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Fed's Quarles Disappointed by Short-Term Lending Strains in March -- Update

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10/15/2020 | 01:31pm EDT

By Paul Kiernan

WASHINGTON -- A top Federal Reserve official said strains in short-term lending markets that emerged in March were "particularly disappointing" given regulators' efforts in the past decade to shore up those markets.

Fed Vice Chairman Randal Quarles on Thursday added his voice to chorus of regulators calling in recent weeks for a re-examination of possible ways to make the commercial-paper market and some money-market mutual funds more resilient during times of market distress.

"The runs on prime money funds and commercial paper were particularly disappointing, since in many ways they resembled runs that we saw in these markets during the [global financial crisis]," Mr. Quarles said in prepared remarks for a webcast hosted by the Institute of International Finance. "It appears that these short-term funding markets remain an unstable source of funding in times of considerable financial stress."

In March, as governments around the world shut down swaths of the economy in March to slow the spread of the novel coronavirus, investor panic caused widespread turmoil in financial markets. That prompted a blitz of measures by the Fed to keep credit flowing through the economy as investors and financial firms scrambled to preserve cash.

Among these initiatives were programs to provide liquidity to money-market mutual funds, which large and small investors often use instead of bank accounts to park cash, and commercial-paper markets, which companies routinely tap for short-term loans.

In normal times, investments in money-market funds and commercial paper are considered nearly as safe as cash. But during times of panic, investors desperate for cash may race to withdraw their money from such instruments before others do. That can set off a vicious cycle in which asset prices decline and companies become unable to cover their short-term obligations.

Some financial-regulation experts said the Fed's need to backstop money-market mutual funds for a second time in less than 12 years exposed flaws in efforts by the Securities and Exchange Commission during the past decade to make the funds less susceptible to runs.

SEC Chairman Jay Clayton and Deputy Treasury Secretary Justin Muzinich have also acknowledged such concerns in recent weeks.

Six months after stabilizing financial markets, the comments from Mr. Quarles and his counterparts come as the Fed and other regulators begin to unpack the events of March in hopes of identifying possible improvements. They have refrained -- so far -- from hinting at what changes they might pursue.

"Looking across the areas in which strains suggest a need for further reforms, I am struck at the prominence of the continued need to focus on vulnerabilities associated with short-term funding," Mr. Quarles said. "One might look to the emergence of strains in short-term funding markets in March of this year as an indication that previous reform efforts fell short. Perhaps, and we will be looking at this."

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

10-15-20 1230ET

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