Common-sense reforms are needed to address some “unresolved structural vulnerabilities” in nonbank financial intermediation and short-term funding markets that became apparent with the financial impact of the coronavirus crisis, a member of the Federal Reserve Board said Monday.
In remarks via webcast to a meeting of the Institute of International Bankers, Gov. Lael Brainard said the shock from the impact of the COVID-19 disease subjected the financial system to an “acute stress that necessitated emergency interventions on a massive scale by financial authorities around the world.” She said the financial turmoil that resulted as the impact of the disease settled in underscores the importance of ensuring the financial system is resilient to a wide range of shocks, including those emanating from outside the financial system.
“Regulators and international standard-setting bodies have an opportunity to draw important lessons from the COVID shock about where fragilities remain, such as in prime MMFs (money market funds) and other vehicles with structural funding risk,” she said.
The Fed governor said signs of acute stress were readily apparent in intermediaries and vehicles with structural funding risk, particularly in prime money market funds (MMFs).
“Indeed, it appears these vulnerabilities had increased, as assets held in prime MMFs doubled in the three years preceding last March,” she said. “When the COVID shock hit, investors rapidly moved toward cash and the safest, most liquid financial instruments available to them. Over the worst two weeks in mid-March, net redemptions at publicly offered institutional prime MMFs amounted to 30% of assets. This rush of outflows as a share of assets was faster than in the run in 2008, and it appears some features of the money funds may have contributed to the severity of the run,” she said.