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Yellen: U.S. financial system is functioning in 'orderly manner,' but some valuations 'remain high'

Kitco News

(Kitco News) U.S. Treasury Secretary Janet Yellen addressed the health of the U.S. financial system during her testimony before the U.S. Senate Banking Committee, indicating that everything is operating in an "orderly manner," but some valuations remain high.

The risks facing economic stability include Russia's invasion of Ukraine and China's COVID lockdowns.

"There is the potential for continued volatility and unevenness of global growth as countries continue to grapple with the pandemic. Russia's unprovoked invasion of Ukraine has further increased economic uncertainty," Yellen said. "The U.S. financial system has continued to function in an orderly manner, though valuations of some assets remain high compared with historical values."

The U.S. Treasury Secretary added that the U.S. would continue to pressure Russia with sanctions and provide aid to Ukraine.

"We stand firmly with the people of Ukraine and have implemented an unprecedented suite of sanctions on Russia that have been implemented by financial institutions. On February 28, I convened the Council in the wake of the invasion, and we will continue to monitor developments and coordinate actions as the risks and threats evolve," she noted.

Digital assets were also discussed during the testimony, with Yellen calling for coordinated regulatory attention due to risks posed by instruments like stablecoins.

"Digital assets may pose risks to the financial system, and increased and coordinated regulatory attention is necessary," she said. "The Council is drafting a report that will identify financial stability risks and regulatory gaps. We are also eager to work with you to ensure that payment stablecoins and their arrangements are subject to a federal prudential framework on a consistent and comprehensive basis."

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Yellen also commented on the risks around the UST stablecoin losing its dollar peg over the weekend. "I think that simply illustrates that this is a rapidly growing product, and that there are risks to financial stability, and we need a framework that's appropriate," she said.

Yellen noted that legislation addressing crypto regulation would be "appropriate" this year. "There we see run risks which could threaten financial stability – risks associated with the payment system and its integrity and risks associated with increased concentration if stablecoins are issued by firms that already have substantial market power," Yellen said. "We definitely see significant risks here."

Other monitored risks include short-term wholesale funding markets, central counterparties, alternative reference rates, cybersecurity, corporate credit markets, and real estate markets.

Yellen's comments come as Wall Street sees a massive selloff all across the board, with the S&P seeing its lowest levels in more than a year this week.

The meltdown in stocks has been driven by a shift in sentiment on the marketplace as the U.S. Treasury yields soared and the U.S. dollar index was near 20-year highs. The crypto space also saw heavy losses in response to the selloff in stocks.

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