On November 22, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech at the Americans for Financial Reform and Economic Policy Institute outlining a potential regulatory initiative to limit short-term wholesale funding risks.  This proposal could increase capital requirements for and apply additional prudential standards to firms dependent on short-term funding, with a focus on securities financing transactions (“SFTs”)—repos, reverse repos, securities borrowing/lending and securities margin lending.
Posts Tagged ‘Daniel Tarullo’
On May 3, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech outlining potential regulatory initiatives before the Peterson Institute for International Economics in Washington, D.C. In this speech, entitled “Evaluating Progress in Regulatory Reforms to Promote Financial Stability,” Governor Tarullo acknowledged that substantial progress has been made in achieving financial regulatory reform, but he maintains that much more is still needed. 
Even beyond the substantive impact of the reforms proposed by Governor Tarullo, his speech is particularly noteworthy for two reasons. First, Governor Tarullo oversees the Federal Reserve Board’s banking supervision and regulation function and was recently appointed as Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation. Second, in the past, Governor Tarullo has used similar speeches to forecast the Federal Reserve’s upcoming regulatory initiatives.
Governor Tarullo’s speech focuses on three general areas of increased regulatory scrutiny: (1) large financial institutions generally; (2) large financial institutions that rely on short-term wholesale funding; and (3) short-term wholesale funding markets, in particular those for securities financing transactions (SFTs). Governor Tarullo proposes a number of regulatory requirements to address what he perceives as the unfinished business of regulatory reform, including both macro- and micro-prudential requirements at an institution-specific level and market practice level.
In an unprecedented and provocative speech, Federal Reserve Governor Daniel K. Tarullo foreshadowed a proposal from the Federal Reserve Board that could fundamentally change the way foreign banks are regulated in the United States. As previewed, the proposal would require foreign banks with large operations in the U.S. to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would sit on top of all U.S. bank and nonbank subsidiaries. The IHC would be required independently to meet all U.S. capital and liquidity requirements as well as other enhanced prudential standards required by the Dodd-Frank Act. While the U.S. branches and agencies of a foreign bank would not be part of the IHC, they would be subject to “certain additional measures,” especially regarding liquidity. Governor Tarullo noted that the “all-important details” of the proposal are still under discussion and anticipated the release of a notice of proposed rulemaking “in the coming weeks.”
If the Federal Reserve actually adopts a proposal along the lines outlined in Governor Tarullo’s speech, it could have profound negative implications not only for the operations of foreign banks in the United States, but also for U.S. banking organizations doing business outside the United States. It would likely contribute and add fuel to the growing trend towards regionalization of global banking, thereby complicating and increasing the cost of providing cross-border banking services.
As one would expect of a piece of legislation that has sixteen titles and runs 849 pages in the Statutes at Large, the Dodd-Frank Wall Street Reform and Consumer Protection Act ranges widely in addressing problems both directly and indirectly associated with the financial crisis. Taken as a whole, though, the primary aim of those 849 pages can fairly be read as a reorientation of financial regulation towards safeguarding “financial stability” through the containment of “systemic risk,” phrases that both recur dozens of times throughout the statute. The law, explicitly in many provisions and implicitly in many others, directs the bank regulatory agencies to broaden their focus beyond the soundness of individual banking institutions, and the market regulatory agencies to move beyond their traditional focus on transaction-based investor protection.
This emphasis on financial stability and systemic risk is hardly surprising in light of the damage done by the financial crisis and the ensuing Great Recession, from which we continue to recover only slowly. Indeed, concern about financial stability and systemic risk has at times been a crucial impetus for financial reform in the United States. Much of the New Deal legislation that defined the financial regulatory structure for more than 40 years was in direct response to what we would today call systemic concerns, including banking panics and excessive leverage in equity markets. Twenty years before the New Deal, the creation of the Federal Reserve had been intended at least as much as a financial stability measure as an instrument of monetary policy.