Fed's Quarles Examining Vulnerabilities
Federal Reserve Vice Chair for Supervision Randy Quarles presented some "Remarks at the Hoover Institution," which briefly touched upon money funds and the March Covid Madness. He says, "While banks so far have been resilient to the shock from the COVID event, the same cannot be said for important parts of the system of nonbank financial intermediation (NFBI). Starting in March, Federal Reserve facilities were needed to contain pressures in some prime money market funds, as well as, to a lesser extent, in certain long-term mutual funds that invest in corporate debt. Other types of NBFI also struggled during that period, including nonbank mortgage servicers and real estate investment trusts, the latter of which received support from the Board's decision to, for the first time, purchase agency commercial mortgage–backed securities." Quarles continues, "The vulnerabilities of NBFI are also at the top of the mind of international regulators. The Financial Stability Board's (FSB) annual report on NBFI indicates that the NBFI sector is now almost 50 percent of total financial intermediation, and many NBFIs rely on the banking system for credit and backstop liquidity. Thus, late last year, I formed a high-level steering group of central bankers, market regulators, and international organizations to oversee the FSB work on nonbank finance and to help coordinate work across the range of global standard setting bodies that oversee the financial sector. The group is currently completing a holistic review of the COVID event to better understand the role that vulnerabilities stemming from the NBFI sector played in those events. In the wake of the COVID event, we have made good progress in arriving at a shared diagnosis of the market turmoil that happened during the onset of the event in March. Our discussions have surfaced a number of issues associated with particular types of market participants and mechanisms that may have caused liquidity imbalances and propagated stress. They include: vulnerabilities in money market funds (as I discussed earlier); dealers' capacity and willingness to intermediate; market structure in the core government bond markets and, potentially, the role of leveraged investors; and fragilities in US dollar cross-border funding." He adds, "We are looking at the role that each of these factors may have played, but we are not yet prepared to say 'J'accuse' to any one of them. This is because our work has also reinforced the point that one needs to examine the system as a whole and take into account the various linkages within nonbank financial intermediation and between nonbanks and banks. We will provide to the G20 Summit next month our holistic review of the turmoil and a concrete set of proposals for follow-up work on NBFI. This will provide a basis for a work plan for 2021, focused on better understanding this critical sector, vulnerabilities related to it, and how we might take a more macroprudential approach to supervising and regulating at least some parts of this sector."
