Powell Says Market Structure Needs Attention

Q: Should the Fed and regulators be thinking about tightening capital requirements/extending nonbank sector oversight so financial stability risk stays low? (from MNI's Jean Yung)

- A: Capital requirements for banks went up tremendously over the course of the ten years between the financial crisis and the pandemic, and banks really made it through a real stress test very well - and passed two of our stress tests. There's another one pending. So capital is in a good place.

• What requires attention? Number one is money market funds and corporate bond funds. We're looking at ways to make those vehicles resilient so that they don't have to be supported by the government whenever there's a severely stressed market condition. It's a private business. They need to have the wherewithal to stay in business and not count on the Fed and others around the world to come in.
• The other is Treasury market structure. Dealers are committing less capital to that activity now than 10, 15 years ago. And the need for capital is higher because there's so much more supply of treasuries. So there are some questions about treasury market structure and a lot of work going on to understand whether there's something we can do about this. This market needs to be liquid and function well.
• At the very beginning of this recent crisis there was such a demand for selling treasuries, including by foreign central banks that really the dealers couldn't handle the volume.
• So the market was really starting to lose function and that was a really serious problem which we had to solve through really massive asset purchases. So we would like to see if we need to build against that kind of an extreme tail risk. And if so, what would that look like.