Federal Reserve Chairwoman Janet Yellen said Wednesday that regulating activity outside the traditional banking sector remains very difficult but the central bank has boosted its monitoring activities to stay on top of possible risks.
International Monetary Fund Managing Director Christine Lagarde asked Ms. Yellen in aquestion-and-answer session at the IMF what the Fed was doing to address risks from non-banks, which include hedge funds, private equity and derivatives. Ms. Yellen replied: “You’re pointing to something that is an enormous challenge.”
“We simply have to expect that when we draw regulatory boundaries, and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them, and if we can, we won’t have adequate regulatory tools,” Ms. Yellen said. “That is a huge challenge to which I don’t have a great answer.”
Ms. Yellen said the Fed’s monitoring of financial risks has improved greatly following the historic financial crisis of 2008. Policy makers were blamed for underestimating the potential for a meltdown during the precrisis period and particularly for failing to spot a massive housing bubble.
She said officials are trying to use tools, such as leverage ratios and margin requirements, that broadly address risk throughout the financial system.
“We have developed very active monitoring programs to try to be on the look out for the cause of the next crisis–hopefully many, many years in the future,” she said.
