.
Notes: The inverse price/earnings ratio is a gauge of the earnings yield of holding stocks, shown here in comparison to risk-free rates. In panel a), excess liquidity is calculated as banks’ current account and deposit facility holdings minus their minimum reserve requirements. In panel b), excess reserves are calculated as reserves of depository institutions minus required reserves (the latter are set to zero in 2020). The latest observations in panel a) are 13 March 2023 for financial market data and 8 March 2023 for excess liquidity. The latest observations in panel b) are 13 March 2023 for financial market data and January 2023 (monthly data) for excess reserves.

As available liquidity shrinks, both in aggregate and for most banks, the supply of lending could also contract rapidly. Estimates by ECB staff suggest that banks with lower excess liquidity are more likely to reduce their supply of credit in response to policy rate hikes, and the increase in their lending rates is likely to be larger (Chart 17).

Chart 17
Response of loan supply and lending rates to a policy rate hike by level of excess liquidity

(percentage points of supply-driven loan growth (panel a) and change in lending rates (panel b) over three months for each percentage point increase in the deposit facility rate; size of bubbles equal to volumes of loans to firms)

Sources: Panel a): ECB (AnaCredit, iBSI, MOPDB) and ECB calculations; panel b): ECB (AnaCredit, iBSI, iMIR, MOPDB) and ECB calculations.
Notes: Supply-driven loan growth at the bank level is identified applying the methodology of Mary Amiti and David Weinstein to the euro area credit register (see Amiti, M. and Weinstein, D. (2018), “How Much Do Idiosyncratic Bank Shocks Affect Investment? Evidence from Matched Bank-Firm Loan Data”, Journal of Political Economy, Vol. 126, No 2, pp. 525-587. The chart reports coefficients from regressions of the supply-driven loan growth (panel a) and bank-level changes in new lending rates to firms (panel b) three months ahead on the level of excess liquidity interacted with the change in the deposit facility rate over the same period, distinguishing between observations before and after December 2021 and with the excess liquidity-over-assets ratio between the levels indicated on the x-axis. The specification includes bank and country time fixed effects and controls for bank assets. The size of the bubbles measures the outstanding amounts of loans to firms for banks belonging to each category. The latest observations are for November 2022.

Implications for the ECB’s monetary policy
So how should monetary policy operate in an environment characterised by high uncertainty, strong spillovers and financial vulnerabilities?
Adapting to the current environment
First, monetary policy must remain fully adaptable to changing developments, given the prevailing uncertainty, the lags with which it operates and the risk of sudden financial tensions. This requires a data-dependent approach that does not prejudge future policy decisions and that reflects the risks on both sides.
Second, our tightening must be calibrated prudently. This is because it is already having a strong impact on financing conditions and because we want to avoid undesirable financial volatility. And this prudent approach holds truer still as our policy rates move more firmly into restrictive territory, inflationary forces ease and the risks to the inflation outlook become balanced. At times like this, abrupt policy moves are not necessary.[25]
Third, in order to avoid financial tensions which could hamper our disinflationary policies, we should rely on our policy rate as the key instrument to steer our stance and we should be measured and predictable in the normalisation of our balance sheet. We should continuously monitor investors’ exposure to interest rate risk and liquidity risk and carefully analyse the impact that the decline in liquidity may have on the supply of credit.
We must stand ready to intervene in a timely manner to counter possible market dysfunctions. We have the instruments to adjust the provision of liquidity and ease collateral conditions as necessary, in line with what we have done during the pandemic. And we need to remain committed to our three lines of defence against financial fragmentation within the euro area.[26]
Finally, all policymakers should be tackling inflation on all fronts. It is not a task for central bankers alone. Thanks to public intervention, we had an unusual recession – one with high profits. This means that firms have the buffers to absorb a catch-up in labour costs without increasing prices in response, also in view of the fall in the cost of other inputs, like energy.
Persistently opportunistic profits should not put a dampener on disinflation. Profiteering strategies that increase inflation and the risk of second-round effects would trigger a monetary policy reaction. But other authorities should also intervene. The appropriate response to excess corporate profits is not more fiscal support to compensate consumers for high prices of goods and services. Rather, it is to intervene to prevent any abuse of market power.
Addressing spillovers
Let me now turn to how monetary policy should address spillovers.
We must take into account all the relevant information when taking decisions, and that includes developments outside the euro area. Given the global nature of the shocks we are facing, we need to consider how they are transmitted across markets and economies, alongside the potential spillovers from the policy response to those shocks. This is what we have done. And in response to tensions in international funding markets, we have worked with other major central banks to enhance the provision of US dollar liquidity via our standing liquidity swap line arrangements.[27]
At the same time, we need to tailor our policy response to the outlook for the euro area and avoid passively importing financing conditions from abroad through policy spillovers to interest rate expectations and long-term interest rates. We have the necessary autonomy to steer financing conditions in a way that reflects the differences between the euro area and other jurisdictions.[28]
We can reconcile these two objectives – factoring in spillovers but tailoring our policy to domestic conditions – if we calibrate our policy appropriately and communicate our reaction function clearly.
Our measures need to be calibrated in such a way that they achieve the appropriate domestic stance. To use a metaphor – if outside temperatures start falling after a period of hot weather, we have less need for air conditioning because temperatures inside will gradually cool, too. If we then apply this approach to our current situation, when calibrating our measures we should consider the restrictive impulse coming from the global tightening and from the vulnerabilities that are emerging in the financial sector abroad.
The clarity of our communication is also crucial, especially in view of the current financial tensions. In order to communicate our policy intentions clearly and consistently at a time when we must remain data-dependent and adapt to new developments, we need to set out a clear reaction function and stick to it.[29] Accordingly, in our latest monetary policy statement we emphasised that “The elevated level of uncertainty reinforces the importance of a data-dependent approach to our policy rate decisions, which will be determined by our assessment of the inflation outlook in light of the incoming economic and financial data, the dynamics of underlying inflation, and the strength of monetary policy transmission.”[30]
Conclusion
Let me conclude.
A string of shocks has created uncertainty for economies around the world. While the effects of some of these shocks are starting to unwind, it may be some time yet before we see volatility in activity and prices subside, and a new equilibrium settle in.
Notably, my remarks today have focused on the current economic situation. But we may well see longer-lasting changes to economic structures as supply chains are reconfigured to increase resilience to global shocks and align with shifting geopolitical strategies.
In the meantime, monetary policy must perform a difficult balancing act.
Faced with an exceptionally complex environment, we need to acknowledge the uncertainty prevailing in the economy. And we need to continuously assess the combined effect of our different policy instruments, the risks of non-linear effects and the spillovers from policies adopted elsewhere. This means our monetary policy should be data-dependent and adaptable. And it requires us to shape our communication on the basis of our monetary policy reaction function.
In a speech last month I summarised my thinking by saying that we do not want “to drive like crazy at night with our headlights turned off”.[31] The recent financial tensions have made this conviction even stronger.
Compliments of the European Commission.
Footnotes:

The possible consequences that an incorrect calibration of monetary policy could have for financial stability and the transmission of monetary policy are discussed in Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, keynote speech at the ECB Money Market Conference, Frankfurt am Main, 3 November.

Panetta, F. (2023), “Monetary policy after the energy shock”, speech at an event organised by the Centre for European Reform, the Delegation of the European Union to the United Kingdom and the ECB Representative Office in London, 16 February.

The risks of policy normalisation – in particular the interaction between rate hikes and quantitative tightening – are discussed in Panetta, F. (2022), “Normalising monetary policy in non-normal times”, speech at a policy lecture hosted by the SAFE Policy Center at Goethe University and the Centre for Economic Policy Research (CEPR), 25 May.

Panetta, F. (2021), “Monetary autonomy in a globalised world”, welcome address at the joint BIS, BoE, ECB and IMF conference on “Spillovers in a “post-pandemic, low-for-long” world”, 26 April.

