Yellen calls for US to tackle financial risks after COVID-19 meltdown

Treasury Secretary Janet Yellen will say Wednesday that the U.S. needs to bolster weak points in the financial system after the country narrowly averted a debilitating crisis last year.

In prepared remarks before a meeting of the Financial Stability Oversight Council (FSOC), Yellen said regulators must take action to prevent shocks involving investment funds, the Treasury bond market and climate change from causing a broader meltdown.

“We are digging out of a deep hole now, but we should be mindful that the hole could easily have been even deeper,” Yellen said.

As Treasury secretary, Yellen is the ex officio chair of FSOC, an interagency panel of financial regulators created by the 2010 Dodd-Frank financial reform law.

“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 to do more to address vulnerabilities in the financial system,” Yellen said.

The Federal Reserve and Treasury Department deployed trillions of dollars with the backing of Congress to stabilize financial markets as the coronavirus outbreak reached pandemic status and upended the global economy.

The Fed in March 2020 began purchasing trillions of dollars in Treasury, mortgage, corporate and other bonds to prevent credit markets from seizing and opened roughly a dozen emergency lending facilities with backstops from the Treasury Department.

Those efforts helped prevent intense volatility in financial markets, driven in part by a mass exodus from funds tied to bonds, from causing a breakdown akin to the 2007 crisis that spawned the Great Recession.

Yellen said that the close call the U.S. faced last year warranted renewed attention — and potential regulatory changes — for the areas of the financial system that nearly broke down in March.

Yellen has asked for an interagency assessment to determine whether regulators should consider action to address open-end mutual funds, which she said “offer investments with greater liquidity than their underlying assets.” She also reestablished FSOC’s Hedge Fund Working Group and called for a “broad, interagency effort” to prevent the Treasury bond market from seizing again.

While most of Yellen’s remarks focused on the recent instability driven by COVID-19, she also called for FSOC to address the economic and financial risks of climate change, one of her top priorities since taking office.

“We know that storms will hit us with more frequency, and more intensity. We know warming temperatures might disrupt food and water supplies, leading to unrest around the world,” Yellen said.

“Our financial system must be prepared for the market and credit risks of these climate related events. But it must also be prepared for the best-possible case scenario: that we begin a rapid transition to a net-zero carbon economy, which also creates potential challenges for financial institutions and markets.”