WASHINGTON Feb 19 The short-term lending market
is in need of reform to improve its transparency, a top U.S.
regulator said on Wednesday, saying that the lack of public
information on how much financial firms rely on such borrowing
could lead to another financial crisis.
"We should be doing more to improve large financial firms'
disclosures about how reliant they are on short-term funding,
and how susceptible they may be to liquidity crises," Kara
Stein, a Democratic commissioner at the Securities and Exchange
Commission, said in an interview with Reuters.
"Improving disclosures about short-term funding will empower
the markets to help prevent the next liquidity crisis," said
Stein, who joined the SEC last summer.
The short-term lending market is a part of the financial
sector known as "shadow banking," a loosely defined set of
lending activities that occur outside of banks.
In securities lending arrangements, mutual funds, insurance
companies and other large investors typically lend out their
securities to earn extra money.
Brokerages such as Goldman Sachs or Morgan Stanley
borrow those securities and then pledge them as
collateral to money market funds in exchange for cash, in a
financing transaction known as a "repurchase" or "repo"
During the financial crisis, the short-term lending market
temporarily dried up after Lehman Brothers collapsed, stoking
fears among banks and decreasing lending activity.
Money market fund investors who had exposure to Lehman and
other banks fled for the exits, causing one prominent fund to
"break the buck" -- meaning that its net asset value dropped
below $1 a share -- and prompting the federal government to
offer a financial backstop for money funds to stop the bleeding.
The 2010 Dodd-Frank Wall Street reform law does little to
address risks to the short-term lending market. Stein's comments
come as several regulators including the SEC and the Federal
Reserve are eyeing their own reforms.
The Fed is drafting a proposal that would force banks that
rely on such short-term funding to hold more capital. Federal
Reserve Governor Dan Tarullo has often spoke about the need for
more oversight to protect against runs on banks.
The SEC, meanwhile, is working to complete a rule that aims
to reduce investor run-risk on money market funds.
One option on the table is to force some prime money market
funds to have their share prices float, rather than stay fixed
at a dollar per share.
In addition, the Office of Financial Research, which was
created under the Dodd-Frank law to do more sophisticated
monitoring of the financial system, recently raised concerns
about systemic risks that could be posed by securities lending
and other short-term borrowing activities.
"Lack of data related to securities lending transactions and
the reinvestment of cash collateral limit the effective
monitoring of securities lending activities," the office wrote
in its 2013 annual report.
Stein did not describe how a final money market fund rule
should be drafted.
However, she said the rule targeting fund run risk is "just
one part of the short-term lending market" and should not be all
that regulators do in this space.
She urged the SEC to work more closely with other regulators
on the issue.
"We need to be thinking about other parts of this market
that should be reformed to prevent another financial crisis,"
"The SEC oversees the broker-dealers who are integral to
securities lending and the corporate issuers doing the
borrowing, so we need to be working with our fellow regulators
to address the risks of short-term funding."