Fed 'remains watchful' on fixing banking system risk: Yellen

Federal Reserve Chair Janet Yellen said policy makers still must be on guard against emerging risks to the financial system even after banks became more robust and less reliant on short-term borrowing to fund investments. 

PHOTO: AFP

6 May10:04 PM

[WASHINGTON] Federal Reserve Chair Janet Yellen said policy makers still must be on guard against emerging risks to the financial system even after banks became more robust and less reliant on short-term borrowing to fund investments.

"We and other supervisory agencies have made significant progress in addressing incentive problems within the financial sector, especially within the banking sector," Yellen said in a speech prepared for delivery on Wednesday in Washington. Policy makers "remain watchful for areas in need of further action or in which the steps taken to date need to be adjusted."

Yellen didn't mention her outlook for the economy or monetary policy.

Steps are under way to address the "perception that any financial institution is too big to fail by ensuring that even very large banking organizations can be resolved without harming financial stability," Yellen said.

Regulators are weighing whether banks have sufficient total loss-absorbing capacity, including long-term debt, to enable them to be unwound without support from the government, Yellen said. The actions also include requiring banks prepare "living wills" for orderly resolution if they're insolvent.

Yellen spoke alongside International Monetary Fund Managing Director Christine Lagarde at the "Finance and Society" conference sponsored by the Institute for New Economic Thinking.

"A well-functioning financial sector promotes job creation, innovation, and inclusive economic growth," Yellen said. "But when the incentives facing financial firms are distorted, these firms may act in ways that can harm society. Appropriate regulation, coupled with vigilant supervision, is essential to address these issues."

Yellen spoke a week after Fed policy makers said they expect the economy to bounce back from a disappointing first quarter. The Federal Open Market Committee repeated it won't raise interest rates until it sees continued improvement in the labour market and its "reasonably confident" that inflation will return toward the central bank's 2 per cent target.

The US economy grew just 0.2 per cent in the three months through March, held back by severe weather, a strong dollar and weak corporate investment. The dollar and a drop in energy prices have also subdued inflation, which rose just 0.3 per cent in the year through March, according to the Fed's preferred measure of prices.

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Shipping industry points to more Asian economic weakness

Steep drops in Asian shipping rates are adding to fears about slowing trade, as a fall in export orders from countries across the region depresses demand for ships carrying 90 per cent of world trade. 

PHOTO: REUTERS

6 May1:44 PM

[SINGAPORE] Steep drops in Asian shipping rates are adding to fears about slowing trade, as a fall in export orders from countries across the region depresses demand for ships carrying 90 per cent of world trade.

Rates for container ships carrying finished goods are down 30 per cent this year, close to record lows despite a recent rebound, and rates for bulk carriers used to transport goods such as iron ore and coal are also near historic lows.

Although shipping rates also reflect sector-specific factors such as vessel orders and seasonal demand swings, analysts say they can act as a bellwhether of global trade given that the vast majority of goods are transported by ship. "Everything is signaling a further slowdown in the global trade cycle. Nothing suggests a turnaround soon," said Frederic Neumann, co-head of Asian Economics Research at HSBC in Hong Kong, pointing to low export orders in Asia. "We're not even seeing a big pick-up following the US West Coast strike closure earlier this year," he added, referring to a dispute that snarled trans-Pacific maritime trade until a settlement on Feb 20.

The declines come as China's factories suffered their fastest drop in activity in a year in April as new orders shrank, while exports have also fallen in countries such as South Korea and Indonesia. "Shipping rates remain very soft, and Asian exports very weak, much weaker than export orders data would suggest,"Westpac Bank said in a report.

While a slight pick-up of trading was expected in April following the U.S. strike and the Lunar New Year holiday in Asia, which both reduced trade flows, the overall seaborne and economic outlook was weak, said Robert Rennie, Westpac Global Head of Market Strategy.

"Shipping markets tell me a lot about what's going on. China is the key source of momentum and I genuinely don't see much momentum there. Growth looks soft and we're not yet seeing any recovery," he said.

The Shanghai Containerized Freight Index SCF-IDX-S is down 30 per cent this year and close to record lows, while the Baltic Dry Index for bulk carriers is near historic lows. Tanker rates rates are faring better but are expected to run into headwinds.

REUTERS