Pandemic shows risks posed by nonbanks: Yellen

WASHINGTON — In a speech defending the Biden administration’s deployment of pandemic aid, Treasury Secretary Janet Yellen highlighted the risks she said nonbanks pose to the financial system. 

“The crisis revealed that significant vulnerabilities in the nonbank financial sector had not been addressed,” she said. 

Yellen said that the Financial Stability Oversight Council and the Biden administration are “working to mitigate these remaining threats.” 

Yellen’s comments allude to some of the attention that the FSOC has brought to the role of hedge funds and mutual funds and their role in the market turbulence at the onset of the COVID-19 shutdowns in 2020.  The council’s first meeting under Yellen in March 2021 focused on those risks, although there’s been little update since. 

“We are digging out of a deep hole now, but we should be mindful that the hole could easily have been even deeper,” she said at the time. “Increased capital and liquidity requirements imposed after the 2008 financial crisis helped banks weather the pandemic-induced crisis, but the fact that extreme policy interventions were still required to support market functioning should serve as a clear reminder: We have more to do to address vulnerabilities in the financial system.” 

In her remarks on Thursday morning at the Brookings Institution, Yellen echoed that sentiment about post-2008 rules on banks. Her comments underscored that nonbanks are still an area of concern for the Biden administration, despite the relative silence publicly on the issue since that first FSOC meeting. 

“They enabled America’s banks to weather the pandemic shock while meeting the credit needs of  a recovering economy,” she said. 

Yellen emphasized the precarious situation economic policymakers found themselves in as lockdowns swept across the country in 2020, noting that the growth the economy and, in particular, the housing market has experienced wasn’t thought of as a likely possibility. 

“It is fairly easy to evaluate policies ex post, but it is important to remember the dire economic projections that prevailed throughout the early days of the pandemic,” she said. 

In the future, the country could prepare for recessions by strengthening “automatic stabilizers,” Yellen said, referring to policies that would allow for more or less stimulus spending depending on certain economic data points without the express authorization of policymakers. 

“Every recession in recent decades has reinforced the need for a flexible, automatic response,” she said. “Well-designed automatic stabilizers are the best remedy. Preparing for the next recession means not only improving existing stabilizers but expanding their reach to other forms of social support and building the ‘pipes’ to distribute relief in a timely manner.”