The Global Supply Chain Pressure Index, developed by the Federal Reserve Bank of New York, decreased considerably in February 2023 and is now below its historical average. This decrease was broad-based across factors but driven mainly by a decline in European and Asian delivery times. This latest estimate suggests that global supply chain conditions have largely normalised.

See Chart 5 in Panetta, F. (2022), “Greener and cheaper: could the transition away from fossil fuels generate a divine coincidence?”, speech at the Italian Banking Association, 16 November.

The ECB Consumer Expectations Survey suggests that euro area consumer inflation expectations have reached a turning point. Median expectations for inflation three years ahead fell to 2.5% in January 2023, from 3.0% in the previous month.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

Lagarde, C. (2023), “The path ahead”, speech at the ECB and its Watchers Conference, 22 March.

The resilience of profits started to be visible during the pandemic, when there was an unusual recession with an increase in unit profits (in contrast with past recessions), while fiscal support absorbed the economic shock.

High input price pressures facilitate increases in profit margins, as the extent to which increases in selling prices reflect the pass-through of increased costs or go beyond the cost increases and benefit profit margins is less clear in such an environment.

Supply-demand mismatches limit competition and enable profit-maximising companies to expand their profit margins without losing market shares.

In the euro area, all private domestic demand components contracted in the fourth quarter of 2022. Private domestic expenditure – the sum of private consumption and investment (excluding non-residential construction and Irish intellectual property products) – dropped by 0.8% quarter on quarter, amid declining real disposable income, lingering uncertainty and tighter financing conditions. In the United States, real private domestic final purchases – which includes private consumption, residential investment and business fixed investment – increased at a subdued annual rate of 0.2% in the fourth quarter of 2022.

Estimates suggest, however, that the reopening is already priced into commodity prices and that its impact on oil prices has been more than offset by ample supply and weak global demand.

With the United States representing over 25% of global consumption – about twice as much as either the euro area or China – and driving much of the growth in global spending on durable goods, the surge in US demand exacerbated pandemic-related bottlenecks worldwide. See Chart 8 in Broadbent, B. (2021), “Lags, trade-offs and the challenges facing monetary policy”, speech at Leeds University Business School, 6 December.

Panetta, F. (2021), “Patient monetary policy amid a rocky recovery”, speech at Sciences Po, 24 November.

ECB analysis finds that a tightening by the Federal Reserve System generates spillovers to euro area real activity and inflation that are comparable to the effects of this tightening on the US economy. Estimates are obtained based on a sample spanning 1991 to 2019, using high frequency-based US monetary policy shocks (sum of conventional, Odyssean forward guidance and quantitative easing) in monthly smooth local projections. For example, a one standard deviation US monetary policy tightening shock contracts US and euro area equity prices about equally by up to 0.75% over a two-year horizon. See Lane, P.R. (2023), “The euro area hiking cycle: an interim assessment”, speech at the National Institute of Economic and Social Research, 16 February.

A tightening in the United States also results in an appreciation of the US dollar, which increases pressure on other central banks to tighten in order to avoid the depreciation of their currencies against the dollar leading to a deterioration of their domestic inflation outlooks. This was particularly noteworthy in the context of the energy shock, because the price of energy commodity imports is often denominated in US dollars.

Dieppe, A. and Brignone, D. (2022), “Synchronised interest rate hikes, spillovers and risks to global growth”, VoxEU, 14 November; Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, op. cit.; and Obstfeld, M. (2022), “Uncoordinated monetary policies risk a historic global slowdown”, Realtime Economics, Peterson Institute for International Economics, 12 September.

The decline in M1 largely reflects shifts away from the unusually large stock of overnight deposits towards other less-liquid but better-remunerated instruments. The sharp deceleration in M3 is driven by the run-off of the Eurosystem balance sheet and the sharp slowdown in credit.

ECB (2023), Euro area bank lending survey, January.

Panetta, F. (2022), “Normalising monetary policy in non-normal times”, op. cit.

These crises were triggered by specific events (the announcement of a fiscal package in the United Kingdom and a shift in sentiment among Silicon Valley Bank’s depositors – tech companies, venture capital and high net worth individuals – that exposed large unhedged interest rate risks).

Panetta, F. (2022), “Mind the step: calibrating monetary policy in a volatile environment”, op. cit.

The first of these is a measured approach to interest rate increases and balance sheet normalisation. The second is the flexibility embedded in our reinvestments under the pandemic emergency purchase programme. The third is the Transmission Protection Instrument.

The frequency of seven-day US dollar operations has been increased from weekly to daily. See ECB (2023), “Coordinated central bank action to enhance the provision of US dollar liquidity”, 19 March.

Panetta, F. (2021), “Monetary autonomy in a globalised world”, op. cit.

In the past, when concerns about having reached the lower bound were dominating discussions, forward guidance helped insulate the euro area from financial spillovers. But forward guidance is not suited to the current environment. See Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

ECB (2023), “Monetary policy statement”, 16 March.

Panetta, F. (2023), “Monetary policy after the energy shock”, op. cit.

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On this note: be sure to check out the EACCNY’s podcast series on the FUTURE OF TECHNOLOGY

Digital technologies shielded labor and productivity from the pandemic, while lagging countries accelerated the adoption of technology. However, digitalization gaps persist.
As the world does its best to move on from the pandemic, one of the lasting legacies for many advanced economies has been greater adoption of digital technologies. Working from home is now common, and many companies have expanded online operations.
And as the crisis recedes, we can now see that digitalization, as measured by the share of workers using a computer connected to the internet, has proved to be a silver lining across many economies. This has far-reaching and long-lasting implications for productivity and labor markets, as we detail in a new staff discussion note focusing on advanced economies.
Before the pandemic, digitalization varied widely by country, industry, and company. For example, more than four-fifths of workers in Sweden had computers with internet access in 2019, the most in our study, while Greece had the lowest share, with less than two-fifths. Two years later, the Greek share had surged almost 8 percentage points, to 45 percent, narrowing the gap with Sweden with one of the most significant gains shown in our study.
Across advanced economies, digitalization increased by an average of 6 percentage points, our research shows. The results underscore how the pandemic accelerated digitalization, especially in economies or industries that had been lagging.
Digitalization has historically been lower in contact-intensive sectors, while small businesses tend to lag larger counterparts, a trend observed across many countries. Notably, however, these disparities were not solely driven by differences by industry. Greek restaurants and hotels, for example, trail Sweden’s by 38 percentage points.
Small firms, which have historically been less digitalized, enjoyed the biggest gains. Similarly, sectors that are least digitalized invested more in digitalization.
The surge in digitalization saved many firms during the pandemic, helping them adapt to lockdowns through remote work and online operations. Our research measures possible gains of digitalization using two different productivity gauges: labor productivity, which measures output per hours worked, and total factor productivity, which tracks output relative to the total inputs used in its production. Our findings confirm that high levels of digitalization helped shield productivity and employment from the shock, with the most digitalized industries experiencing significantly smaller losses in labor productivity and hours worked than less digitalized sectors.
At the depths of the pandemic in 2020, our research shows, higher digitalization in a sector reduced labor productivity losses by a sizable 20 percent when comparing the 75th and 25th percentiles of digitalization. Moreover, had less-digitalized economies matched the 75th percentile in the sample for each sector, aggregate labor productivity growth during the pandemic would have been a quarter higher.
While some changes brought about by the pandemic may not endure, evidence for larger firms shows a growing total factor productivity differential between high- and low-digitalized firms as the crisis drew to a close.
It’s too soon to assess the longer-term effects of digitalization, but we can see that it helped boost productivity, protect employment, and mitigate economic disruptions during the pandemic.
Labor markets and remote work
At the onset of the pandemic, policymakers feared greater digitalization could widen job market inequality by increasing demand for higher-skilled workers and displacing low- and medium-skilled workers.
While digital occupations were more shielded from layoffs than non-digital ones during the crisis, there is little evidence so far of a structural shift in the composition of labor demand toward digital occupations. Indeed, as we showed in a September working paper, vacancies data showed a strong increase in the demand for less-skilled workers as the economy started to recover.
A change that is more persistent and could have long-term implications in the labor market is the working-from-home revolution. Prior to the crisis, only 5 percent of workers typically worked from home in Europe, but by 2021 that had topped 16 percent.
Countries where working from home is more common saw larger increases in labor force participation, indicating that this arrangement may attract more workers to the labor market. For example, participation has already surpassed pre-crisis levels in the Netherlands, where over 20 percent of workers usually work from home, while in Italy, where less than 10 percent of workers work from home, participation remains below pre-pandemic trends.
Working from home can generate significant welfare gains by reducing commutes and increasing time management flexibility. Working from home can boost attachment to the labor market and the labor supply, while supporting the environment by reducing commuting.
The pandemic accelerated adoption of digital technologies and shielded productivity. However, with persistent gaps across countries and sectors, policymakers must seize the moment and take steps to continue closing the digitalization gap and ensure that the gains from digitalization are broadly shared.
This includes promoting policies that maintain healthy competition in digital markets and adapting labor laws and regulations to facilitate remote work. Doing so can build a more resilient and adaptable economy better prepared to navigate future crises.
Authors:

