Federal Governor Daniel Tarullo said global financial regulators needed to have more policy tools at their disposal, as well as powers over hedge firms like hedge funds. These would reportedly enable the watchdogs to protect against the risk that a run on investment banks can cause. In a conference with other regulators, Tarullo gave more details of plans of the US central bank to require lenders to have more capital should they raised short-term cash mostly from other banks.
However, Tarullo said more should be done by global regulators. He said they should not only focus their attention on banks since the risks that could lead to their downfall can often be found in the shadow banking system. Shadow banking loosely refers to non-bank lending activities.
Tarullo said, "There is a need to supplement prudential bank regulation with a third set of policy options in the form of regulatory tools that can be applied on a market-wide basis." According to a Reuters report, shadow banking is a largely unregulated industry despite the fact that it was crucial to the fall of Lehman Brothers in the 2008 financial crisis.
Tarullo said the Federal Reserve intends to make raising cash from short-term wholesale funding markets less attractive to banks by requiring them to add more in their capital than what was required by the international Basel III agreement. Tarullo said the amount of funds that would be needed to serve as the buffer for the banks can be arrived at by computing the bank's total liabilities and subtracting the regulatory capital, deposit and obligations with a maturity that is longer than a given minimum. The computation may also take into consideration the funding source's level of risk.
In addition, he also said international regulators should also think about imposing a surcharge on the lender's exposure to the repurchasing or repo markets since this is a very major part of shadow banking.
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