Treasury's Yellen says U.S. financial system operating in 'orderly manner'

© Reuters. FILE PHOTO: U.S. Treasury Secretary Janet Yellen testifies before a House Financial Services Committee hearing on "the State of the International Financial System,” on Capitol Hill in Washington, U.S., April 6, 2022. REUTERS/Tom Brenner

By David Lawder

WASHINGTON (Reuters) -U.S. Treasury Secretary Janet Yellen said on Monday the U.S. financial system was functioning in an "orderly manner" despite the current stock market sell-off, and valuations of some assets remain high compared to historical values.

In prepared testimony for a U.S. Senate Banking Committee hearing on Tuesday, Yellen said the Financial Stability Oversight Council (FSOC) will continue to monitor developments related to the war in Ukraine and continued struggles against the coronavirus pandemic.

"There is the potential for continued volatility and unevenness of global growth as countries continue to grapple with the pandemic," Yellen said. "Russia's unprovoked invasion of Ukraine has further increased economic uncertainty."

U.S. stocks were down sharply again on Monday as the broad S&P 500 index extended its longest losing streak since mid-2011 and touched a one-year low as higher Treasury yields stoked market fears of aggressive monetary policy tightening.

Yellen said the FSOC's annual report to Congress - the subject of Tuesday's hearing - discusses other potential emerging financial threats and vulnerabilities that the multi-regulator council continues to monitor. These include short-term wholesale funding markets, central counterparties, alternative reference rates, cyber security, corporate credit markets and real estate markets.

Yellen said the FSOC report discusses vulnerabilities in the non-bank financial sector and the steps the FSOC has taken to examine these risks, including re-establishing an interagency Hedge Fund Working Group.

"The market turmoil in March 2020 demonstrated that the liquidity mismatch and the use of leverage by some nonbank financial institutions can make them vulnerable to acute financial stresses, and these stresses can be transmitted and amplified to the broader financial system," she said.

Yellen also said the report highlights FSOC's work in assessing climate-related financial risks and ensuring that financial institutions better understand them. The council has recommended that regulators build their capacity and expand their efforts to address climate risks, improve the availability of data and create enhanced and standardized disclosure rules.

The council is also drafting a report to identify financial stability and regulatory gaps related to digital assets, new products and financial technologies related to President Joe Biden's March 9 executive order calling for a comprehensive approach to digital asset policies, Yellen said.