Florence Jaumotte is Acting Division Chief of the Structural and Climate Policies Division in the IMF Research Department

Myrto Oikonomou is an Economist in the African Department of the IMF

Carlo Pizzinelli is an economist in the Research Department of the IMF

Marina M. Tavares is an economist in the Research Department of the IMF
This blog reflects research contributions by Longji Li, Andrea Medici, Ippei Shibata and Jiaming Soh.

Compliments of the IMF.
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On 20 March 2023, the European Commission has started unannounced inspections at the premises of a company active in the energy drinks sector in various Member States.
The Commission has concerns that the inspected company may have violated EU antitrust rules that prohibit cartels and restrictive business practices (Article 101 of the Treaty of the Functioning of the European Union (‘TFEU’) and Article 53 of the European Economic Area Agreement (‘EEA’)). The inspected company may also have violated EU antitrust rules that prohibit abuses of a dominant position (Article 102 of the TFEU and Article 54 of the EEA).
The Commission officials were accompanied by their counterparts from the national competition authorities of the Member States where the inspections were carried out.
Unannounced inspections are a preliminary step in an investigation into suspected anticompetitive practices. The fact that the Commission carries out such inspections does not mean that the company is guilty of anti-competitive behaviour, nor does it prejudge the outcome of the investigation itself. The Commission respects the rights of defence, in particular the right of companies to be heard in antitrust proceedings.
There is no legal deadline to complete inquiries into anticompetitive conduct. Their duration depends on several factors, including the complexity of each case, the extent to which the undertakings concerned cooperate with the Commission and the scope of the exercise of the rights of defence.
Under the Commission’s leniency programme companies that have been involved in a secret cartel may be granted immunity from fines or significant reductions in fines in return for reporting the conduct and cooperating with the Commission throughout its investigation. Individuals and companies can report cartel or other anti-competitive behaviour on an anonymous basis through the Commission’s whistle-blower tool. Further information on the Commission’s leniency programme and whistle-blower tool is available on DG Competition’s website.
Compliments of the European Commission.
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You may have heard of simulation theory, the notion that nothing is real and we’re all part of a giant computer program. Let’s assume at least for the length of this blog post that this notion is untrue. Nonetheless, we may be heading for a future in which a substantial portion of what we see, hear, and read is a computer-generated simulation. We always keep it real here at the FTC, but what happens when none of us can tell real from fake?
In a recent blog post, we discussed how the term “AI” can be used as a deceptive selling point for new products and services. Let’s call that the fake AI problem. Today’s topic is the use of AI behind the screen to create or spread deception. Let’s call this the AI fake problem. The latter is a deeper, emerging threat that companies across the digital ecosystem need to address. Now.
Most of us spend lots of time looking at things on a device. Thanks to AI tools that create “synthetic media” or otherwise generate content, a growing percentage of what we’re looking at is not authentic, and it’s getting more difficult to tell the difference. And just as these AI tools are becoming more advanced, they’re also becoming easier to access and use. Some of these tools may have beneficial uses, but scammers can also use them to cause widespread harm.
Generative AI and synthetic media are colloquial terms used to refer to chatbots developed from large language models and to technology that simulates human activity, such as software that creates deepfake videos and voice clones. Evidence already exists that fraudsters can use these tools to generate realistic but fake content quickly and cheaply, disseminating it to large groups or targeting certain communities or specific individuals. They can use chatbots to generate spear-phishing emails, fake websites, fake posts, fake profiles, and fake consumer reviews, or to help create malware, ransomware, and prompt injection attacks. They can use deepfakes and voice clones to facilitate imposter scams, extortion, and financial fraud. And that’s very much a non-exhaustive list.
The FTC Act’s prohibition on deceptive or unfair conduct can apply if you make, sell, or use a tool that is effectively designed to deceive – even if that’s not its intended or sole purpose. So consider:
Should you even be making or selling it? If you develop or offer a synthetic media or generative AI product, consider at the design stage and thereafter the reasonably foreseeable – and often obvious – ways it could be misused for fraud or cause other harm. Then ask yourself whether such risks are high enough that you shouldn’t offer the product at all. It’s become a meme, but here we’ll paraphrase Dr. Ian Malcolm, the Jeff Goldblum character in “Jurassic Park,” who admonished executives for being so preoccupied with whether they could build something that they didn’t stop to think if they should.
Are you effectively mitigating the risks? If you decide to make or offer a product like that, take all reasonable precautions before it hits the market. The FTC has sued businesses that disseminated potentially harmful technologies without taking reasonable measures to prevent consumer injury. Merely warning your customers about misuse or telling them to make disclosures is hardly sufficient to deter bad actors. Your deterrence measures should be durable, built-in features and not bug corrections or optional features that third parties can undermine via modification or removal. If your tool is intended to help people, also ask yourself whether it really needs to emulate humans or can be just as effective looking, talking, speaking, or acting like a bot.
Are you over-relying on post-release detection? Researchers continue to improve on detection methods for AI-generated videos, images, and audio. Recognizing AI-generated text is more difficult. But these researchers are in an arms race with companies developing the generative AI tools, and the fraudsters using these tools will often have moved on by the time someone detects their fake content. The burden shouldn’t be on consumers, anyway, to figure out if a generative AI tool is being used to scam them.
Are you misleading people about what they’re seeing, hearing, or reading? If you’re an advertiser, you might be tempted to employ some of these tools to sell, well, just about anything. Celebrity deepfakes are already common, for example, and have been popping up in ads. We’ve previously warned companies that misleading consumers via doppelgängers, such as fake dating profiles, phony followers, deepfakes, or chatbots, could result – and in fact have resulted – in FTC enforcement actions.
While the focus of this post is on fraud and deception, these new AI tools carry with them a host of other serious concerns, such as potential harms to children, teens, and other populations at risk when interacting with or subject to these tools. Commission staff is tracking those concerns closely as companies continue to rush these products to market and as human-computer interactions keep taking new and possibly dangerous turns.
Compliments of Federal Trade Commission.
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The challenges to the European Union’s security and resilience are becoming increasingly complex and dynamic. A range of actors constantly test our resilience, seeking to exploit the openness, interdependence and connectivity of our societies and economies.
The weaponisation of energy and the acts of sabotage against the Nord Stream gas pipelines have led to heightened attention to ensure the resilience of our critical infrastructure. Against this background, it is crucial for both the EU and NATO to support efforts to enhance national and collective resilience against threats to our critical infrastructure.
Today EU and NATO are joining forces to step up the existing cooperation by launching an EU-NATO Task Force on Resilience of Critical Infrastructure to reinforce our common security. This Task Force was announced jointly by President von der Leyen and NATO Secretary General Stoltenberg on 11 January 2023.
On today’s occasion, President von der Leyen said: “We must strengthen the resilience of our critical infrastructure to always be ready. Today we successfully launched the first meeting of the Task Force for Resilient Critical Infrastructure. EU and NATO senior experts will work hand in hand to identify key threats to our critical infrastructure and work on responses.”
The EU and NATO will share best practices, enhance shared situational awareness, develop key principles to improve resilience including mitigating measures and remedial actions. The Task Force will cover four sectors at this stage: energy, digital infrastructure, transport, and space. The Task Force is between EU and NATO staff, and it will be established within the EU-NATO Structured Dialogue on Resilience.
Only by working together, we can counteract those seeking to undermine our security, and ensure that our critical infrastructure remains robust and reliable in the face of evolving threats.
Compliments of the European Commission.
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Today, the Commission proposed the Net-Zero Industry Act to scale up manufacturing of clean technologies in the EU and make sure the Union is well-equipped for the clean-energy transition. This initiative was announced by President von der Leyen as a part of the Green Deal Industrial Plan.
The Act will strengthen the resilience and competitiveness of net-zero technologies manufacturing in the EU, and make our energy system more secure and sustainable. It will create better conditions to set up net-zero projects in Europe and attract investments, with the aim that the Union’s overall strategic net-zero technologies manufacturing capacity approaches or reaches at least 40% of the Union’s deployment needs by 2030. This will accelerate the progress towards the EU’s 2030 climate and energy targets and the transition to climate neutrality, while boosting the competitiveness of EU industry, creating quality jobs, and supporting the EU’s efforts to become energy independent.
President of the European Commission, Ursula von der Leyen, said: “We need a regulatory environment that allows us to scale up the clean energy transition quickly.   The Net-Zero Industry Act will do just that. It will create the best conditions for those sectors that are crucial for us to reach net-zero by 2050: technologies like wind turbines, heat pumps, solar panels, renewable hydrogen as well as CO2 storage. Demand is growing in Europe and globally, and we are acting now to make sure we can meet more of this demand with European supply.” 
Together with the proposal for a European Critical Raw Materials Act and the reform of the electricity market design, the Net-Zero Industry Act sets out a clear European framework to reduce the EU’s reliance on highly concentrated imports. By drawing on the lessons learnt from the Covid-19 pandemic and the energy crisis sparked by Russia’s invasion of Ukraine, it will help increase the resilience of Europe’s clean energy supply chains.
The proposed legislation addresses technologies that will make a significant contribution to decarbonisation. These include: solar photovoltaic and solar thermal, onshore wind and offshore renewable energy, batteries and storage, heat pumps and geothermal energy, electrolysers and fuel cells, biogas/biomethane, carbon capture, utilisation and storage, and grid technologies, sustainable alternative fuels technologies, advanced technologies to produce energy from nuclear processes with minimal waste from the fuel cycle, small modular reactors, and related best-in-class fuels. The Strategic Net Zero technologies identified in the Annex to the Regulation will receive particular support and are subject to the 40% domestic production benchmark.
Key actions to drive net-zero technology manufacturing investments
The Net-Zero Industry Act is built on the following pillars:

