The art of business lending has changed. Business borrowers have clearly benefited from this new financial environment, which delivers a wider and more affordable menu of credit possibilities...These ongoing changes have important implications for the structure and performance of the financial industry, for innovation and risk in the financial system, for the creation of credit and its distribution, and for macroeconomic growth and stability.

Strong financial institutions are especially important at this time when asset prices could move by large amounts unexpectedly. By ensuring that financial institutions are adequately capitalized and well prepared in general to deal with major changes in asset prices, prudential regulation decreases the risk that the actions of impaired financial institutions could disrupt the flow of credit and thereby intensify what might already be difficult adjustments. In addition, strong institutions should be positioned to weather any necessary changes in short-term interest rates as policy is adjusted.

The U.S. financial system seems less vulnerable to specific shocks and better able to absorb larger shocks than was true in the relatively recent past. At the same time, however, changes in the structure of the financial system and an increase in product complexity could make a crisis more difficult to manage and perhaps more damaging...While the probability of a major crisis induced by the financial failure of a major institution may be lower, the damage associated with such an event could be higher.

As we move to refine and implement the Basel II framework for credit and operational risk, we need to strengthen the framework for market risk and encourage further improvements in how firms capture the possibility of extreme events.

We ought to be building datasets containing detailed and comprehensive records of financial transactions as well as income and spending for a panel of households over the course of many years. So if I were to try to identify the main challenges in community development research, one would be to find ways of improving our understanding of how changes in financial institutions, instruments and regulation have affected the behavior and welfare of individual households in the population of interest. This is not an easy task. One obvious reason for the greater focus on lenders and neighborhoods is data availability. But to the extent to which our research program is driven by policy questions, I would hope that our future research efforts are guided more by a focus on people.

One of the most important limitations of the [Home Mortgage Disclosure Act ] data set is that it does not include data about many of the legitimate factors lenders use to determine prices in the mortgage market, including key credit-risk factors. Credit-risk factors absent from the HMDA data set include loan-to-value ratio, consumer debt-to-income ratio, and a consumer's experience with credit. Thus, price disparities by race or ethnicity, if revealed in the HMDA data, will not alone prove unlawful discrimination. Such disparities will, however, indicate a need for closer scrutiny--a look at these other variables.

The rising interest rate environment is also on our radar screen...Some borrowers may have difficulty meeting higher payments on variable-rate loans—especially consumers who already have built up a high level of debt burden. That said, the potential impact on banks should be limited because nonperforming loans are at such a low level right now, and because of offsets from a stronger economy.

While many banks are understandably positioning their balance sheets for rising rates—by shortening asset durations, for example—some are not considering alternative scenarios with respect to the shape of the yield curve and the timing of rate changes, and we’ve already seen how the bond market and long rates have fluctuated in reaction to...economic uncertainties.

While deposit growth has held up reasonably well, funding may become more challenging as depositors seek higher returns...Rising rates will test banks’ interest rate risk management and funding strategies, especially if loan demand jumps concurrently.

We will probably see business demand for credit rise further with the trimming of profit growth among nonfinancial firms...In terms of the ability to borrow, business balance sheets overall look to be in good shape in terms of debt burdens.

We don’t know for sure what levels of debt burden [households] feel comfortable with. Although the Federal Reserve’s figures on financial obligations relative to income for households have come down some in recent quarters, they are still high. Nonetheless, the expectation is that consumer spending will continue to grow at a moderate pace.

Lending standards are being relaxed a bit.  That does not give me a lot of concern.

On the whole, these continue to be favorable times for the financial services providers, whether commercial banks or credit unions.

The two perspectives on cycles in the financial services business--the performance of financial services firms in this phase of the business cycle, and what asset quality indicators tell us about the state of the economy--together suggest that growth in economic activity will continue to support favorable conditions for financial institutions for at least the near term.

It is important that the world’s major private financial institutions run themselves with a sufficiently strong financial cushion, a cushion calibrated not just against the risks they confront in this uncertain world, but to the much more central role they play in many markets. Particularly for those institutions whose size and scope make them systemically important, capital, liquidity, and the overall risk management and control architecture need to be exceptionally strong.