Regulators must better monitor and consider new rules for the growing proportion of lending being done by non-bank financial firms, the Federal Reserve's second highest official said on Monday.
"Non-bank firms and activities can pose the same key vulnerabilities as banks, including high leverage, excessive maturity transformation, and complexity, all of which can lead to financial instability," Fed Vice Chairman Stanley Fischer said in the text of remarks prepared for delivery at a financial markets conference in Stone Mountain, Ga.
Fischer is leading the Fed's efforts to bring more attention to risks posed by the so-called shadow banking sector, giving his second speech on the topic since Friday. The Fed and other central banks have hardened regulation of banks since the 2008 financial crisis, helping to spur the growth of less tightly regulated forms of lending.
"Before the crisis, the authorities had few policy levers to provide liquidity or to resolve failures of nonbanks in a way that would avoid serious spillovers," Fischer, 71, head of the Fed's financial stability committee, told the conference.
Fischer floated a handful of possible changes, including placing direct restrictions on how broker-dealers raise funds that would limit the duration of their liabilities or their use of wholesale funding.
"One could also imagine requiring some non-banks to maintain buffers of highly liquid assets that are sized according to the risk that their liabilities will run off quickly in a stress situation," he said.
Fischer drew attention to maturity mismatches faced by some mutual fund managers. While noting the Fed had imposed capital requirements and stress tests on banks to address the same issue, he added, "these requirements cannot simply be applied, as is, to nonbanks."
Proposals for the largest banks to maintain a buffer of debt that could be converted into equity "could be viewed as a form of solvency regulation and this form of loss-absorbing capital might be appropriate for some of the largest and most interconnected nonbanks as well," he said.
Fischer said regulators had already made a number of steps to reduce risks in the financial system, including creating new rules governing money-market mutual funds and loan securitization, and planning new rules for derivative markets.
Regulators had also made progress gathering data on hedge funds, repurchase agreements and securities lending, he said.
"We must remain vigilant for changes in the system that increase systemic risk, and we should make appropriate changes to regulation and the structure of regulation as necessary," Fischer said.
Shadow banking assets grew by 7 percent to $75 trillion in 2013, the last year for which figures were available, according to a report by the Financial Stability Board, a global group of regulators. Assets of deposit-taking banks rose less than 1 percent to $139 trillion.
Fischer's committee is mapping different parts of the shadow banking system and trying to figure out which regulator has authority over each portion.
