Federal Reserve Governor Daniel K. Tarullo gave a speech discussing the cross-border effects of the financial crisis, existing efforts to strengthen international regulatory coorporation, and the next steps toward advancing global financial stability. As to the causes of the financial crisis, Governor Tarullo pointed to (i) insufficiently high capital charges and a capital system that favored off-balance sheet activities such as the establishment of structured investment vehicles and (ii) a system of oversight that relied less on regulation than it did on supervision. He also discussed “shadow banking,” significant examples of which he said include “money market funds, the triparty repo market and securities lending.” The implication of his remarks was that all of these activities require stricter regulation.
Governor Tarullo then laid out several principles for deciding upon the agenda that should govern the efforts of various international organizations and committees. According to Governor Tarullo, (i) initiatives should be prioritized, and one point of emphasis should be completing and implementing the framework for containing “too-big-to-fail” risks associated with systemacally important firms; (ii) initiatives should be focused and manageable; and (iii) international efforts to develop new regulatory mechanisms should build on experience derived from national practice in one or more jurisdictions.
Governor Tarullo then suggested a number of short-term goals:
- Two ongoing initiatives should be completed over the next year: the proposal for a capital surcharge for systemically important banking organizations, and work on designating non-bank SIFIs;
- Regulators should build on the analytic work done by the Basel Committee to apply standardized credit and market risk capital measures to all internationally active banking firms; and
- A requirement should be proposed for large internationally active financial institutions to have minimum amounts of long-term unsecured debt, which would be available to absorb losses in the event of insolvency.
Lofchie Comment: This is one of those speeches that covers so much ground that its specific intent is not so clear. On one hand, Governor Tarullo seemed wary of traditional lending activities being conducted in the same organization as capital markets activities. On the other hand, he indicated that “large, free-standing investment banks” should be subject to “macroprudential regulation,” presumably meaning regulation, in the United States, by the Fed. Here is a link to another of Chairman Tarullo’s significant speeches in which he covers ground also discussed in this speech: Fed. Governor Daniel Tarullo on Industry Structure and Systemic Risk Regulation.
We also note that one of the Governor’s last major statements presaged the Federal Reserve Board’s proposal of major changes in the manner in which it would regulate non-U.S. banks doing business in the United States. See Fed Governor Daniel Tarullo Speech on Regulation of Foreign Banking Organizations (Very Significant Speech); FRB Releases Proposed Rules to Strengthen Oversight of U.S. Operations of Foreign Banks.
View speech in full here (links externally to Federal Reserve site).