"While the shadow banking sector is smaller today than before the crisis...regulators and the private sector need to address remaining vulnerabilities"
- Fed's Chairman Ben Bernanke
The Fed's Chairman Ben Bernanke warned that risks of shadow banking system persists the and are still posing a serious threat to financial stability, and raised concerns that funding markets might still not be able to deal with a major default. He also noticed that the Fed has overhauled risk monitoring after a collapse in mortgage finance triggered a crisis 5 years ago that led to the worst recession since the Great Depression. The Federal Reserve is unlikely to change its policy unless it will see overvalued assets and a concentration of risks in the financial system. Currently they are working with individual banks to test the effect of the change in the interest rates. One of the major risks is that banks may suffer loses when the rates will go up.
"While the shadow banking sector is smaller today than before the crisis...regulators and the private sector need to address remaining vulnerabilities," Bernanke said at a banking conference sponsored by the Chicago Federal Reserve Bank.
"More work is needed to better prepare investors and other market participants to deal with the potential consequences of a default by a large participant in the repo market," Bernanke said. He said that the "possibility of a run" on money-market funds remains.
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