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From Banking and Finance Law Daily, October 24, 2016

Additional regulation of SIFIs and shadow banking 'may be forthcoming,' says Tarullo

By J. Preston Carter, J.D., LL.M.

More Dodd-Frank Act-related regulations "may be forthcoming," according to Federal Reserve Board Governor Daniel Tarullo, in remarks at Columbia Law School on Oct. 21, 2016. Tarullo’s speech—"Pedagogy and Scholarship in a Post-Crisis World"—was given at the Conference on the New Pedagogy of Financial Regulation.

Regulatory gaps. Tarullo told conference attendees that the financial crisis highlighted "two critical gaps" in the regulatory system: the inadequate prudential regulation of the most systemically important financial institutions (SIFIs) and the sometimes nonexistent prudential regulation of the many activities now denominated as "shadow banking."

SIFIs. Tarullo noted that the SIFI issue was at the center of some of the most notable provisions of the Dodd-Frank Act. "It seems reasonably clear," he said, "that teaching and scholarship should highlight the SIFI problem, appraise the regulatory approach toward such institutions since the crisis, and consider alternatives."

Tarullo acknowledged that an appraisal of whether more or fewer measures are needed "will be a little challenging." Some measures, including stress testing, capital requirements, and resolution planning, "are still in train," and others may be forthcoming, he added, as a result of the research program the Fed is launching to consider the potential for additional explicitly macroprudential features in capital and liquidity stress testing.

Shadow banking. Tarullo said the other major vulnerability revealed by the financial crisis was systemic risk that may be created through so-called shadow banking activities, which he defined as credit intermediation outside the prudentially regulated banking system. However, he noted that many shadow banking channels passed through prudentially regulated institutions, "as with the notorious structured investment vehicles and asset-backed commercial paper conduits."

According to Tarullo, changes in accounting, bank capital, and liquidity requirements have done a great deal to guard against a recurrence of such patterns in the future, though "continued monitoring will be needed to prevent the development of other forms of support that elude these regulatory measures." He said it will be essential to "disaggregate" shadow banking activities in order to regulate those that pose risks to the financial system while not unduly burdening forms of credit extension that may help meet the savings and investment needs of households and businesses.

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