Federal Reserve Board Governor Lael Brainard called attention to the fragilities in the financial system that were made evident by the COVID-19 pandemic.

In a speech at the Institute of International Bankers 2021 Annual Washington Conference, Ms. Brainard described these vulnerabilities and offered "common-sense" reforms:

  • Money Market Funds. Ms. Brainard highlighted swing pricing as a potential solution to mitigate risks associated with runs on money market funds. Ms. Brainard cited the success that European mutual funds have had with swing pricing in slowing redemptions during stress events.
  • Treasury Market Functioning. Considering the "acute stresses" in the Treasury market that led to the FRB's unprecedented $1.2 trillion increase in its Treasury securities holdings, Ms. Brainard suggested (i) increased data collection and public reporting to boost market participant transparency, and (ii) FRB standing facilities to backstop repurchase agreements in stress conditions.
  • Central Clearing. Ms. Brainard recognized that central clearing platforms ("CCPs") performed well during the COVID-19 pandemic. She urged consideration of potential CCP actions that would further reduce the risk of defaults, including that CCPs reassess their liquidity planning and the tradeoffs between risk-management decision-making and broader financial stability.
  • Bank Capital and Cyclical Vulnerabilities. Ms. Brainard emphasized that banks should remain "strongly capitalized" to avoid a tightening of credit conditions, and highlighted the countercyclical capital buffer as a tool to mitigate financial imbalances.

Primary Sources

  1. FRB Speech, Lael Brainard: Some Preliminary Financial Stability Lessons from the COVID-19 Shock

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