Federal Reserve officials, fresh from the latest round of tests designed to ensure the safety of the biggest banks, are now peering into the darker corners of the financial system as they assess the risks of another crisis.
One source of concern: Tighter regulation of banks is prompting more borrowers to seek funding through the $25 trillion shadow banking system — money-market mutual funds, hedge funds, brokerages and other entities that face fewer restrictions.
“These institutions are a significant and growing source of credit in the economy,” Dennis Lockhart, president of the Atlanta Fed, said in a March 20 speech. “They are part of an interconnected financial system that, in extreme circumstances, is prone to contagion.”
Lockhart will draw more attention to the issue next week when he hosts a conference in Stone Mountain, Ga. The event will bring together current and former Fed policymakers, money managers and academics to discuss how central banks can best identify and limit the biggest sources of risk to the financial system.
A key player in that effort is the Fed’s financial stability committee, headed by Vice Chairman Stanley Fischer, who will deliver a speech at next week’s forum.
“To say that the nonbank sector today appears less vulnerable than it did during the global financial crisis is not to say that authorities in the United States have tamed the nonbank sector,” he told an audience in Frankfurt on Friday.
Fischer’s committee is mapping different parts of the shadow banking system and trying to figure out which regulator has authority over each portion.
Among measures under consideration by Fed officials: stricter margin requirements for broker-dealers, which can serve to limit the amount of borrowed money that firms like hedge funds use to finance investments.