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Expanding bank-like regulation to a wider range of firms could lead to risk-taking decline or a false sense of security, Assistant Secretary David Nason said. “Both of these outcomes are unattractive”, he said. “But so is the status quo. Change, in one form or another, is likely to come.”
Speaking on the Treasury’s Blueprint at Chatham House, he also made clear that “the traditional toolbox of monetary policy and the regulatory framework associated with financial institutions might not be well-suited to deal with transmission of financial shocks to the real economy in today's financial markets.”
“We recommended recasting the role of the Federal Reserve as our market stability regulator to expand its assessment and authority over potential risks in the overall financial system”, he said.
For the near term some decisions seem clear, Nason said. “If firms have permanent access to a government backstop, then these firms need to be regulated in the same way as all other institutions that have access to this backstop”, he said. “Similarly, as our markets have gotten more inter-connected, it is necessary to have some type of oversight to ensure that broader issues of market stability are considered adequately.”
The possible new role of the Fed as a ‘market stability regulator’ would focus counterparty risk exposures, the operation of market structures, as well as asset exposures and overall risk management practices, Nason said.
The new regulator must have access to detailed information from all types of financial institutions, he noted. It “should have the authority to require additional disclosure by financial institutions so that market participants can better evaluate their risk profiles”, he said.
Nason went on to propose that the ‘market stability regulator’ could also “publish aggregate information to highlight issues and trends associated with potential risk exposure … to provide a clear signal to market participants and other regulators that the market stability regulator has identified some potential problems that should be addressed.”
Speech Nason on Treasury's Blueprint