Fed Tarullo outlines key components of legislative agenda for systemic risks
08 June 2009
Fed Governor Tarullo during his speech focused on the Framing of a Post- Crisis Regulatory Programme.
Fed Governor Tarullo during his speech pointed out that bank holding company supervision was principally focused on protecting the commercial bank within the holding company. There was probably too little attention to the risks faced, and created, by the entire holding company, including the affiliates principally involved in trading and other capital market activities. By dividing supervisory authority for holding company affiliates among a number of supervisors based on their charter or activity, that law elevated the concept of "functional regulation" to the potential detriment of a more effective form of consolidated supervision. But it was also the case that not enough supervisory scrutiny was given to the risks associated with securitization, the common exposures of different affiliates, and the implications of the massive growth of off-balance-sheet assets for safety and soundness. Indeed, supervisors sometimes seemed themselves to under appreciate the importance of reputational risk, which to some degree undermined the entire concept of an off-balance-sheet asset.
Part of his speech was focused on the Framing of a Post- Crisis Regulatory Programme where he highlighted three main areas where the regulatory agencies should response:
- the agencies should adjust their policies and practices in light of the lessons learned from examination of past shortcomings or of new problems revealed by the crisis;
- the Fed should contribute to the discussion of possible Congressional initiatives that could provide useful new legislative authorities to help contain systemic risk and the problem posed by institutions that are too-big-to-fail; and
- the Fed should be developing ideas and proposals that are not appropriate for adoption now--and, indeed, may never be-but are worthy of consideration to inform the debate on policy alternatives.
He concluded by saying that even thought there are a number of thoughtful commentators that, given the continuing difficulties in credit markets, affirm that there is not a need to rush on the reform our regulatory system, he thinks that we must get reform right and believes it is essential to move forward now. History shows that opportunities for real reform are often short-lived. Momentum can too easily be lost, and the return of better times too easily leads to complacency. “If we are to spare the next generation the pain and loss caused by a financial crisis, we must not only learn lessons. We must act on them.”
© Federal Reserve