Setting enabling conditions: the Act will improve conditions for investment in net-zero technologies by enhancing information, reducing the administrative burden to set up projects and simplifying permit-granting processes. In addition, the Act proposes to give priority to Net-Zero Strategic Projects, that are deemed essential for reinforcing the resilience and competitiveness of the EU industry, including sites to safely store captured CO2 emissions. They will be able to benefit from shorter permitting timelines and streamlined procedures.

Accelerating CO2 capture: the Act sets an EU objective to reach an annual 50Mt injection capacity in strategic CO2 storage sites in the EU by 2030, with proportional contributions from EU oil and gas producers. This will remove a major barrier to developing CO2 capture and storage as an economically viable climate solution, in particular for hard to abate energy-intensive sectors.

Facilitating access to markets:  to boost diversification of supply for net-zero technologies, the Act requires public authorities to consider sustainability and resilience criteria for net-zero technologies in public procurement or auctions.

Enhancing skills: the Act introduces new measures to ensure there is a skilled workforce supporting the production of net-zero technologies in the EU, including setting up Net-Zero Industry Academies, with the support and oversight by the Net-Zero Europe Platform. These will contribute to quality jobs in these essential sectors.

Fostering innovation: the Act makes it possible for Member States to set up regulatory sandboxes to test innovative net-zero technologies and stimulate innovation, under flexible regulatory conditions.
A Net-Zero Europe Platform will assist the Commission and Member States to coordinate action and exchange information, including around Net-Zero Industrial Partnerships. The Commission and Member States will also work together to ensure availability of data to monitor progress towards the objectives of the Net-Zero Industry Act. The Net-Zero Europe Platform will support investment by identifying financial needs, bottlenecks and best practices for projects across the EU. It will also foster contacts across Europe’s net-zero sectors, making particular use of existing industrial alliances.

To further support the uptake of renewable hydrogen within the EU as well as imports from international partners, today the Commission is also presenting its ideas on the design and functions of the European Hydrogen Bank. This sends a clear signal that Europe is the place for hydrogen production.
As announced in the Green Deal Industrial Plan, the first pilot auctions on renewable hydrogen production will be launched under the Innovation Fund in Autumn 2023. Selected projects will be awarded a subsidy in the form of a fixed premium per kg of hydrogen produced for a maximum of 10 years of operation. This will increase the bankability of projects and bring overall capital costs down. The EU auction platform can also offer “auctions-as-a-service” for Member States, which will also facilitate the production of hydrogen in Europe. The Commission is further exploring how to design the international dimension of the European Hydrogen Bank to incentivise renewable hydrogen imports. Before the end of the year, all elements of the Hydrogen Bank should be operational.
Next Steps
The proposed Regulation now needs to be discussed and agreed by the European Parliament and the Council of the European Union before its adoption and entry into force.
Background
The European Green Deal, presented by the Commission on 11 December 2019, sets the goal of making Europe the first climate-neutral continent by 2050. The EU’s commitment to climate neutrality and the intermediate goal of reducing net greenhouse gas emissions by at least 55% by 2030, relative to 1990 levels, are made legally binding by the European Climate Law.
The legislative package to deliver on the European Green Deal  provides a plan to put the European economy firmly on track to achieve its climate ambitions, with the REPowerEU Plan accelerating the move away from imported Russian fossil fuels. Alongside the Circular Economy Action Plan, this sets the framework for transforming the EU’s industry for the net-zero age.
The Green Deal Industrial Plan was presented on 1 February to boost net-zero industry and ensure the objectives of the European Green Deal are delivered on time. The plan sets out how the EU will sharpen its competitive edge through clean-tech investment, and continue leading on the path to climate neutrality. It responds to the invitation by the European Council for the Commission to make proposals to mobilise all relevant national and EU tools and improve framework conditions for investment, with a view to safeguarding the EU’s resilience and competitiveness. The first pillar of the Plan aims to create a predictable and simplified regulatory environment for net-zero industries. To this end, in addition to the Net-Zero Industry Act, the Commission is presenting a European Critical Raw Materials Act, to secure a sustainable and competitive critical raw materials value chain in Europe, and has proposed a reform of the electricity market design that will allow consumers to benefit from the low production costs of renewables.
Compliments of the European Commission.
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Today, the EU Commission proposes a comprehensive set of actions to ensure the EU’s access to a secure, diversified, affordable and sustainable supply of critical raw materials. Critical raw materials are indispensable for a wide set of strategic sectors including the net zero industry, the digital industry, aerospace, and defence sectors.
While demand for critical raw materials is projected to increase drastically, Europe heavily relies on imports, often from quasi-monopolistic third country suppliers. The EU needs to mitigate the risks for supply chains related to such strategic dependencies to enhance its economic resilience, as highlighted by shortages in the aftermath of the Covid-19 and the energy crisis following Russia’s invasion of Ukraine. This can put at risk the EU’s efforts to meet its climate and digital objectives.
The Regulation and Communication on critical raw materials adopted today leverage the strengths and opportunities of the Single Market and the EU’s external partnerships to diversify and enhance the resilience of EU critical raw material supply chains. The Critical Raw Materials Act also improves the EU capacity to monitor and mitigate risks of disruptions and enhances circularity and sustainability.
President of the European Commission, Ursula von der Leyen said: “This Act will bring us closer to our climate ambitions. It will significantly improve the refining, processing and recycling of critical raw materials here in Europe. Raw materials are vital for manufacturing key technologies for our twin transition – like wind power generation, hydrogen storage or batteries. And we’re strengthening our cooperation with reliable trading partners globally to reduce the EU’s current dependencies on just one or a few countries. It’s in our mutual interest to ramp up production in a sustainable manner and at the same time ensure the highest level of diversification of supply chains for our European businesses.”
Together with the reform of the electricity market design and the Net Zero Industry Act, today’s measures on critical raw materials create a conducive regulatory environment for the net-zero industries and the competitiveness of European industry, as announced in the Green Deal Industrial Plan.
Internal Actions
The Critical Raw Materials Act will equip the EU with the tools to ensure the EU’s access to a secure and sustainable supply of critical raw materials, mainly through:
Setting clear priorities for action: In addition to an updated list of critical raw materials, the Act identifies a list of strategic raw materials, which are crucial to technologies important to Europe’s green and digital ambitions and for defence and space applications, while being subject to potential supply risks in the future. The Regulation embeds both the critical and strategic raw materials lists in EU law. The Regulation sets clear benchmarks for domestic capacities along the strategic raw material supply chain and to diversify EU supply by 2030:

