Secretary Statements & Remarks

Remarks by Secretary Janet L. Yellen at the Open Session of the Meeting of the Financial Stability Oversight Council

As prepared delivered

Today, the Council is releasing its 2021 annual report.  The report has one eye on the past and one on the future.  It analyzes recent episodes of financial turmoil to understand weak points in our financial system and identifies potential threats.  It reviews actions taken by the Council to strengthen our financial system and recommends additional steps that could be taken by the public and private sectors. 

The report marks nearly two years since the first appearance of COVID-19 and the resulting financial turmoil in March 2020.  As the economy began to shut down that month, many investors sought safety in the form of cash and short-term government securities.  Corporate and municipal bond markets became illiquid. 

Of course, increased capital and liquidity helped banks weather the crisis, and in that way, the episode showed that our financial system is far more shock-resistant than it was in 2008.  As this report shows, the lessons of 2008 and 2020 strongly inform the Council’s work. 

I am pleased to have this opportunity to summarize the work of the Council.  In particular, I would like to take a moment to review three key priorities for the Council that I outlined nine months ago in my first meeting as Chair. 

The first priority was nonbank financial intermediation, including money market funds, open-end mutual funds, and hedge funds.  In March 2020, we saw that open-end mutual funds and prime money market funds could amplify liquidation pressures because of liquidity risk in their business models and the incentives they give to investors.  The same held true for hedge funds because of their use of leverage. 

Our report reviews the Council’s progress on work related to these sectors.  In June, the Council issued a statement regarding the structural vulnerabilities of MMFs.  It called for reforms that would improve the resilience and functioning of short-term funding markets. The Council expressed support for the SEC’s engagement on this critical issue, and I was pleased to note the SEC’s proposed rule earlier this week.  The Council will continue to monitor this effort.  In addition, the Council’s working groups on open-end funds and on hedge funds are assessing the risks posed by these types of firms, and will evaluate whether actions are necessary to address their vulnerabilities. 

A second priority was the resilience of the U.S. Treasury market.  The Treasury market is the deepest and most liquid market in the world.  Because of its critical importance to the financial system, we must understand the disruptions that have occurred in that market.  The Council’s annual report reviews the progress of the Inter-Agency Working Group on Treasury Market Surveillance, which has worked closely with the Council to study what happened in March 2020 and what it had in common with other recent episodes.  The interagency working group is analyzing ways to improve the Treasury market’s resilience.  They’re looking at possible policies to improve data quality and availability, bolster the resilience of market intermediation, evaluate expanded central clearing, and enhance trading venue transparency and oversight. 

The annual report also discusses the Council’s new body of work around climate-related financial risks, the third priority I spoke of in March.  I am very pleased at the Council’s progress in the short period since then. 

As I’ve previously said, even as the Council and regulators make progress in ensuring that the past does not repeat itself, we must keep in mind the maxim that we cannot simply “fight the last war.”  The Council is required to evaluate and respond to new and emerging threats. 

With this purpose in mind, the Council issued a Report on Climate-Related Financial Risk in October that made recommendations to promote the resilience of the financial system.  These steps include expanding capacity, improving data and measurement, enhancing disclosure of climate-related risks, assessing the scale of potential vulnerabilities, and adjusting regulatory and supervisory tools.  To help coordinate our efforts on these issues, the report called for the Council to establish a new staff committee, the Climate-related Financial Risk Committee.  And later in today’s meeting, the Council will vote to do so. 

Of course, climate is not the only emerging risk.  As the annual report details, risks to U.S. financial stability are elevated compared to before the pandemic even as the financial vulnerabilities of banks and central counterparties are low.  For instance, the report discusses potential shocks related to the elevated level of uncertainty characterizing the global growth outlook.  The report also discusses vulnerabilities related to elevated asset prices, for example. 

In addition, the report highlights the critical importance of regulatory attention and coordination regarding stablecoins and other crypto assets, as the market for these assets continues to rapidly grow and evolve.  Cybersecurity also remains a high priority, as does the LIBOR transition.  I look forward to engaging with the Council in 2022 on these issues and others discussed in the report.