Ten days ago, while discussing a macroprudential approach to regulation, Federal Reserve Board Governor Daniel K. Tarullo suggested the Board may invoke its authority under the Securities Exchange Act to propose margin rules for firms that are not subject to prudential regulation and who are active in the securities financing market. Tarullo further suggested a policy framework that builds on the traditional investor protection and market functioning aims of securities regulation by incorporating a systemwide perspective. “[T]his new form of regulation might start by strengthening some of the firm or fundspecific measures associated with those traditional regulatory aims, but then move forward to take into account such considerations as systemwide demands on liquidity during stress periods and correlated risks among asset managers that could exacerbate liquidity, redemption, and fire sale pressures. The specific policies associated with prudential market regulation might be transactionspecific, or apply to certain kinds of business models.” Tarullo Remarks.
The day before Tarullo’s speech, the International Monetary Fund published a study on the securitization market. The study suggests how the securitization process can be reformed to maximize benefits and minimize risks. It also addresses how to strengthen the chain of financial intermediation and what steps can be taken to spur demand. Specifically, the IMF recommends improving the loan origination process; resolving legal ambiguities related to the rights and obligations of servicers, trustees, and investors; establishing secure, transparent, and costeffective transfer of claims on collateral; standardizing risk definitions; and consistently applying capital charges across asset classes and borders.
In midJanuary, the Bank of England published a working paper entitled, “Do contractionary monetary policy shocks expand shadow banking?” Using data from the United States, the paper finds that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitization activity. Brigham Young University law professor Christine Hurt, blogging for Conglomerate, questions recent concerns that another securitization bubble, this one involving used car loans, may soon result in financial havoc. View the blog post here.
University of Iowa law professor Robert T. Miller summarized his recent article “The RMBS PutBack Litigations and the Efficient Allocation of Endogenous Risk Over Time” for the CLS Blue Sky Blog. Miller considers the role the statute of limitations plays in the efficient allocation of residential mortgagebacked securities risk. View the blog post here.