Interbank Market News Scan: Federal Reserve signals closer eye on hedge fund and prime brokerage ebullience…

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FedSpeak: Fed governor Lael Brainard issues statement about resiliency in the financial system …

Statement by Governor Lael Brainard, 6 May 2021

“The latest Financial Stability Report provides valuable analysis to track increases in financial system vulnerabilities. I would highlight a few areas. Vulnerabilities associated with elevated risk appetite are rising. Valuations across a range of asset classes have continued to rise from levels that were already elevated late last year. Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top of their historical distribution, and the appetite for risk has increased broadly, as the “meme stock” episode demonstrated. Corporate bond markets are also seeing elevated risk appetite, and the spreads of lower quality speculative-grade bonds relative to Treasury yields are among the tightest we have seen historically. The combination of stretched valuations with very high levels of corporate indebtedness bear watching because of the potential to amplify the effects of a re-pricing event.

The FSR describes the failure of Archegos Capital Management and the associated losses at a number of large banks. It highlights the potential for nonbank financial institutions such as hedge funds and other leveraged investors to generate large losses in the financial system. The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks. The potential for material distress at hedge funds to affect broader financial conditions underscores the importance of more granular, higher-frequency disclosures.

With investors ebullient on expectations for a strong rebound, it is important to closely monitor risks to the system and ensure the financial system is resilient. With valuations and risk appetite at elevated levels, strong microprudential safeguards and macroprudential tools such as the Countercyclical Capital Buffer will be important to address risks to financial stability and enable monetary policy to focus on its maximum employment and average inflation goals.”

Links to follow …

Banks. A choppy day of trading on Wall Street ended Thursday with stocks broadly higher and another all-time high for the Dow Jones Industrial Average. US Stocks Close Higher as Banks, Technology Lead Broad Rally | Business News | US News

Banks, Archegos. The dust hadn’t yet settled on Archegos Capital Management’s implosion, when hedge funds started shifting their bets toward banks that avoided getting hurt, hoping to keep leveraging up just like before. Good luck with that. Archegos Blowup Crimps Hedge Fund Leverage as Banks Cut Risk – Bloomberg

Banks. The European Central Bank will take a closer look at bank loans to lightly regulated investment funds and specialised lenders after the spectacular collapses of Archegos Capital Management and Greensill, top ECB supervisor Andrea Enria told Reuters. ECB to inspect loans to shadow banks after Greensill, Archegos fiascos (msn.com)

Foreign exchange rates of interest

Currency PairsRates as of 10:27 pm EST 6 May 2021Rates as of 8:27 pm EST 5 May 2021 Change in pips
EUR/USD1.20601.2007 +53
GBP/USD1.39041.3904 No change
AUD/USD0.77800.7746 +34
USD/CAD1.21541.2269 -115
USD/JPY109.1100109.2500 -1400
USD/NOK8.30288.3504 -476
USD/CHF0.90770.9127 -50
USD/SEK8.42238.4830 -607
USD/MEX20.086020.2560 -1700
Source: Reuters
Selected Rates 
Fed Funds.05
Bank prime rate3.25
Fed Funds target rate.25
2-yr Treasury.15
10-yr Treasury1.57
30-yr2.24
Source: Bloomberg

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