At least 10% of the EU’s annual consumption for extraction,
At least 40% of the EU’s annual consumption for processing,
At least 15% of the EU’s annual consumption for recycling,

Not more than 65% of the Union’s annual consumption of each strategic raw material at any relevant stage of processing from a single third country.

Creating secure and resilient EU critical raw materials supply chains: The Act will reduce the administrative burden and simplify permitting procedures for critical raw materials projects in the EU. In addition, selected Strategic Projects will benefit from support for access to finance and shorter permitting timeframes (24 months for extraction permits and 12 months for processing and recycling permits). Member States will also have to develop national programmes for exploring geological resources.
Ensuring that the EU can mitigate supply risks: To ensure resilience of the supply chains, the Act provides for the monitoring of critical raw materials supply chains, and the coordination of strategic raw materials stocks among Member States. Certain large companies will have to perform an audit of their strategic raw materials supply chains, comprising a company-level stress test.
Investing in research, innovation and skills:  The Commission will strengthen the uptake and deployment of breakthrough technologies in critical raw materials. Furthermore, the establishment of a large-scale skills partnership on critical raw materials and of a Raw Materials Academy will promote skills relevant to the workforce in critical raw materials supply chains. Externally, the Global Gateway will be used as a vehicle to assist partner countries in developing their own extraction and processing capacities, including skills development.
Protecting the environment by improving circularity and sustainability of critical raw materials: Improved security and affordability of critical raw materials supplies must go hand in hand with increased efforts to mitigate any adverse impacts, both within the EU and in third countries with respect to labour rights, human rights and environmental protection. Efforts to improve sustainable development of critical raw materials value chains will also help promoting economic development in third countries and also sustainability governance, human rights, conflict-resolution and regional stability.
Member States will need to adopt and implement national measures to improve the collection of critical raw materials rich waste and ensure its recycling into secondary critical raw materials. Member States and private operators will have to investigate the potential for recovery of critical raw materials from extractive waste in current mining activities but also from historical mining waste sites. Products containing permanent magnets will need to meet circularity requirements and provide information on the recyclability and recycled content.
International Engagement
Diversifying the Union’s imports of critical raw materials: The EU will never be self-sufficient in supplying such raw materials and will continue to rely on imports for a majority of its consumption. International trade is therefore essential to supporting global production and ensuring diversification of supply. The EU will need to strengthen its global engagement with reliable partners to develop and diversify investment and promote stability in international trade and strengthen legal certainty for investors. In particular, the EU will seek mutually beneficial partnerships with emerging markets and developing economies, notably in the framework of its Global Gateway strategy.
The EU will step up trade actions, including by establishing a Critical Raw Materials Club for all like-minded countries willing to strengthen global supply chains, strengthening the World Trade Organization (WTO), expanding its network of Sustainable Investment Facilitation Agreements and Free Trade Agreements and pushing harder on enforcement to combat unfair trade practices.
It will further develop Strategic partnerships: The EU will work with reliable partners to promote their own economic development in a sustainable manner through value chain creation in their own countries, while also promoting secure, resilient, affordable and sufficiently diversified value chains for the EU.
Next Steps
The proposed Regulation will be discussed and agreed by the European Parliament and the Council of the European Union before its adoption and entry into force.
Background
This initiative comprises a Regulation and a Communication. The Regulation sets a regulatory framework to support the development of domestic capacities and strengthen sustainability and circularity of the critical raw material supply chains in the EU. The Communication proposes measures to support the diversification of supply chains through new international mutually supportive partnerships. The focus is also on maximising the contribution of EU trade agreements, in full complementarity with the Global Gateway strategy.
The Critical Raw Materials Act was announced by President von der Leyen during her 2022 State of the Union speech, where she called to address the EU’s dependency on imported critical raw materials by diversifying and securing a domestic and sustainable supply of critical raw materials. It responds to the 2022 Versailles Declaration adopted by the European Council which outlined the strategic importance of critical raw materials to guarantee the Union’s strategic autonomy and European sovereignty. It also responds to the conclusions of the Conference on the Future of Europe and to the November 2021 resolution of the European Parliament for an EU critical raw materials’ strategy.
The measures build upon the 2023 criticality assessment, the foresight report focusing on strategic technologies, and the actions initiated under the 2020 Action Plan on critical raw materials. Today’s proposal is underpinned by the scientific work of the Commission’s Joint Research Centre (JRC). Together with the JRC Foresight study, the JRC also revamped the Raw Materials Information System which provides knowledge on raw materials, both primary (extracted/harvested) and secondary, for example from recycling. The tool provides information on specific materials, countries, as well as for different sectors and technologies and includes analyses for both supply and demand, current and future.
The Critical Raw Material Act is presented in parallel to the EU’s Net Zero Industry Act, which aims to scale up the EU manufacture of key carbon neutral or “net-zero” technologies to ensure secure, sustainable and competitive supply chains for clean energy in view of reaching the EU’s climate and energy ambitions.
Compliments of the European Commission.
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Governor Michelle W. Bowman at the Independent Community Bankers of America ICBA Live 2023 Conference, Honolulu, Hawaii | March 14, 2023 |
I would like to thank the ICBA for the invitation to speak with you today. It is a pleasure to be with you to discuss innovation in the U.S. financial system, the emerging trends that are shaping the industry, and the influence of regulatory approach on this evolution.1
Before turning to the main theme of my remarks, I would like to take a moment to acknowledge the events of the past week, and the actions taken by regulators in response. As you are aware, last Friday, March 10, the California Department of Financial Protection and Innovation closed Silicon Valley Bank. On March 12, the New York Department of Financial Services closed Signature Bank. In both cases, the Federal Deposit Insurance Corporation (FDIC) has been appointed as receiver. One significant factor leading to the stress and subsequent closure at each institution was the rapid outflow of deposits, specifically uninsured deposits above the FDIC-guaranteed amount of $250,000 per depositor, per account type.
On Sunday, several specific actions were announced that are intended to limit the direct and indirect risks to the U.S. financial system resulting from the closure of these two financial institutions. The Federal Reserve Board announced that it will make additional funding available to eligible depository institutions through a newly created Bank Term Funding Program.2 This program will offer one year loans to institutions that pledge U.S. Treasury securities, agency debt and mortgage-backed securities, and other qualifying assets as collateral. The facility will provide an additional source of liquidity to banks and eliminate the need for institutions to quickly sell these securities during a time of stress. The FDIC also took action to protect all depositors, including uninsured depositors, of both Silicon Valley Bank and Signature Bank. Beginning Monday morning, these depositors were able to access all of their funds on deposit with these banks. The federal regulators, including the FDIC, the Federal Reserve Board and U.S. Treasury Secretary Janet Yellen approved the actions to protect depositors.
The U.S. banking system remains resilient and on a solid foundation, with strong capital and liquidity throughout the system. The Board continues to carefully monitor developments in financial markets and across the financial system.
Now, turning to the main theme of my remarks today, I will discuss the imperative of fostering innovation in the banking system.
Often, when innovation is discussed within the context of the banking system, the focus is not on traditional banks engaged in core banking activities, like taking retail deposits and making loans. I think this perception misses the mark. Innovation has always been a priority for banks of all sizes and business models, from small community banks to the largest global systemically important banks (G-SIBs), and for good reason. Banks in the U.S. have a long history of developing and implementing new technologies. Innovation has the potential to make the banking and payments systems faster and more efficient, to bring new products and services to customers, and even to enhance safety and soundness. Yet, some have criticized the banking regulators for being hostile to innovation, at least when that innovation occurs within the regulated financial system. Regulators are continually learning about and adapting to new technologies, just as banks are, and regulators can play an important, complementary role, making the regulatory rules of the road clear and transparent to foster bank innovation.
Innovation does pose challenges within the regulated banking system, which can be amplified for community banks. Along with presenting new opportunities, innovation can introduce new risks and create new vulnerabilities. Banks, and really, any business today that adopts new technologies must be prepared to make corresponding improvements to manage these risks and vulnerabilities, including improvements to risk management, cybersecurity, and consumer compliance. Regulators must continue to promote efforts that are consistent with safe and sound banking practices and in compliance with applicable laws, including consumer protection laws. As I am sure you appreciate, this is not always an easy task, and the regulatory response to innovation must reflect the changes in how banks engage in this process.
It is absolutely critical that innovation not distract banks and regulators from the traditional risks that are omnipresent in the business of banking, particularly credit, liquidity, concentration, and interest rate risk.3 These more traditional risks are present in all bank business models but can be especially acute for banks engaging in novel activities or exposed to new markets, including crypto-assets.4 Whatever the cause, many traditional risks can be mitigated with appropriate risk-management and liquidity planning practices, and effective supervision, and without stifling the ability of banks to innovate.
