Fed’s Stanley Fischer Urges Vigilance on Shadow-Bank Risks – Real Time Economics

Stanley Fischer
VICTOR J. BLUE/BLOOMBERG NEWS

The Federal Reserve’s No. 2 official urged regulators to be vigilant in monitoring risks outside the traditional banking system even though the so-called shadow-banking sector is less vulnerable than it was before the recent global financial crisis.

“Many reforms have been adopted for both banks and nonbank financial institutions. But regulation is a cat and mouse game,” Fed Vice Chairman Stanley Fischer said in remarks prepared for a Bundesbank conference in Frankfurt on Friday. “Regulators need to respond to existing regulatory gaps and to keep pace with further changes.”

Mr. Fischer, who sits on the Fed board that supervises most large U.S. financial firms, is the latest central banker to point to potential risks posed by asset managers after that industry’s rapid growth in recent years.

He didn’t discuss monetary policy in his remarks, focusing instead on the evolution of nonbank financial institutions that provide credit, also known as shadow banks.

Mr. Fischer noted that mutual funds are holding a larger share of debt as well as more leveraged loans, credit-default swaps and other assets that are difficult to turn quickly into cash. “These funds offer daily or even intraday liquidity to investors while holding assets that are hard to sell immediately, thus making the funds vulnerable to liquidity risk,” he said. Liquidity risk refers in part to the danger that the fund might not be able to return cash to investors when they pull out and redeem their shares.

The mutual-fund industry has pushed back on such concerns, saying their investors are aware of those risks, and historical data don’t support the idea that “runs” on mutual funds are a significant risk to financial stability.

Mr. Fischer also said regulators lack data on the activities of hedge funds, which appear to have been increasing their leverage, or borrowing, in recent years. Regulators also need better data on derivatives, he said.

Mr. Fischer didn’t suggest policy makers take any further regulatory steps beyond the ones they already have announced for nonbanks, such as a coming Fed proposal to require minimum amounts of margin on securities-financing transactions that many financial firms take part in.

Overall, he said, the nonbank financial sector is less vulnerable than it was in 2008. “The available data paint a picture of a nonbank sector that has generally reduced its vulnerability to the types of shocks that we saw during the crisis,” he said.

 


 


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27 March 2015 | 10:30 am – Source: blogs.wsj.com

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