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Thursday, October 11, 2012

Tarullo on Financial Stability Regulations

Federal Reserve Governor Daniel Tarullo spoke at the University of Pennsylvania Law School on financial stability regulations, primarily the Dodd-Frank Act and its effect on financial stability.
Dodd-Frank creates a legal and institutional framework within which financial stability regulation is to be developed but, with a couple of notable exceptions, it does not delineate the steps that should actually be taken to promote financial stability.

The necessarily somewhat extemporized character of Dodd-Frank has had several consequences for the development of financial stability regulation.

First, many of the new authorities and requirements of Dodd-Frank require extensive elaboration through administrative rulemaking, often coordinated or agreed among three or more agencies.

Second,…the provisions of the law that use the concept of risk to financial stability as a directly applicable legal standard provide only general guidance for regulators in applying that standard.

Third, broad as Dodd-Frank is in some respects, it does not grant direct regulatory authority in some areas that academic and agency analysis suggests may pose systemic risk.

Finally, the law made important institutional changes, creating novel governmental entities specifically designed to address financial stability, and binding existing agencies more closely together in their rulemaking and supervisory activities. The relationships among existing agencies and the evolving practice of these new entities may in turn pose some novel practical and administrative law issues.
Tarullo also spoke of the money market mutual funds market, noting it was unfortunate the SEC has not begun to form new regulations and rules for the market. Tarullo noted the money market funds remain a threat to financial stability and that having the Financial Stability Oversight Council (FSOC) or the Federal Reserve step in to regulate the market would be a worse option for all involved.

FSOC could designate money market funds as systemically important and thus subject the market to the prudential requirements under the Dodd-Frank Act.

Read Tarullo’s full speech.

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