Federal Reserve Governor Sarah Bloom Raskin said regulators should prevent asset-price bubbles by boosting the amount and quality of capital required of banks.
Officials also should continue stress testing of lenders, restrain banks from “excessively” extending loans, and reduce “overreliance on unstable short-term wholesale funding,” Raskin said in a speech prepared for delivery today in Washington. She did not comment on the outlook for the economy or monetary policy in her prepared remarks.
“These reforms will build resilience to whatever shocks may come, and will reduce the potential for asset bubbles and excessive credit growth, leverage, maturity transformation, reliance on unstable short-term wholesale funding, and, thus, the potential for future financial crises,” Raskin, formerly Maryland’s top financial regulator, said in her speech to bankers and other financial industry leaders.
Central bank officials, including Vice Chairman Janet Yellen, Governor Jeremy Stein, and Kansas City Fed President Esther George, have voiced concern this year that four years of record-low interest rates are overheating markets for assets from farmland to junk bonds. Stein in February cited leveraged loans and junk bonds as areas that have been “very robust.”
“Regulatory policies can lean against emerging asset bubbles and the vulnerabilities that attend them by restraining financial institutions from excessively extending credit,” Raskin told the Exchequer Club. “Such policies can build resilience in the financial system, enhancing its ability to absorb and shrug off unexpected losses from any source, including sharp asset price declines.”
Fed Chairman Ben S. Bernanke said today in testimony to the House Financial Services Committee the central bank’s asset purchases “are by no means on a preset course” and could be reduced more quickly or expanded as economic conditions warrant.
Regulators have sought to prevent excessive risk taking in markets since the 2008 credit freeze led to the worst U.S. recession since the 1930s. The Fed has kept its benchmark interest rate near zero since December 2008 and is buying bonds to reduce borrowing costs, spur growth and combat unemployment.
Yellen said in a Jan. 4 speech that financial markets should be regulated more tightly to reduce the risk of 2008-like credit crises. Regulators could make financial markets more resilient by setting higher capital requirements for so-called systematically important global banks, she said.
Stein in a Feb. 7 speech said some markets are showing signs of potentially excessive risk-taking and “a fairly significant pattern of reaching-for-yield” in corporate bonds. Bonds, farmland, and high-yield and leveraged loans “are at historically high levels,” George said in a Jan. 10 speech.
Raskin, 52, has backed Federal Open Market Committee decisions this year to continue purchasing securities at the rate of $85 billion a month to boost growth and reduce unemployment.
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