US Federal Reserve considering adopting more measures to address lingering stability risks in short-term wholesale funding markets, saying new liquidity standards for global banking firms do not cover 'shadow' banks, financial system as whole

Cindy Allen

NEW YORK and ATLANTA , April 15, 2014 (Thomson Reuters Corp.) – The U.S. Federal Reserve is considering adopting yet more measures to address the remaining stability risks in the short-term wholesale funding markets that seized during the 2008 financial crisis, Fed Chair Janet Yellen said on Tuesday. In a video speech, Yellen praised new liquidity standards for global banking firms, but warned that they do not apply to so-called shadow banks or to the financial system as a whole.

The internationally adopted standards that will require lenders to hold separate buffers of cash and bonds "do not fully address the financial stability concerns associated with short-term wholesale funding," she said via video to a financial markets conference hosted by the Atlanta Federal Reserve.

"Federal Reserve staff are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets," Yellen said, adding that some of the measures could apply market-wide and not just to the largest banks.

She pointed to a study by the global Basel committee that considered tightening risk-based capital and liquidity requirements, and that suggested there would be net social gains from further reforms.

"While it would be a mistake to give undue weight to any one study, this study provides some support for the view that there might be room for stronger capital and liquidity standards for large banks than have been adopted so far," she said.

The global Basel rules, known as the liquidity coverage ratio (LCR) and net stable funding ratio (NSFR), are meant to help banks weather short-term funding crises.

While these rules are being phased in between 2015 and the start of 2019, the Federal Reserve has recently telegraphed that it could write extra requirements for banks that rely on sometimes risky funding sources.

Short-term credit seized up in the throes of the financial crisis, when investors fled firms such as Lehman Brothers and even money market mutual funds previously deemed super safe.

Last week, U.S. regulators including the Fed adopted a rule requiring the eight biggest banks to boost their capital levels by some $68 billion in total, part of efforts to prevent another crisis.

Yellen, who did not discuss the economy or monetary policy in her speech on Tuesday, said the new market-wide measures under consideration are, for example, minimum margin requirements for repurchase agreements, or repos. For only the largest banks, the Fed is considering additional capital and funding measures, she said.

"In designing such measures, we are carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation that will be discussed at this conference," the Fed chair said.

(Editing by Clive McKeef)

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