Official Monetary and Financial Institutions Forum Fed Week Financial Stability Session

By Eric S. Rosengren

Friday, June 25, 2021

Virtual

Official Monetary and Financial Institutions Forum (OMFIF) Fed Week: Financial Stability session

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5 takeaways from Boston Fed President Eric Rosengren’s June 25, 2021, remarks to the Official Monetary and Financial Institutions Forum

Takeaway: Rosengren observed that short-term credit markets have been disrupted in the past two recessions, and significant risks remain. For example, prime money market mutual funds and stablecoins bear attention.

Excerpt on money market funds:

“The result has been that [prime] money market funds have been a critical feature of the financial crises that we've seen in the last decade, and this is a problem that has yet to be resolved.”

Excerpt on stablecoins:

“I think there's a financial stability concern that a future crisis could easily be triggered as these become a more important sector of the financial market, unless we start regulating them and making sure that there's actually a lot more […] stability to what is being marketed to the general public as a ‘stable’ coin.”

Takeaway: Substantial emergency actions were necessary to support lending during the pandemic, and the economy would benefit from being less dependent on ad hoc measures in crises.

Excerpt:

“We need a less ad hoc approach to these crises. We need to think more systematically about how we can make sure that credit is available, and not only to the largest institutions, but many of the small- and medium-sized enterprises as well.”

Takeaway: A properly implemented Countercyclical Capital Buffer, or CCyB, would help avoid some of these issues.

Excerpt:

“I think a well-designed CCyB, which is a counter cyclical capital charge, which builds up capital buffers during good times [and] gets released when we have bad economic times, would have made … at least some of those measures less necessary, because it would have been a natural way to provide a lot more capacity for banks to continue to do their lending.”

Takeaway: Unfortunately, emergency facilities do well supporting large firms but are challenged somewhat to reach small firms. Without better facilities for small firms, the situation will increase economic concentration.

Excerpt:

“So, if we continue to have these kind of crises where these kind of interventions are needed, I think ultimately it's going to result in a greater concentration that we want in the U.S. economy, in the corporate sector.”

Takeaway: Housing prices have played a role in financial stability problems in the past, so recent housing price trends should be monitored closely by policymakers.

Excerpt:

“Around the world, banking crises and financial stability periods are frequently tied to real estate... And, so, I think this bears watching as a potential ‘side effect’ that [policymakers] have to be thinking about as we [determine] what appropriate monetary policy is, going forward.”

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About the Authors

Eric S. Rosengren

Resources

Figures

(pdf)

Keywords

financial stability

credit

CCyB

emergency lending facilities

housing market

Main Street Lending Program

Money Market Mutual Funds

MMLF