Improvements mandated by post-crisis financial reforms – particularly in capital, liquidity, and risk management – and put into place by financial institutions are fending off the emergence of threats to the financial system, a Federal Reserve governor said today.
In remarks to the Economic Club of New York, Fed Gov. Lael Brainerd said that, while it is important to be “vigilant to the signs that asset valuations appear to be elevated, especially in areas such as commercial real estate and corporate bonds, as well as the exceptionally low levels of expected volatility,” there are few signs of a “dangerous buildup of leverage or of maturity transformation.” She said both traditionally have been “important contributors” to financial instability.
However, she noted that the lack of these signs is due, “in no small measure,” to improvements in capital, liquidity and risk management. She said the improvements were made by financial institutions “at the core of the system,” and that the improvements are associated “with post-crisis financial reforms, as well as money market reform and the greater transparency in the derivatives markets.”