Structural vulnerabilities in the nonbank financial sector – especially in money and hedge funds – are manageable and can be addressed by targeted regulation and supervision during the economic recovery following the coronavirus crisis, the Federal Reserve’s top supervisor said Wednesday.
In a speech via webcast to the Brookings Institution, Federal Reserve Board Vice Chair for Supervision Randal Quarles said using regulation and supervision to deal with money and hedge funds vulnerability would be preferable to monetary policy actions. “At a crucial moment in our recovery from the COVID-19 event, the utility of using monetary policy to try to address financial stability concerns would be greatly outweighed by the costs to employment and growth,” he said.
Regarding the banking industry, Quarles praised the “resilience” that the sector displayed during the financial impact of the crisis and its contribution to financial stability. “When I think about financial stability, I think most directly about resilience to shocks, and it would be hard to imagine a better test of that resilience than what occurred in the spring of 2020,” Quarles said.
“Banks met extraordinary demands for credit last spring from nonfinancial businesses and households while simultaneously providing forbearance on millions of existing loans and building substantial loss reserves, all without significant strains to their overall health,” he said. He asserted that the largest banks in the financial system are better capitalized than they have been in decades, “and these institutions are sitting on large amounts of highly liquid assets while relying on relatively low levels of short-term funding. The banking sector is strong.”
He also gave a nod to household resiliency, noting that credit is primarily owed by borrowers with prime credit scores, rising home prices have most homeowners flush with equity, and households are sitting on a large stock of savings.
On inflation, Quarles acknowledged that prices would run above the Fed’s 2% target in 2021 but added that most of the increase will be transitory. “After an exceedingly difficult year, we are poised to enter a robust and durable expansion,” he said.
Fed Vice Chair for Supervision Randal K. Quarles: The Economic Outlook and Monetary Policy