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The Federal Reserve is keeping an eye on
Fed Gov. Christopher Waller said the central bank is keen to better understand
"Financial stability vulnerabilities, such as run risk, excessive leverage and bubbly valuations, could amplify the effect of adverse shocks, potentially resulting in big economic losses and a slowdown in economic activity," Waller said. "Understanding the mechanisms that allow these vulnerabilities to grow and transmit stress to the rest of the financial system requires rigorous theoretical research and solid micro-foundations."
Waller, who serves as the Fed Board's oversight governor for reserve bank operations and payment systems, highlighted the Federal Reserve System's efforts during opening remarks Monday morning at the central bank's Summer Workshop on Money, Banking, Payments and Finance.
The annual event, which is set to run all week in Washington, D.C., pulls in researchers from regional reserve banks, the Fed Board in Washington and academic institutions around the globe. Waller said the workshop provides a crucial opportunity to understand real-world implications of emerging trends and the risks that come with them.
"No single field of study can give the answers to all of the big questions we face relating to the evolution of money and banking," he said. "Commingling of insights and techniques from monetary theory, finance theory and other fields is vital in studying the complex interactions of modern financial systems."
Other areas of focus for the five-day event include "distributed ledgers" — also known as blockchain systems — and crypto assets, Waller said.
He said understanding evolutions in money and banking are critical to the Fed's five primary functions: setting monetary policy, safeguarding financial stability, supervising and regulating banks, operating payment systems, and protecting consumers and communities.
Past events have been instrumental in deepening Waller's personal understanding of evolving technologies and his approach to setting policies, he said.
"The knowledge that I have gained from interacting with researchers in this area for the last 20 years has aided me in one of my roles as a Federal Reserve governor, supporting the Fed's oversight of the U.S. payment system," Waller said. "It also guides my thinking about how to make global payments cheaper and faster, which is a key objective adopted by the G20 countries in 2020 and is one fully supported by the Federal Reserve."
The research put forth during the workshop helps close critical gaps in the world of applied economic research, arguing that traditional models fail to account for payments logistics, Waller said.
"In short, standard supply and demand analyses have nothing to say about the actual exchange process and how payment is made—in a sense, exchange and payment are viewed as trivial issues," he said. "By delving into the micro-foundations of exchange and payment, researchers in this area were able to identify key frictions that make exchange and payment far from trivial."