What Is a Stable and Resilient Economy and Financial System?

February 8, 2018


Photo by David Fine

Most of the Federal Reserve's work is focused on achieving the central bank's dual monetary policy mandate: maximum employment and stable prices. Ordinarily, we think of the dual mandate simply in terms of the expected levels of employment and inflation. However, the financial crisis of 2007–08 and its aftermath reminded us of the importance of reducing the risk of severe economic downturns. Since the financial crisis and its aftermath, the Federal Reserve has worked not only to strengthen economic activity but also to promote an economic system that is more stable and resilient. In simple terms, a stable system has buffers that allow it to absorb negative shocks—economic or financial surprises—without worsening those shocks. In other words, a stable system can take an unexpected hit and contain the damage.

A resilient system can recover quickly from any damage these shocks may cause. Closely related as they are, a subtle distinction separates the stability and resilience of individual households and financial institutions and the stability and resilience of the broader economic and financial systems. A resilient financial system continues to function through a crisis, ensuring that lending continues and capital flows efficiently during times of disruption.

Financial system stability and resilience

While isolated bank failures are unavoidable, it's critical that the larger banking system can continue to support a growing economy. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 helps address this issue by requiring systemically important banking companies and financial firms to craft plans detailing how they would "wind down" without crashing the entire system. In addition, since the financial crisis, the Fed and other institutions have focused on making the banking and financial system more robust and resilient.

The success of the postcrisis efforts of the Federal Reserve, other bank regulatory agencies, and the banks themselves show up in various measures of bank health. One quick bit of evidence: the percentage of delinquent loans—those 90 or more days past due and still accruing interest and those not earning income—at commercial banks was below 2 percent in the fourth quarter of 2017, down from above 6 percent in 2009.

This success allowed then-Fed chair Janet Yellen to say in December 2017: "We have a much more resilient, stronger banking system, and we're not seeing some worrisome buildup in leverage or credit growth at excessive levels."

Big contribution in the day-to-day work

Many parts of the Atlanta Fed contribute to strengthening the economy of the Sixth Federal Reserve District and the country. The Federal Reserve Bank of Atlanta's 2017 annual report examines three facets of the bank’s contribution to stability and resilience: prudential banking supervision and regulation, retail payments, and workforce development.

Prudential supervision aims to promote economic stability by making the banking and financial system more stable. The Atlanta Fed contributes to banking and financial stability by supervising banking organizations in the Sixth District and working with Fed colleagues on national supervisory issues.

Additionally, Atlanta Fed economists contribute to policy formation by publishing research on a variety of financial stability issues.

As home of the Fed's Retail Payments Office, the Atlanta Fed helps ensure that payments move easily and securely throughout the nation. The result is a payments system that is resilient and stable.

The Atlanta Fed's Community and Economic Development team works with constituencies throughout the region to help job seekers and employers. In doing so, it helps households become more stable and thus lessen their risk of failure.

The following essays, videos, and images explore in more detail the Atlanta Fed's role in fostering financial stability and resilience. The report is intended to be an overview. Links throughout take you to more technical, detailed material.

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