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Tarullo: Fed Will Monitor for Risk Migration to Shadow Banks

Federal Reserve Board Member Daniel Tarullo stated that the Federal Reserve will continue to monitor whether bank regulation could lead to increased risk in other areas of the economy during a question and answer session at the Institute of International Finance on Saturday. However, Tarullo noted that the focus should be on the actor and not necessarily the activity as he acknowledged that the same activities may not pose the same risks for banks and non-banks. According to Tarullo, “when activity does seem to migrate from regulated institutions to the unregulated sector, central banks and regulators need to ask themselves the question as to whether there is, in fact, a set of systemic risks roughly comparable to those that existed when the activities were in the large institutions.” Tarullo noted that the Federal Reserve would concentrate on other aspects (such as funding structures and total leverage) of the firm to which the activity migrated to determine if they are susceptible to bank-like runs as well as “correlated asset holdings” among non-banks. Tarullo argued that the activity can migrate in a “healthy way” or “a way that is just going to repeat a vulnerability."