U.S. Federal Reserve Vice Chair Stanley Fischer said on Friday that the nonbank financial sector today is less vulnerable to the type of shocks that played a key role in spreading the U.S. financial crisis.
Fischer, who chairs a Fed subcommittee on financial stability, said there is less leverage, less use of securitization, and more moderate reliance on short-term funding among the insurance companies, mutual funds, money market funds and hedge funds that make up the U.S.'s sprawling nonbank financial sector.
"At this stage of the recovery, there are signs of reduced nonbank financial sector vulnerabilities," Fischer said in remarks prepared for delivery at a conference in Frankfurt, Germany. "The available data paint a picture of a nonbank sector that has generally reduced its vulnerability to the types of shocks that we saw during the crisis."
Even so, he said the Fed and other regulators still need more data on the activities of hedge funds and derivatives markets to assess their risk to the overall economy, and that the reliance of some firms on short-term funding remains a possible risk.
The nonfinancial industry plays a major role in U.S. credit markets. It includes the companies often referred to as "shadow banks" because they perform many of the same credit functions as commercial lenders but are not subject to the same regulations.
Their connections with commercial banks and the economy overall were not well understood before the crisis, when their involvement in subprime mortgage lending and investments contributed to the largest economic downturn since the Great Depression.