Federal Reserve Governor Daniel K. Tarullo gave a speech discussing regulatory efforts to promote financial stability, including efforts to address the “too-big-to-fail” problem and systemic risk generally. Governor Tarullo noted that the existing regulatory response has been extensive, citing ongoing efforts such as the Basel III rulemaking, the Section 165 prudential regulation of large bank holding companies, and the implementation of Title VII of the Dodd-Frank Act as examples. Nevertheless, Governor Tarullo stated that current efforts do not adequately address all of the vulnerabilities that developed in the U.S. financial system in the years preceding the financial crisis. Most important, Governor Tarullo stated, is that relatively little has been done to change the structure of wholesale funding markets to make them less susceptible to damaging runs, especially with respect to security financing transactions. While Governor Tarullo acknowledged that there is no existing blueprint for addressing the basic vulnerabilities in short-term wholesale funding markets, he cautioned that a more comprehensive set of regulatory measures is necessary.
With respect to the too-big-to-fail problem, Governor Tarullo asserted that the “regularization and refinement” of stress testing may be the most important supervisory improvement to strengthen the resilience of large institutions. Additionally, although finalizing the Basel III rulemaking should be a priority, Governor Tarullo stated his belief that such measures do not go as far as he would like. He went on to discuss several additional potential regulatory reforms, including the possibility of imposing higher liquidity and capital standards, as well as that of tying liquidity and capital standards together by requiring higher levels of capital for large firms unless their liquidity positions are substantially stronger than minimum requirements.
Click here to view speech in full (links externally to FRB website).