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Bernanke Sees Need for More Curbs on Shadow Banking
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Bernanke Sees Need for More Curbs on Shadow Banking

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Bernanke Sees Need for More Curbs on Shadow Banking

Federal Reserve Chairman Ben S. Bernanke called on regulators to stem risks from “shadow banking” operating beyond traditional oversight and favored steps to promote the “resiliency” of money market funds.

“An important lesson learned from the financial crisis is that the growth of what has been termed ‘shadow banking’ creates additional potential channels for the propagation of shocks through the financial system and the economy,” Bernanke said today in a speech in Stone Mountain, Georgia.

Bernanke in prepared remarks also called for close tracking of financial innovation and backed curbs on intraday credit in tri-party repo markets. While not specifying what steps he favors to increase stability among money market funds, he referred to Securities and Exchange Commission proposals to require firms to maintain capital buffers or to redeem shares at the market value of underlying assets rather than at a fixed price of $1.

Congress under a 2010 regulatory overhaul known as Dodd- Frank mandated the Fed to safeguard stability partly by monitoring firms whose collapse may provoke turmoil across financial markets. The law is aimed at averting a repeat of the credit crisis that was triggered by the collapse of U.S. mortgage finance and deepened by the failure of Lehman Brothers Holdings Inc. in 2008.

“About three and a half years have passed since the darkest days of the financial crisis, but our economy is still far from having fully recovered from its effects,” Bernanke said in his only reference to the economy’s current condition. He didn’t refer to current monetary policy.

U.S. stocks fell today and yields on 10-year Treasuries slipped as job creation in the world’s biggest economy trailed estimates last week. The S&P 500 lost 1.1 percent to 1,382.20 at 4 p.m. New York time. Treasury 10-year yields fell to 2.047 percent from 2.054 percent on April 6.
‘Heavy’ Costs

“The heavy human and economic costs of the crisis underscore the importance of taking all necessary steps to avoid a repeat of the events of the past few years,” he said.

Bernanke used his remarks at the 2012 Federal Reserve (FDTR) Bank of Atlanta Financial Markets Conference to summarize the Fed’s progress in implementing the Dodd-Frank act and to highlight current challenges.

“Additional steps to increase the resiliency of money market funds are important for the overall stability of our financial system and warrant serious consideration,” he said.

The SEC is working on revamping rules for money market funds, as regulators have debated how to make the funds more stable since the 2008 collapse of the $62.5 billion Reserve Primary Fund, which triggered an industry-wide run by clients that helped freeze global credit markets.
Prevent Runs

The agency enacted changes two years later in an attempt to prevent runs, including new liquidity requirements, shorter maturity limits and enhanced disclosure mandates. SEC Chairman Mary Schapiro has called for further steps to fix “weaknesses” with the funds.

Bernanke, 58, also called on participants in the tri-party repo market to eliminate intraday credit, something an industry task force called on in 2010, he said.

“Although some progress has been made, securities dealers and clearing banks have yet to fully implement that recommendation,” Bernanke said. “Through supervision and other means, we continue to push the industry toward this critical goal.”

The Fed has been seeking to strengthen the tri-party repurchase agreement market, which almost collapsed in 2008 amid the demise of Bear Stearns Cos. and bankruptcy of Lehman Brothers.

In February, the central bank said it will increase oversight of efforts to protect the market for borrowing and lending securities after an industry group, the Tri-Party Repo Infrastructure Task Force, said more time was needed for it to meet goals for reducing risk.
Primary Dealers

Repos are transactions used by the Fed’s primary dealers for short-term funding and typically involve the sale of U.S. government securities in exchange for cash, with the debt held as collateral for the loan. Dealers agree to repurchase the securities at a later date, and cash is sent back to the lender, typically a money-market mutual fund.

In a tri-party arrangement, a third party, one of two clearing banks, functions as the agent for the transaction and holds the security as collateral.

Bernanke said that “data on the shadow banking sector, by its nature, can be more difficult to obtain” and so the Fed is “working with other agencies to create a comprehensive set of regulatory data on hedge funds and private equity
firms.”

Bernanke Sees Need for More Curbs on Shadow Banking - Bloomberg

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