Governor Stein Delivers Speech to FRB Chicago on "Fire Sales" in Securities Financing Markets

Governor Jeremy C. Stein delivered a speech at the Federal Reserve Bank of Chicago and International Monetary Fund Conference which echoed themes of his previous speeches, focusing on "fire sales" in securities financing transactions and laying out a case for further policy attention to the issue. As in prior speeches, Governor Stein discussed the welfare economics of fire sales, explaining that a forced sale of an asset is not just an event that leads to prices being driven below long-run fundamental values, but one that involves market failure or externality of the sort that might elicit a regulatory response. He further discussed how securities financing transactions ("SFTs"), such as those done via repurchase agreements, are an object of concern for policymakers since they give way to fire sale externalities (e.g., market costs that may result from problems in these markets).

Governor Stein also assessed the effectiveness of recent regulatory tools, and suggested possible alternative ways to deal with SFT-related fire-sale externalities, such as capital surcharges, modified liquidity regulation, and universal margin requirements.

In closing, Governor Stein briefly mentioned the risks to the financial system created by money market funds, which he essentially described as operating as banks with no capital.

See: Governor Stein's Speech at FRB Chicago. Related News: FRB Governor Stein's Speech at FRB on "Fire Sales" in Securities Financing Markets (with Lofchie Comment) (October 4, 2013).