Bernanke Says Shadow Banking System Still Poses Risks

Bernanke cautions banks against excessive financial risk, and says the Federal Reserve is increasing its monitoring of asset markets.

CHICAGO, ILLINOIS, UNITED STATES (MAY 10, 2013) (RESTRICTED POOL) - U.S. Federal Reserve Chairman Ben Bernanke said on Friday (May 10) that the shadow banking system continued to pose a threat to financial stability, and that bank funding markets might still not be able to cope with a major default.

In a wide-ranging speech explaining the Fed's role in monitoring the stability of the banking system, Bernanke also said the central bank was closely monitoring asset markets for signs of excessive risk taking."While the shadow banking sector is smaller today than it was before the crisis and some of its least stable components have either disappeared or been reformed, regulators and the private sector need to address remaining vulnerabilities, said Bernanke a speech delivered in Chicago.

More work was needed to ensure the repo market - the wholesale market banks use for their everyday funding needs - could deal with the potential consequences of a default by a large borrower or a broker-dealer.

And a run on money market funds also still remained a possibility, Bernanke said.

Bernanke said the Fed was monitoring a wide range of asset markets for signs investors were "reaching for yield" in a way that might pose risks to the financial system, given that interest rates were so low.

Bernanke did not address the outlook for monetary policy or the economy in the speech delivered at the 49th Annual conference on Bank Structure and Competition sponsored by the Federal Reserve Bank of Chicago.