Federal Reserve Vice Chairman Stanley Fischer said while the non-bank financial industry appears less vulnerable since the financial crisis, more work must be done to reduce risks.

“While progress has been substantial, areas for continued work remain,” Fischer said in the text of remarks prepared for delivery Friday in Frankfurt. “To say that the non-bank sector today appears less vulnerable than it did during the global financial crisis is not to say that authorities in the United States have tamed the non-bank sector.”

Despite improvements in how money markets function, many non-banks such as hedge funds and broker-dealers still need secured short-term funding to operate, and much of that funding involves longer-term and illiquid assets, Fischer said. “This maturity transformation remains a key vulnerability,” he said.

He didn’t comment about the outlook for the economy or monetary policy in his prepared remarks.

Fischer, who was governor of the Bank of Israel before joining the Fed in May, leads a committee to monitor financial stability and avoid the emergence of asset-price bubbles. Policy makers want to ensure that six years of near-zero interest rates don’t lead to a repeat of the U.S. housing boom and subsequent financial crisis.

Joining Fischer on the Committee on Financial Stability are Daniel Tarullo, the Fed governor in charge of bank supervision, and Governor Lael Brainard, who was a top Treasury Department official before joining the Fed last year.

Asset Managers

Fischer, 71, also said regulators must be attuned to the growth and evolution of the asset management industry after funds “that track the returns of indexes of relatively illiquid assets have mushroomed in size.” He cited funds of leveraged loans, credit default swaps, and other less liquid assets.

“We need to be alert to changes and trends in the financial system that may pose risks to financial stability, particularly those stemming from areas of the non-bank sector that are not subject to prudential supervision,” Fischer said.

Another danger is in parts of the non-bank financial system where regulators have a limited view, Fischer said. Regulators still need to get a “complete picture of the scope and size of hedge fund activities” and better data on the “vast derivatives market,” he said.