Tarullo Says Regulators Must Do More on Short-Term Funding

Federal Reserve Governor Daniel Tarullo said U.S. regulators should focus on protections around banks’ short-term wholesale funding as they finish implementing reforms prompted by the global financial crisis.

“The big area I think we need to do more on is short-term funding,” Tarullo, the Fed governor responsible for financial regulation, said today in Washington at an event sponsored by Politico’s “Morning Money.”

Tarullo said letting a bank lean heavily on transactions such as repurchase agreements could “make the institution and the system susceptible to runs” of the kind that toppled Bear Stearns Cos. and Lehman Brothers Holdings Inc. Fixing that vulnerability, which banks still face, is a more important goal for protecting the financial system than reinstituting the separation between commercial and investment banking, he said.

In response to a question about efforts by Senators Elizabeth Warren and John McCain to revive the Glass-Steagall Act, which separated banking functions, Tarullo said the Depression-era law wouldn’t have prevented the 2008 crisis because it was more about “short-term, runnable funding.”

Collateralized borrowing in the wholesale markets accounts for about 36 percent of funding at Goldman Sachs Group Inc. and Morgan Stanley, according to regulatory filings. That compares with 13 percent at Charlotte, North Carolina-based Bank of America Corp., where deposits account for a majority of funding.

Morgan Stanley and Goldman Sachs, both based in New York, have said secured funding is more stable than before the credit crisis because they have increased both the duration of their lending and the number of counterparties from which they borrow.

Binary Status

Financial regulators have done “a good bit” to combat the notion that some U.S. banks are too big to fail, Tarullo said today. Bank capital has more than doubled since the crisis, and new rules seek to keep it high.

Too big to fail isn’t a “binary status” where a bank either is or isn’t in the category, because the determination is contingent on what’s going on in the wider financial system at a given moment, Tarullo said.

“We still do need to do more to get to the point at which the risks posed by some of these institutions are confined to what we would think of as manageable proportions,” he said.

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