Fed Gov. Tarullo Comments on Shadow Banking System
Many of the regulatory reform efforts—including the recently announced Basel III capital rules and the Dodd-Frank Act—have been aimed at large, regulated banking institutions, noted Federal Reserve Gov. Daniel Tarullo in a Sept. 17 speech. While there have been some important changes to the regulation of the shadow banking system, "more will need to be done in this area," he said. In particular, gaps still remain in critical areas such as money-market mutual funds, securitization, and repurchase transactions, also known as repos.
Speaking at the Brookings Panel on Economic Activity in Washington, D.C., Gov. Tarullo commented on a paper titled "Regulating the Shadow Banking System." The paper, by Yale University economists Gary Gorton and Andrew Metrick, proposes a new framework for the largely unregulated parts of the financial system.
Addressing information assymetry
Further, only NFBs would be allowed to buy securitized assets. Tarullo said the paper proposes that "the consequent franchise value would compensate NFBs for the costs they incur because they can hold only high-quality securities, are subject to supervision and prudential requirements, and have to operate in a highly transparent fashion."
Avoiding undue restrictions
While there are potential complications associated with the proposal, it will nonetheless continue to "shape our understanding of the role and risks of the shadow banking system, as well as … add a specific proposal to our menu of possible responses," said Tarullo.
September 28, 2010