Federal Reserve Chairman Janet Yellen said that the central bank does not have the ability to regulate so-called “shadow banks,” including hedge funds and private equity firms.
In a discussion with International Monetary Fund Managing Director Christine Lagarde, Yellen admitted that there’s not much the Fed can do about risks posed by non-banking institutions.
“You’re pointing to something that is an enormous challenge,” Yellen told Lagarde. “And we simply have to expect that when we draw regulatory boundaries and supervise intensely within them, that there is the prospect that activities will move outside those boundaries and we won’t be able to detect them. And if we can, we won’t be—we won’t have adequate regulatory tools. And that is going to be a huge challenge to which I don’t have a great answer.”
Yellen did suggest that there were some things that the Fed could do to tackle hedge fund risk.
“I mentioned margin requirements and, you know, limit—that can serve to limit leverage not only within the banking system but more broadly, but any institution, hedge fund… using short-term financing to take on leverage positions,” she said.