Treasury Under Secretary Highlights Efforts to Bolster Resiliency of Financial System
Commentary by Steven Lofchie
In remarks before the ISDA Annual General Meeting, Treasury Under Secretary for Domestic Finance Nellie Liang highlighted steps regulators must take to identify vulnerabilities within the financial system in order to help prepare for shifts in systemic liquidity demand and supply. She outlined ongoing mitigation efforts in the following areas:
- Banking. Ms. Liang asserted that the banking system today has more capital and liquid assets due to regulatory reforms following the 2008 financial crisis. She said that in light of the bank runs at Silicon Valley Bank and Signature Bank, regulators will need to consider how to adjust liquidity risk and interest rate risk management to account for the impact of technological advancements and social media on deposits.
- Nonbank Financial Institutions. Ms. Liang said that regulators are reforming efforts on nonbanking financial institutions noting that money market funds serve as "close substitutes" for bank deposit accounts. She said that the Financial Stability Oversight Council is working to improve monitoring systems to identify related-financial stability risks that are posed by highly leveraged hedged funds. She added that the Office of Financial Research proposed permanent data collection efforts to aid regulators in detecting emerging vulnerabilities.
- Treasury Markets. Ms. Liang described the relationship between financial institution resilience and market liquidity as a "two-way street." She said that without strong liquidity risk management, (or where there is excessive leverage from institutions,) market liquidity can deteriorate during periods of stress. She added that financial institutions depend on liquid markets to help manage risk. To strengthen market resiliency, Ms. Liang said that the Inter-Agency Working Group on Treasury Market Surveillance is (i) increasing transparency in the cash secondary market, (ii) considering adjustments to the way Treasury securities are traded and cleared, in order to make the markets more "robust" and (iii) developing a regular buyback program for Treasury securities.
Commentary
Ms. Liang might want to consider the following:
- While it is obvious that the banks that failed did a poor job of managing interest rate risk, the precipitant of that failure was high and rapid inflation; banks borrow short and lend long; one can reasonably guess that there are widespread losses from inflation throughout the banking system, even if other banks have not failed.
- Blaming the banks' failures on "social media" seems to be an assertion making the rounds; but in the 2008 financial crisis, firms failed just as fast; the big institutions are not dependent on social media for their news; and retail investors who are fully insured at banks have the least concern.
- If the OFR actually believes it is important to have data from hedge funds, the OFR should throw out their existing forms and start from scratch. The existing forms are poorly designed and can not possibly produce much useful information.
- It is not clear what benefit is obtained from a buyback of Treasury securities when U.S. Government debt is rapidly escalating (an escalation that will be even more damaging as inflation increases the costs of funding the debt).