Today, I will address three issues related to innovation. First, I will briefly discuss how bank regulation and supervision can best support responsible innovation. Second, I will touch on the unique challenges that apply to smaller and community banks pursuing innovation. Finally, I will mention a few key actions that the federal banking regulators have taken to date, and how I think about future regulatory and supervisory actions to support innovation. And before I conclude, I will also quickly touch on a few other issues that may be of interest to you.
Supporting Responsible Innovation
In the past, I have spoken about the principles that I believe should guide bank regulation and supervision.5 I have noted the value of independence—tempered by public accountability—in the Fed’s role as a bank supervisor. I have also stressed the need for clear rules of engagement and predictability in the bank applications process. And I have emphasized that transparency of expectations in rules and guidance are critical to a bank regulatory system that is fair and efficient. I think these principles are instructive when it comes to how regulators should address innovation.
As both consumer needs and their preferences in accessing financial services change, so too must the banking industry. Banks of all sizes see new opportunities to develop enhanced and customized products for their customers, introduce faster payments, and improve efficiency.
If our goal is a banking system that leverages the many benefits of innovation, regulators need to make deliberate choices about how we regulate and supervise. Further, we need to be aware of and sensitive to the unintended consequences of our regulatory framework. The Federal Reserve and the other federal banking agencies have an important role to play in helping ensure banks can innovate in a safe and sound manner, and that role includes transparency in expectations. And of course, we must ensure that regulation and supervision do not place unnecessary burdens on small banks. The vast majority of banks want to meet regulatory expectations. By publishing clear guidance and developing tools to help assist these banks, regulators can improve regulatory transparency and facilitate compliance.
Transparency is a tool that can serve the supervisory goal of promoting a safe, sound, and fair banking system, particularly when it comes to innovation. In exercising supervisory and regulatory authority, the federal banking agencies must be aware of not only the risks to the U.S. financial system, but also the harm that can be caused to U.S. consumers and businesses when we don’t achieve sufficient clarity and transparency in our expectations and when our regulations are disproportionately burdensome to the risks they are intended to address. With innovation, the risk is that a regulatory approach based on subjective, ad hoc judgments—as opposed to clear guidance and regulatory expectations—could cause new products and services to migrate to the shadow banking system. We have already seen a similar phenomenon in some markets, as with nonbank lending, which has proportionately increased when compared to bank lending in recent years.
A lack of transparency, and the corresponding limits on bank innovation, has adverse consequences for consumers, businesses, and communities. Therefore, it should be a regulatory priority to ensure our approach continues to support innovation that is conducted in a safe and sound manner and is consistent with applicable laws, including consumer protection.
The Innovation Challenges for Community Banks
I think everyone here today recognizes the valuable role that small banks play in the U.S. financial system, and just as important, in the communities they serve.6 Small banks provide credit and financial services to businesses and individuals through personalized services and relationship banking. Small banks have a deep commitment to their communities and understand their unique customers, including how they may weather the ups and downs of economic cycles.
If we look at the financial health of small banks today, we see an industry that is well-positioned to support economic growth. Across a broad range of metrics, including capital, liquidity, earnings, credit quality, and loan growth, small banks have been performing well.
But small banks also face unique challenges, especially when it comes to innovation. Small banks tend to have fewer resources to devote to these activities and fewer staff members with the technological expertise to develop products in-house. Therefore, small banks tend to be more reliant on third-party relationships to support innovation, including the critical relationship between small banks and their core service providers. However, third-party relationships can also increase operational risk, data security and cybersecurity vulnerabilities, and create other compliance issues. And of course, a bank’s use of third parties does not diminish its responsibility with respect to the activities conducted by the third-party service provider.
I think the principles I mentioned earlier can be particularly relevant when thinking about how regulators can support small bank innovation. Transparency in expectations is important for the smallest banks, who may view innovation as a strategic priority, but may lack the resources of larger peers to engage in innovation and third-party partnerships or cover costs of legal advice to address ambiguous regulatory expectations. One way we can adopt a tailored approach is by providing additional resources and tools for smaller institutions to assist with compliance. Regulators have already successfully developed compliance tools. These include the Board’s recently developed tools to assist community banks estimate their losses under the Current Expected Credit Loss, or CECL, accounting standard. The federal banking agencies also published a guide for community banks on conducting due diligence for financial technology companies.7
I think these types of efforts are very important as we introduce new regulations and requirements. Clear guidance and practical implementation tools can reduce the burden of regulation while also promoting compliance.
The Evolving Regulatory Response to Innovation
Innovation allows banks to become more efficient and better meet customer demands. So, while bank regulators do not want to hinder innovation, we also have a responsibility to ensure that the banking industry adopts new technologies appropriately. To help balance these two goals, it is incumbent upon regulators to prioritize clear guidance to banks. Having clear (and public) regulatory expectations not only supports public accountability, but also gives banks greater flexibility to innovate and experiment with new technologies.
Across a range of activities, both banks and regulators are working to make innovation accessible to all banks, with clear guidance and additional tools and resources to help small banks. I’ll now turn to a few specific examples where regulators have been working to develop transparency and clear expectations.
Crypto-asset activities
Many bank customers have expressed interest in crypto-assets over the past several years, with some banks exploring how they can meet this customer demand. There are a multitude of design and use cases for new and innovative technologies, such as distributed ledger technology and crypto-assets, which can pose unique challenges for regulators. The variability of these activities complicates the development of clear regulatory expectations around safety and soundness and risk management, and raises questions about legal permissibility. The lack of clear and timely regulatory guidance creates a real challenge for banks interested in exploring these activities.
Crypto-asset activities remain an important focus for the Federal Reserve and other bank regulators. While some banks continue to explore offering crypto-asset-related products and services to their customers, the extreme volatility of these assets creates significant challenges for banks. These assets also vary widely in terms of their structure, the markets for trading, and whether they are backed by any assets. Until clear statutory and regulatory parameters exist to govern these types of assets and the exchanges on which they are traded, I think some of the uncertainties about how the banking system can engage in crypto activities will remain unsettled.
While there is more to do, there have been some helpful initial steps to provide clarity on regulatory expectations. First, the Board published guidance clarifying that all state member banks should notify their lead supervisory point of contact prior to engaging in crypto-asset-related activities.8 The letter also clarified the broad requirements of a firm’s obligations, including the need to analyze the legal permissibility of the activities, and to develop adequate systems, risk management, and controls to conduct these activities in a safe and sound manner and consistent with all applicable laws.
More recently, the bank regulators published additional guidance to highlight the risks of crypto-asset-related activities. In January, the federal agencies released a statement highlighting crypto-asset risks and recently issued a statement on liquidity risks resulting from crypto-asset market vulnerabilities.9 Federal Reserve staff continues to develop guidance on crypto-asset activities, including on custody, trade facilitation, loans collateralized by crypto-assets, and the issuance and distribution of stablecoins. I think these are critical next steps to provide clarity around regulatory expectations.
Third-party risk management
Third-party relationships can provide smaller banks access to new products, services, and technology. The scope of these partnerships can be quite broad, including fintech companies, partners who use the bank’s “Banking as a Service” products, cloud service providers, and many others. But third-party partnerships designed to bring innovation into a bank can also create risk-management and due diligence challenges, particularly with respect to identifying the risks that a third-party partner may pose and to managing these risks.
For small banks, these compliance problems can be amplified by a number of factors. Small banks may have limited experience and in-house expertise conducting due diligence on third-party partners like fintech companies. And small banks likely have limited leverage in negotiating contracts and informational rights with third-party partners. Small banks may also encounter friction with nonbank partners who fail to understand the bank’s ongoing responsibilities to ensure that even outsourced activities are conducted in a safe and sound manner and in compliance with consumer protection laws.
The Federal Reserve and other federal banking agencies can play an important role in helping banks continue to innovate through third-party partnerships. Specifically, the agencies have been working to develop joint guidance to clarify regulatory expectations around third-party risk management, which will be an important step in supporting innovation built on third-party partnerships.
This guidance could be particularly helpful for small banks. But clearer guidance and regulatory expectations will not fully address these challenges. Guidance alone cannot address the challenges that a small bank faces in conducting due diligence on third parties and the difficulty in negotiating a contract with larger nonbank service providers and partners.
ICBA has taken some important first steps in determining if there are opportunities to fill these knowledge gaps by leveraging collective action to help with due diligence. In addition, some interesting preliminary work has been done to consider whether a standards-setting organization, in the form of a public–private partnership, could expedite due diligence on third-party fintech partners. A centralized, standards-setting organization could help develop minimum standards to ensure better consistency in the diligence banks apply to these partnerships. I see a great deal of promise in these efforts, and I support continued work to develop these mechanisms to help small banks innovate through third-party partnerships. Another area in need of attention is in assisting small banks achieve similar treatment in their contracts in comparison to larger nonbank service providers and partners.
