Fed's Tarullo says bank funding still biggest risk

WASHINGTON Fri Oct 18, 2013 1:10pm EDT

Federal Reserve Board Governor Daniel Tarullo gestures as he testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on ''Mitigating Systemic Risk Through Wall Street Reforms'' on Capitol Hill in Washington July 11, 2013. REUTERS/Yuri Gripas

Federal Reserve Board Governor Daniel Tarullo gestures as he testifies before a Senate Banking, Housing and Urban Affairs Committee hearing on ''Mitigating Systemic Risk Through Wall Street Reforms'' on Capitol Hill in Washington July 11, 2013.

Credit: Reuters/Yuri Gripas

WASHINGTON (Reuters) - Reforming short-term funding markets in which banks finance large parts of their business, remains the biggest unfinished job for supervisors around the world, a top U.S. bank regulator said on Friday.

"The most important systemic vulnerabilities that have not been subject to sufficient regulatory reforms are those created in short-term wholesale funding markets," U.S. Federal Reserve Governor Daniel Tarullo said in a speech.

A mechanism to keep troubled banks afloat - which was set up after the 2007-09 financial crisis - was a good way to wind down large and risky firms without having to ask taxpayers for billions of dollars of support, Tarullo said.

But the so-called orderly liquidation authority was at the same time an untested procedure that still needed work and it was better to shore up banks' own safety buffers by telling them to borrow less and hold more cash.

The Fed was doing its bit to help the Federal Deposit Insurance Corporation - the agency responsible for such rescue operations in times of crisis - to make the orderly resolution authority credible for market participants.

It would issue a proposal requiring the largest banks to hold minimum amounts of long-term, unsecured debt at the holding company level "in the next few months," Tarullo said, a further buffer against creditor losses.

The Fed had already announced it was working on this rule, in conjunction with three others to shore up banks' health. One of those will force banks that are heavy users of short-term funding markets to hold more capital.

One issue with the orderly liquidation authority that needed addressing were problems occurring when a bank had operations in more than one country, Tarullo said.

(Reporting by Douwe Miedema; Editing by Andrea Ricci)

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/
Comments (1)
Bugzy wrote:
How can banks need so much help when they actually engaged in fraudulent activities which only results in fines. The government helps the banks via taxpayer money, the banks rip taxpayers off, foreclose their homes, inflate prices. Then the government fines the banks, the FED gives them license to make easy money with 0% interest rate. They inflate prices, then orchestrate a collapse. The banks manufactured the 2008 crisis

Oct 18, 2013 1:53pm EDT  --  Report as abuse
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

Recommended Newsletters

Reuters U.S. Top News
A quick-fix on the day's news published with Reuters videos and award-winning news photography and delivered at your choice of one of four times during the day.
Reuters Deals Today
The latest Reuters articles on M&A, IPOs, private equity, hedge funds and regulatory updates delivered to your inbox each day.
Reuters Technology Report
Your daily briefing on the latest tech developments from around the world from Reuters expert tech correspondents.