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Treasury Secretary Janet Yellen on Wednesday presented a three-pronged program to tackle what she described as continuing threats to the country’s financial system.
These threats include both the disruptions that occurred at the start of the Covid-19 pandemic as well as more recent developments regarding hedge funds.
Chairing the Financial Stability Oversight Board, which she now heads but was once a member of, Yellen said last year’s market disruption at the start of the Covid-19 pandemic could have been worse.
“Without the swift action of the Federal Reserve, the Treasury, Congress and others, these tensions could have led to an even greater economic contraction,” she said. “Indeed, we are digging a deep hole now, but we have to keep in mind that the hole could easily have been deeper.”
The meeting comes just days after family office Archegos was at the center of a market disruption over margin calls. Credit Suisse and Nomura have warned they will take substantial beatings, and the actions of ViacomCBS and Discovery have come under fire.
A summary from an executive session of the committee said the panel “discussed recent market developments related to hedge fund activities”, although the reading does not specifically mention Archegos.
Yellen instructed the board to tackle three areas: vulnerabilities in the money market and open-ended mutual funds and other issues in the non-bank financial market, weaknesses in the U.S. treasury bill market, and the dangers that the climate change could represent for the system.
Part of that work will be to re-establish the FSOC’s hedge fund watchdog group, which had already been disbanded.
“The pandemic has shown that the leverage of some hedge funds can also amplify tensions,” Yellen said. “This board used to have a hedge fund task force, and as of today we still have one. We are setting up the task force so that we can better share data, identify risks and work to strengthen our financial system.
This system was locked down last March as the Covid-19 threat turned into a pandemic. A rush for liquidity among institutional investors has clogged what are normally highly liquid short-term funding markets, forcing the Fed and the Treasury to work together to put in place multiple facilities aimed at melting these markets.
Most of those facilities have been closed, but the Fed still buys at least $ 120 billion in bonds a month, in part to keep the market functioning.
On the issue of climate change, Yellen reiterated the concerns she shared on the issue and were voiced by several Fed officials. The central bank recently set up a pair of committees that will look at what big banks should do to prepare for climate-related events.
“It’s an existential threat to our environment, and it poses a huge risk to our country’s financial stability,” Yellen said.
She expects the FSOC to address other issues, including cyber threats, the growing use of non-banks for corporate credit, and the growing presence of digital currencies.
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