Federal Reserve Board Governor Lisa D. Cook delivered a speech setting out her current assessment of financial stability, describing the U.S. financial system as resilient while highlighting four areas she is monitoring: elevated asset valuations, the rapid growth and evolving structure of private credit, the expanding role of hedge funds in the U.S. Treasury market, and the potential implications of generative artificial intelligence (AI) in market trading. Asset valuations were described as elevated relative to historical benchmarks across several markets, including equities, corporate bonds, leveraged loans, and housing, with Cook judging the likelihood of outsized price declines to have increased but not viewing potential declines as a systemic threat given overall resilience. Private credit was characterized as having roughly doubled over the past five years and as increasingly involving more complex intermediation chains and connections with leveraged entities such as banks and insurers; while she did not assess private credit as a current financial stability threat, she pointed to opacity, rapid growth, and limited experience through a full credit cycle as factors that can amplify losses, noting that recent private business bankruptcies in the auto sector revealed unexpected exposures across banks, hedge funds, and specialty finance companies. In U.S. Treasury markets, she noted that hedge fund holdings of Treasury cash securities rose from about 4.6 percent of Treasuries outstanding in the first quarter of 2021 to 10.3 percent in the first quarter of 2025, and emphasized that leveraged, repo-funded relative value strategies can create vulnerabilities through funding and margining pressures that may prompt rapid position unwinds during stress. On AI, Cook highlighted that generative AI could introduce new monitoring and governance challenges in algorithmic trading, including risks related to correlated trading, tacit collusion, and market manipulation, alongside potential mitigants such as improving surveillance tools and trading-venue requirements to explain and reproduce algorithmic decisions. Cook said her focus will be on continuing to understand how these vulnerabilities evolve and on working with colleagues to navigate the associated risks and opportunities.
Federal Reserve Board 2025-11-20
Federal Reserve Board Governor Lisa Cook outlines financial stability watchlist spanning asset valuations, private credit, hedge fund Treasury trading and generative AI
Federal Reserve Board Governor Lisa D. Cook assessed the U.S. financial system as resilient but raised concerns over elevated asset valuations, rapid private credit growth, hedge funds' expanding role in the Treasury market, and generative AI's implications in trading. She emphasized potential risks from opacity and complex intermediation, noting increased asset valuations and the doubling of private credit. Cook also highlighted hedge funds' rising Treasury holdings and AI's potential challenges in trading, stressing the need for ongoing monitoring and governance.