Yellen outlines monetary reforms, restart of the hedge fund group

Treasury Secretary Janet Yellen on Wednesday tabled a tripartite agenda to address the issues she described as an ongoing threat to the nation’s financial system.

These threats include both disruptions that emerged at the start of the Covid-19 pandemic and more recent developments related to hedge funds.

Yellen, chair of the Financial Stability Oversight Council, which she now chairs but was once a member, said market disruptions could have been worse at the start of the Covid-19 pandemic last year.

“Without the swift action of the Federal Reserve, Treasury Department, Congress and others, these pressures could have resulted in an even greater economic decline,” she said. “Indeed, we are digging out of a deep hole now, but we should be aware that the hole could easily have been deeper.”

The meeting comes just days after the Archegos family office was at the center of a market disruption related to margin calls. Credit Suisse and Nomura cautioned against scoring significant hits and shares of ViacomCBS and Discovery were struck.

Yellen tasked the council with addressing three areas: security vulnerabilities in money market and mutual funds and other non-bank financial market issues, weaknesses in the US treasury market, and threats climate change could pose to the system.

Part of this work will include restoring the previously disbanded hedge fund oversight group of the FSOC.

“The pandemic has shown that leverage from some hedge funds can also add to stress,” Yellen said. “This council used to have a working group on hedge funds, and now we have one again. We are setting up the working group so we can better share data, identify risks and work on strengthening our financial system.”

This system was blocked in March last year when the Covid-19 threat turned into a pandemic. A rush for cash from institutional investors clogged the normally highly liquid short-term finance markets and required the Fed and Treasury to work together to create several facilities to thaw these markets.

Most of these facilities have been closed, but the Fed is still buying bonds worth at least $ 120 billion a month to keep the market running smoothly.

On the issue of climate change, Yellen reiterated concerns she shared on the issue and raised by several Fed officials. The central bank recently set up two committees that will examine what big banks should do to counter climate-related events.

“It is an existential threat to our environment and represents an enormous risk to the financial stability of our country,” said Yellen.

Other issues for FSOC to address include cyber threats, the increasing use of non-banks for corporate credit, and the increasing presence of digital currencies.

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