A top U.S. Federal Reserve official on Monday suggested stress tests and certain capital requirements to contain the risks within the non-bank lending sector, while acknowledging there is little the central bank can do to impose such restrictions. Fed Vice Chairman Stanley Fischer offered a framework to more tightly regulate the lending activities of hedge funds, mutual funds and other non-bank entities – often referred to as shadow banks – though he was careful to show that he was offering suggestions and not potential central bank rules.
Fischer also gave a nod to the Bank of England, which formed a nimble and powerful financial stability arm, and suggested the Fed is headed in a similar direction. “To promote solvency, one could impose ratio-type capital requirements, such as leverage-ratio requirements or risk-based requirements,” Fischer said, referring to non-bank lenders.
Fischer, in remarks at an Atlanta Federal Reserve Bank event, added that shadow banks should also consider conducting a stress test on themselves. The Fed has ramped up its focus on crisis-prevention, recognizing the regulatory failures that led to the 2007-09 financial industry collapse.