Federal Reserve Bank of San Francisco Publishes Paper on “Revisiting Risky Money”
- Date: November 26, 2024
- Source: FRB San Francisco
Summary:
The Federal Reserve Bank of San Francisco has released a new paper titled “Revisiting Risky Money,” which analyzes the potential risks associated with the increasing prevalence of risky assets in global financial markets. The paper argues that the growing exposure to these assets raises concerns about financial stability and systemic risk.
Key Findings:
- Increased Exposure to Risky Assets: The paper finds that investors have significantly increased their exposure to risky assets, such as leveraged loans, collateralized loan obligations (CLOs), and other non-bank financial intermediation (NBFI) products.
- Concentration Risk: The paper highlights that the increased demand for these risky assets has led to a concentration of risk in a narrow set of institutions and markets. This concentration increases the potential for systemic disruptions in the event of an adverse shock.
- Limited Liquidity: The paper also raises concerns about the limited liquidity of many of these risky assets. In times of stress, it may be difficult for investors to quickly exit these positions, potentially exacerbating market volatility and contagion.
- Regulatory Challenges: The paper acknowledges that the growing prevalence of risky assets has posed challenges to financial regulators. It calls for a comprehensive approach to mitigating risks, including improved data collection, enhanced risk monitoring, and potential regulatory adjustments.
Policy Implications:
The paper recommends several policy measures to address the risks associated with risky money:
- Strengthening Regulatory Oversight: Implement measures to enhance the transparency and resilience of NBFI markets.
- Improving Risk Management: Encourage institutions to adopt sound risk management practices and stress-testing capabilities.
- Macroeconomic Policies: Use macroeconomic tools to manage systemic risks, such as interest rate adjustments or quantitative easing.
- Market Structure Reforms: Consider reforms to improve the liquidity and market structure of NBFI products.
Conclusion:
The FRB San Francisco’s paper “Revisiting Risky Money” provides important insights into the potential risks associated with the growing prevalence of risky assets in financial markets. It underscores the need for policymakers and regulators to address these risks through a comprehensive approach involving enhanced oversight, risk management, and market structure reforms.
Additional Information:
- The full text of the paper is available here: www.frbsf.org/economic-research/publications/economic-letter/2024/november/risky-money/
- The FRB San Francisco is one of 12 regional reserve banks that make up the Federal Reserve System.
- Risky assets are typically characterized by high yields and higher levels of risk compared to more traditional investments, such as government bonds or blue-chip stocks.
FEDS Paper: Revisiting Risky Money
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