UPDATE:=Fed's Tarullo Calls For Strategy To Contain Risk
March 19 2009 - 10:43AM
Dow Jones News
Federal Reserve Board Governor Daniel K. Tarullo told lawmakers
Thursday he believes a new systemic-risk regulator should
complement and not trump existing regulators' day-to-day oversight
of large financial institutions.
In prepared testimony before the Senate Banking Committee,
Tarullo laid out the Fed's latest thinking on how Congress should
rewrite the country's financial regulatory framework.
"It seems most sensible that the role of the systemic risk
authority be to complement, not displace, that of a firm's
consolidated supervisor," Tarullo said. "Under this model, the
firm's consolidated supervisor would continue to have primary
responsibility for the day-to-day supervision of the firm's
risk-management practices, including those relating to compliance
risk management, and for focusing on the safety and soundness of
the individual institution."
In addition to the creation of a systemic risk regulator,
Tarullo said other steps must be taken to ensure the safety and
soundness of large non-banking institutions. This should include
broadening existing framework of consolidated supervision over
banking institutions to large non-banking firms as well, he
said.
"The board believes there should be statutory coverage of all
systemically important financial firms - not just those affiliated
with an insured bank as provided for under the Bank Holding Company
Act of 1956," Tarullo said.
"The current financial crisis has highlighted a fact that had
become more and more apparent in recent years - 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."
Tarullo's comments Thursday come as Congress is gearing up to
restructure the country's financial regulatory framework. Some
lawmakers are seeking to dub the Fed the new systemic risk
regulator, but critics fear that doing so may give one agency too
much power and may also hinder the Fed's ability to set monetary
policy.
Tarullo on Thursday reiterated comments made earlier this month
by Fed Chairman Ben Bernanke, saying it would make sense for the
Fed to play some type of role in overseeing systemic risk.
Tarullo also repeated the Fed's call for a mechanism to wind
down financial companies other than banks if they pose dramatic
risks to the economy.
"The United States needs improved tools to allow the orderly
resolution of systemically important nonbank financial firms,
including a mechanism to cover the costs of the resolution if
government assistance is required to prevent systemic
consequences," he said.
Among other areas where the Fed has cited the need for
additional risk oversight is in the over-the-counter derivatives
market. The Fed has played a leading role in working with the
private sector and other regulators to develop centralized clearing
for credit-default swaps, an exotic financial instrument that many
say contributed to the near-downfall of American International
Group Inc. (AIG).
The Fed will serve as the primary regulator for
IntercontinentalExchange Inc.'s (ICE) new clearinghouse, but
Tarullo said he believes Congress needs to extend the Fed's
authority over payment and settlement systems.
"Currently, the Federal Reserve relies on a patchwork of
authorities, largely derived from our role as a banking supervisor,
as well as on moral suasion to help ensure that critical payment
and settlement systems have the necessary procedures and controls
in place to manage their risks."
-By Sarah N. Lynch and Maya Jackson-Randall, Dow Jones Newswires; 202 862-6634; sarah.lynch@dowjones.com