Issues related to non-bank financial credit intermediation continue to be hotly debated. Ten days ago, the Federal Reserve Bank of New York held a conference on the tri-party repurchase market. In his opening remarks the President of the Bank, William Dudley, discussed the primary issue which must be addressed, the risk that a dealer's loss of access to tri-party repo funding could precipitate asset fire sales, whether by the dealer itself or by the dealer's creditors following a default. Dudley warned: "if industry is unable to play its role in achieving a holistic solution, regulators may find themselves forced to employ the specific policy tools at their disposal in their respective purviews to address the fire sale risk." View the text of Dudley's remarks here.
Federal Reserve Board Governor Jeremy Stein suggested ways by which fire sale risk could be reduced. He posed for consideration capital surcharges, modifications to the liquidity regulation framework, and universal margin requirements. View the text of Stein's remarks here.
The Financial Times discussed other alternatives to address the risks posed by the tri-party repo market including a repo resolution authority and the creation of a repo clearing utility.
Money market funds are of course the other principal "shadow banking" market which concerns regulators. As was noted last week, the Treasury Department's Office of Financial Research delivered a report to the Financial Stability Oversight Council on ways that activities in the asset management industry might create, amplify, or transmit stress through the financial system. The report, "Asset Management and Financial Stability," identifies industry activities that, it believes, could pose risks to the financial stability of the United States. The SEC took the unusual step of opening a webpage where public comments on the report can be submitted. Reuters reported that the SEC opened the webpage in part to allow industry participants to express their objections to the report. Citing unnamed sources, Reuters further said some in the SEC believe that the report's authors simply do not understand the industry.
The Federal Reserve Bank of New York has also joined the fray. It posted a blog entitled "Twenty-Eight Money Market Funds That Could Have Broken the Buck: New Data on Losses During the 2008 Crisis." The International Financing Review summarized a paper which studied the consequences of prohibiting asset managers from using derivatives. The paper concluded that such a ban would lower fund performance and choice, and increase risk.
