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The Fed’s plan to tackle residual risks to financial stability

Phalguni Soni

Yellen weighs in on banks' liquidity risk and capital requirements (Part 3 of 4)

(Continued from Part 2)

The Fed’s plan

On April 15, Fed Chair Janet Yellen made the opening remarks (via video conference) at the Federal Reserve Bank of Atlanta’s 19th Annual Financial Markets Conference, held on April 15–16, 2014, in Atlanta. In the last article of this series, we discussed aspects of her speech addressing strengthening capital requirements for financial institutions as represented by the liquidity norms of the Liquidity Coverage Ratio (or LCR) and the Net Stable Funding Ratio (or NSFR).

Yellen also said that the measures of LCR and NSFR were more pertinent to multinational institutions, were largely firm-specific, and also ignored the liquidity risks emanating from the shadow banking system, which were equally relevant in a market-wide crisis, as the events of the last financial crisis had proven.

How the Fed seeks to address these residual risks impacting market stability

In her address to the FOMC, Yellen said Fed staff are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets. Some of the measures were:

  • Higher capital adequacy and stable funding with highly liquid assets—measures which would likely pertain only to complex multinational financial institutions
  • Margin requirements for repo and other financial transactions that would apply across markets

These measures, said Yellen, would have to be implemented after careful study of their associated costs and benefits.

In the next article of this series, we’ll discuss the importance of adequate liquidity and capital requirements for complex financial institutions—for example, Wells Fargo (WFC), Bank of New York Mellon (BK), and Goldman Sachs (GS—as well as their impact on both fixed income (JNK) and equity ETFs (OEF) like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) and the iShares Core S&P 500 ETF (IVV). To learn more, please read on to Part 3.

Continue to Part 4

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