All banks should understand regulatory expectations with respect to due diligence, risk management, and ongoing compliance when engaging in third-party relationships. Banking regulators can support this approach by providing clear expectations and the tools smaller banks may need to help them meet these expectations. For example, in 2021 the Federal Reserve began providing state member banks with supervisory reports on their third-party partners that are subject to supervision under the Bank Service Company Act. These reports contain information that may provide helpful insight in assessing the performance of bank service providers, depending on the services used and the risk the services pose. As we are considering additional opportunities to provide resources in this space, your feedback and experience would be helpful to understand where we should focus our future efforts.
Bank service company oversight
Another area that complements third-party risk management is the agencies’ regulatory authority over bank service companies. While banks who engage in partnerships with third parties continue to bear responsibility for due diligence and compliance, we should also consider whether the bank itself, or the third-party service provider, is best positioned to address risks.
The regulatory burden of third-party relationships falls heavily on banks (particularly small banks), and sometimes bleeds over to their core service providers, because the core service providers often make the technical changes to core systems to enable integration with innovative new products and services. Core service providers are already subject to activities-based supervision under the Bank Service Company Act. But with the expansion of third-party relationships, it is worth considering whether this allocation of responsibility remains sound, or whether additional parties—like fintechs and other technology companies—should be subject to closer scrutiny for the products and services they provide to banks. If third parties provide products and services to bank customers, it also may be appropriate for these providers to bear greater responsibility for their own products and services, including to ensure that they are provided in a safe and sound manner and in compliance with financial and consumer laws and regulations.
Cybersecurity
We do not often talk about cybersecurity in the context of innovation, but improving cybersecurity can complement innovation. When a bank is planning to develop new technology or pursue innovation, those new activities often bring new risks. As you know, bankers often refer to cybersecurity as one of the top risks facing the banking industry, and the Federal Reserve has issued guidance and examination procedures on a range of cybersecurity issues to help banks prepare for cyber events when they occur.
Cyber threats constantly evolve, and banks’ cybersecurity efforts must be dynamic in response. Banks must respond to emerging threats by adapting risk-management practices, engaging with regulators and law enforcement when an attack occurs, and participating in training and exercises to ensure cyber preparedness. As I have noted in the past, the Federal Reserve continues to work closely with banks to support these efforts.10
Other Important Trends
Although I won’t be able to take questions today, I would like to address a few other issues that may be of interest to this group related to bank regulation and supervision.
Community Reinvestment Act reform.
As you all know, last May, the federal banking agencies issued a notice of proposed rulemaking that would amend the Community Reinvestment Act. The agencies received extensive comments on the proposal, including comments describing the costs and benefits of the proposal and how it would impact banks. Chair Powell noted last week that there is essentially agreement among the three agencies. While we are hard at work, it is expected that it will take some months to complete.
I am continuing to review and understand this proposal and the costs it will impose. From my perspective, it will be important to consider how the costs imposed by any final rule compare to the benefits of the rule, not just in the aggregate, but for institutions of different sizes and engaged in different banking activities.
Climate risk management and regulation.
Climate risk-management and regulation efforts include the recent launch of a climate scenario exercise for the largest firms and a climate guidance proposal for a broader range of large firms. The Federal Reserve’s role in this space is very limited and generally is confined to ensuring banks operate in a safe and sound manner, relying on appropriate risk management.
With respect to climate change risks, it is important to think carefully about the costs and benefits of any guidance and the scope such guidance may include. As proposed, the climate risk-management guidance would apply only to the largest firms. Of course, all banks below this threshold, including small banks, would remain subject to robust risk-management expectations, which includes managing all material risks. In many instances, these expectations may require banks to manage a range of related risks, especially from extreme weather and natural disasters.
Capital.
As you know, the banking agencies are currently engaged in a holistic bank capital standards review and are working to implement the Basel III “endgame” reforms. With respect to the Basel III capital reforms, the agencies recently reaffirmed their commitment to implement these standards to strengthen the resilience of the U.S. financial system. As I think you all know, there are no plans to propose changes to the community bank capital framework as part of this capital review. It remains to be seen how broad the proposal will be, and for the larger firms, which firms will be affected.
Bank merger policy.
There are significant consequences for firms when applications are not acted on in a timely manner, including increased operational risk, the additional expense associated with running two institutions in parallel over a longer period, employee retention issues, and perceived reputational risk. In my mind, this is an area that we need to improve; delays in the processing of applications are not exclusively an issue for large banks.
Small banks are also subject to timing issues when engaged in bank merger transactions. In fact, small banks that operate in more rural areas with few competitors who try to merge with other local banks can raise competitive concerns under the Federal Reserve’s traditional merger standards. As I’ve previously noted, one way to improve the timing of small bank merger transactions is by considering all competitors when evaluating the competitive effects of mergers.11 In many rural markets, credit unions, farm credit system institutions, banks without a branch presence, and nonbank lenders can all be significant competitors in different product markets. In some cases, these smaller banks face greater issues in pursuing merger transactions than larger banks that operate in dense urban centers with many bank competitors. For all banks engaged in merger transactions, delays should be the exception, not the rule.
Efforts to support minority depository institutions. Minority depository institutions, or MDIs, play an important role in our financial system. MDIs often provide credit and financial services to low and moderate income and minority communities. The Federal Reserve is committed to preserving minority ownership of depository institutions, and providing technical assistance to MDIs, through the Fed’s Partnership for Progress program. Federal Reserve staff frequently meets with MDI management teams to discuss emerging issues, provide technical assistance, explain supervisory guidance, and respond to management concerns. This engagement not only furthers our efforts to support these banks, but also provides valuable insight and feedback on the challenges facing MDIs. It is also an opportunity to gather feedback on regulatory proposals.
Overdraft fees.
Banks often provide limited overdraft protection to customers and historically have charged a fee for this service. Recently, as you know, this practice has come under some regulatory scrutiny. For example, many banks have taken a close look at their practices to ensure that they are subject to appropriate disclosures and are operated in a way that is fair to consumers.
The Federal Reserve’s approach in evaluating overdraft practices has been to prioritize compliance through the review of these practices, ongoing engagement with bank management, and most importantly, transparency in our regulatory expectations. Regulatory expectations should never come as a surprise to regulated institutions, and our examiners find that transparency is an effective tool to promote compliance.
I would like to address one specific overdraft practice that has been the focus of recent attention—authorize positive, settle negative (or APSN) transactions. These transactions occur when a bank authorizes a consumer’s point-of-sale transaction based on sufficient funds in the consumer’s account, but at the time the transaction posts, the consumer’s account has insufficient funds. In some cases, the institution imposes an overdraft fee on the consumer when this occurs.
Over the past decade, the Federal Reserve has focused on this issue as part of our supervisory activities. For example, in July 2018, we published an article in the Consumer Compliance Supervision Bulletin that explained our concerns that charging consumers overdraft fees based on APSN can constitute an unfair practice.12
At the same time, we recognize that some of this risk is driven by system limitations of the core service providers, which can pose a real challenge to community banks confronting this issue in their own transaction processing operations. In some cases, core service providers need to implement changes to their systems to allow banks to avoid charging these fees. While this issue is a narrow one in the context of broader discussions about overdraft fees, it is important. We encourage banks to continue working with their service providers to implement fixes to system-based issues, and we encourage service providers to support their bank clients in providing compliant products.
Conclusion
Innovation has long been a high priority for banks, and I expect it will continue to be a key issue for the future. New technologies have created significant opportunities for banks to become more efficient and competitive and to provide improved products and services for customers. While innovation brings new opportunities, it also introduces additional risks.
But a transparent regulatory posture for these activities can help banks of all sizes embrace new technologies, to the benefit of their customers and the broader economy. The specific innovations I mentioned today only scratch the surface of the technologies and innovations that banks are exploring, which also include the use of artificial intelligence and machine learning; efforts to develop faster payments, clearing, and settlement technologies; and many others. For all areas of innovation that banks are interested in pursuing, regulators should continue to prioritize timely, clear, and transparent guidance.
I would like to again thank the ICBA for the invitation to speak to you today, and also to recognize the incredible commitment and efforts of the bankers in this room and beyond in support of their communities and the ongoing strength of the U.S. economy.
Compliments of the U.S. Federal Reserve.
Footnotes:

