A ”concrete set of proposals” for addressing non-bank financial institutions’ (NBFI) growth as financial intermediaries will be presented to the G20 Summit next month, the Federal Reserve’s top supervisor said Wednesday.
Federal Reserve Board Vice Chair for Supervision Randal Quarles said the proposals 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.”
Quarles made the comments in remarks delivered remotely to the Hoover Institution in Stanford, Calif.
The Fed’s top supervisor asserted that NBFIs have struggled to deal with the financial impact of of the coronavirus crisis. He pointed to prime money market funds, long-term mutual funds investing in corporate debt, nonbank mortgage services and real estate investment trusts as specific examples.
“The vulnerabilities of NBFI are also at the top of the mind of international regulators,” said Quarles, who chairs the multi-national Financial Stability Board, which is charged with addressing emerging issues across the globe threatening financial stability. “The Financial Stability Board’s (FSB) annual report on NBFI indicates that the NBFI sector is now almost 50% of total financial intermediation, and many NBFIs rely on the banking system for credit and backstop liquidity,” he said.
Quarles said in late 2019 he formed a group with the FSB (made up of central bankers, market regulators, and international organizations) to oversee the FSB’s work on nonbank finance and to coordinate international work among financial sector regulators.
He said the group has identified issues associated with market participants that may have “caused liquidity imbalances and propagated stress.” He said the issues include vulnerabilities in money market; dealers’ capacity and willingness to intermediate; market structure in the core government bond markets and, potentially, the role of leveraged investors; and fragilities in U.S. dollar cross-border funding.
“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,” Quarles told the group. “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.”