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In his last speech as Federal Reserve Board chairman, Ben Bernanke said the central bank's steps to support wholesale funding markets were "as important, if not more important" than other actions taken during the crisis.
January 16 -
The Federal Reserve Board is due in 2014 to unveil an initial plan to clamp down on risks tied to financial institutions' reliance on short-term wholesale funding.
December 27
WASHINGTON Federal Reserve Board Chair Janet Yellen said Tuesday that the largest banks need to face higher capital requirements to stem potential risks to the financial system.
While much work has been achieved by both international and U.S. regulators in finalizing a global framework for capital and liquidity rules known as Basel III, such efforts still fall short of addressing financial stability concerns tied to short-term wholesale funding, she said.
Yellen said standards like the liquidity coverage ratio and the net-stable funding ratio, two separate short- and long-term liquidity requirements, only apply to internationally active banks and do not directly address shadow banking, even though the "liquidity shocks within the shadow banking system played a major role in the crisis."
"Furthermore, the current versions of the LCR and NSFR do not address financial stability risks associated with so-called matched book securities financing transactions," she told a Financial Markets Conference in Atlanta.
The Fed has already spent considerable time weighing additional measures they could roll out to address risks tied to the short-term wholesale funding markets. Fed officials have suggested such proposals will be coming soon.
Regulators have remained concerned that the current set of reforms of the banking system has been insufficient in addressing the financial stability risks that were seen during the 2008 financial crisis. Yellen cited runs by short-term creditors from firms like Northern Rock, Bear Stearns, and Lehman Brothers and from other money market mutual funds and asset-backed commercial paper programs.
"Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover," she said.
Yellen said Fed staff are "actively considering" additional measures that could be used to fix the problem.
"Some of these measures such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding would likely apply only to the largest, most complex banking organizations," Yellen said.
Additionally, to capture risk elsewhere, other measures, like minimum margin requirements for repurchase agreements and other securities financing transactions, could apply broadly on a marketwide basis.
Yellen said the Fed is "carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation."
The Fed chair cited a 2010 study by the Basel Committee on Banking Supervision as "some support" to go beyond capital and liquidity standards that have already been adopted.
"Tightening risk-based capital and liquidity requirements would, on net, provide economic benefits," she said.
