Yellen Delivers Remarks on Non-Bank Financial Risks, Open-End Funds

In a recent speech, Treasury Secretary Janet Yellen delivered remarks on financial stability and the “proper role of government in regulating the financial sector.” Secretary Yellen noted that for regulators, “policy is not aimed at preventing external shocks nor eliminating all volatility,” but rather the goal of macroprudential policy is to “make the financial system more resilient to external shocks – so the system can dampen, not amplify, their consequences…” Her comments note the impact of “fire sales” on the market and the impact of March 2020 market volatility. She noted there exists unfinished business in the banking, nonbank financial intermediation, private fund (specifically noting hedge funds), and digital assets sectors.

On open-end funds and money market funds, Secretary Yellen noted two principles that guide Treasury and other prudential regulators’ work in the nonbank sector: (1) Addressing risk regardless of where it comes from, and (2) Adapt and tailor policies to fit the unique structural features of the entities they regulate. Secretary Yellen noted “[o]pen-end funds offer daily redemptions, but some hold assets that cannot be sold quickly – particularly in large volumes.” She noted this similar liquidity mismatch also exists in the money market fund space, “first redeemers could exit the fund at $1 per share, but those who waited might be subject to a reduced market value as they are left with claims on less-liquid assets.” Secretary Yellen went on to add “the financial stability risks posed by money market and open-end funds have not been sufficiently addressed.” She highlighted the proposals the SEC and Chair Gary Gensler have put forward which would reduce the first-mover advantage, reduce run incentives during times of stress, require new liquidity management tools, and mandate more comprehensive and timely information on these funds for the SEC and investors. Secretary Yellen noted Treasury continues to work with the Financial Stability Board to revise liquidity management recommendations for open-end funds to boost resiliency.

As part of her closing remarks, Secretary Yellen noted that Congress needs to act to “raise or suspend the debt limit,” and that “it should do so without conditions – and without waiting until the last minute.”

Click here to read Treasury Secretary Yellen’s speech.