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The financial crisis has highlighted that risks to the financial system can arise not only in the banking sector, but also from the activities of financial firms that traditionally have not been subject to the type of consolidated supervision applied to bank holding companies, US Fed Governor Daniel Tarullo said before the US Senate Committee on Banking.
“Turning to the reach of consolidated supervision, the Board believes there should be statutory coverage of all systemically important financial firms”, he said.
The concept of companies being too-big-to-fail has caused unintended consequences in the past. Therefore, tools have to be developed and improved “to allow the orderly resolution of systemically important non-bank financial firms”, Tarullo said. This will include a mechanism to cover the costs of the resolution if government assistance is required to prevent systemic consequences, he outlined.
Tarullo also called for additional statutory authority for the Fed to address the potential for systemic risk in payment and settlement systems. “A good case can be made for granting the Federal Reserve explicit oversight authority for systemically important payment and settlement systems”, he said.
With regard to the discussion on a systemic risk authority, its role should be to complement that of a firm's consolidated supervisor. This authority would focus on the stability of systemically critical financial institutions, but would also “need some role in the setting of standards for capital, liquidity, and risk-management practices for financial firms”, Tarullo outlined.