Testifying before the Senate Banking Committee last month, Federal Reserve Board Governor Daniel K. Tarullo reemphasized the importance of a stable short-term wholesale funding market. Calling for strong consolidated supervision and regulation of all financial firms whose failure could pose a threat to that market, and the financial system as a whole, Tarullo discussed the need for increased transparency in the tri-party repo and securities lending markets. Tarullo Testimony.
Bloomberg News reviewed Tarullo's ongoing work on bank capital rules such as increasing leverage ratios, and his roles as chairman of the Standing Committee on Supervisory and Regulatory Cooperation at the Financial Stability Board, and member of the Financial Stability Oversight Council.
As noted by the Financial Times, efforts to stabilize the banking industry could have the unintended consequence of disrupting the repo markets. It discussed the concerns that have been raised over proposed bank capital rules and their potential effect on the repo market. Under the Basel Committee's most recent bank capital proposal banks will not be able to net their repo trades. As a result the cost of borrowing may go up.
In September, the European Commission is expected to adopt a communication on shadow banking and propose draft regulation on money market funds. Calling shadow banking systemically important, the communication will expand on the E.C.'s green paper on shadow banking published last year. E.C. Press Release.
According to EuropeanVoice.com, the E.C.'s communication will likely propose that funds which maintain a fixed share price should keep a cash buffer to protect them from runs and financial shocks, similar to EU requirements on banks to keep capital and liquidity.