1. The views expressed in these remarks are my own and do not necessarily reflect those of my colleagues on the Board of Governors of the Federal Reserve System or the Federal Open Market Committee. Return to text

2. Board of Governors of the Federal Reserve System, “Federal Reserve Board Announces It Will Make Available Additional Funding to Eligible Depository Institutions to Help Assure Banks Have the Ability to Meet the Needs of All Their Depositors,” news release, March 12, 2023. Return to text

3. As part of our ongoing outreach and dialogue to community banks, I along with colleagues at the Federal Reserve Bank of Kansas City conducted an “Ask the Fed” session this past December, discussing unrealized losses at community banks in a rising rate environment. Ask the Fed, a Program of the Federal Reserve System, “A Discussion of Unrealized Losses at Community Banks in a Rising Interest Rate Environment” (December 16, 2022). Return to text

4. See Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency, “Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities (PDF),” news release, February 23, 2023. Return to text

5. See Michelle Bowman, “Welcoming Remarks” (speech at the Midwest Cyber Workshop, organized by the Federal Reserve Banks of Chicago, Kansas City, and St. Louis, February 15, 2023); “Independence, Predictability, and Tailoring in Banking Regulation and Supervision” (speech at the American Bankers Association Community Banking Conference, February 13, 2023); “Brief Remarks on the Economy and Bank Supervision” (speech at the Florida Bankers Association Leadership Luncheon Events, January 10, 2023); “Large Bank Supervision and Regulation” (speech at the Institute of International Finance Event: In Conversation with Michelle Bowman, September 30, 2022); “Technology, Innovation, and Financial Services” (speech at the VenCent Fintech Conference, August 17, 2022); “My Perspective on Bank Regulation and Supervision” (speech at the Conference for Community Bankers sponsored by the American Bankers Association, February 16, 2021). Return to text

6. For purposes of these remarks, I will refer to regional banking organizations and community banking organizations as “small banks.” Return to text

7. Board of Governors of the Federal Reserve System, FDIC, and OCC, “Conducting Due Diligence on Financial Technology Companies: A Guide for Community Banks (PDF)” (Washington: Board of Governors, FDIC, OCC, August 2021). Return to text

8. Board of Governors of the Federal Reserve System, “SR 22-6 Letter / CA 22-6 Letter: Engagement in Crypto-Asset-Related Activities by Federal Reserve-Supervised Banking Organizations,” August 16, 2022. Return to text

9. Board of Governors of the Federal Reserve System, FDIC, and OCC, “Joint Statement on Crypto-Asset Risks to Banking Organizations (PDF)” (Washington: Board of Governors, FDIC, OCC, January 3, 2023); “Joint Statement on Liquidity Risks to Banking Organizations Resulting from Crypto-Asset Market Vulnerabilities (PDF),” February 23, 2023. Return to text

10. See Michelle W. Bowman, “Welcoming Remarks” (speech at the Midwest Cyber Workshop, organized by the Federal Reserve Banks of Chicago, Kansas City, and St. Louis, February 15, 2023). Return to text

11. See Michelle W. Bowman, “The New Landscape for Banking Competition” (speech at the 2022 Community Banking Research Conference, sponsored by the Federal Reserve, the Conference of State Bank Supervisors, and the Federal Deposit Insurance Corporation, St. Louis, Missouri, September 28, 2022). Return to text

12. See Board of Governors of the Federal Reserve System, Consumer Compliance Supervision Bulletin (PDF), (July 2018). Return to text

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