July 15, 2013 / 5:12 PM / 4 years ago

Fed's Tarullo says Glass-Steagall return not high on his list

WASHINGTON (Reuters) - A Federal Reserve official on Monday questioned the latest congressional plan to break up big banks, saying it is unclear whether such a move would prevent the next financial crisis.

Fed Governor Daniel Tarullo, who has been the agency’s point man on financial regulation, said regulators should instead crack down on short-term funding methods that leave banks susceptible to runs.

A group of U.S. senators, including Massachusetts Democrat Elizabeth Warren and John McCain, an Arizona Republican, unveiled a bill last week to bring back elements of a Depression-era law that divided commercial and investment banking.

The 21st Century Glass-Steagall Act comes amid a fierce debate over whether regulators have done enough to oversee banks seen as too big to fail. It would face a tough road to passage in a deeply divided Congress.

“My own sense is that I wouldn’t have this approach as high on my list,” Tarullo said of efforts to reinstate the divide. “For me, the priority is in short-term wholesale funding.”

Warren told reporters last week that banking should be “boring.” Glass-Steagall proponents say a firewall is needed to prevent risk taking Wall Street firms from relying on backstops such as the Fed’s discount window when they get in trouble.

Warren said regulators fell down on the job by allowing Glass-Steagall to be chipped away until its repeal in 1999 and re-implementing the divide would make the system safer.

Tarullo, who was asked about the proposal on Monday during a forum hosted by Politico, pointed out that many firms that failed during the 2007-2009 crisis were not commercial banks.

“There’s some question as to how much that separation would actually prevent the kinds of problems we saw from developing,” he said.

He said letting banks rely on repurchase agreements and other short-term funding played a bigger role in the downfall of investment firms such as Bear Stearns and Lehman Brothers.

Tarullo has spoken about this issue many times and said earlier this month that regulators planned to address short-term funding risks.

Tarullo also said it could help the economy to have banks that can provide many kinds of funding to clients, but not enough research has been done to determine what those benefits are or whether they exist.

Reporting by Emily Stephenson; Editing by Karey Van Hall and Andre Grenon

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