Yellen Prepares Wall Street for More Wholesale Funding Rules from Fed

The Federal Reserve is mulling additional regulations on banks to ensure that short-term wholesale fund markets don’t freeze up again like they did at the beginning of the 2008 financial crisis, Fed Chair Janet Yellen said Tuesday. In prepared remarks during a teleconference, Yellen focused on liquidity issues in banks, a problem that has been partially addressed by raising international standards for the amount of capital banks need to keep in reserves. But more needs to be done because the new international standards “do not fully address the financial stability concerns associated with short-term wholesale funding.” Specifically, the new regulations have targeted the world’s largest banks -- JPMorgan Chase (JPM), Bank of America (BAC), Citigroup (C), for example -- but not all lending institutions, Yellen explained. Other measures might be needed to address concerns for other types of lending institutions. “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 new measures being considered could be applied on a market-wide basis. Those additional measures might include minimum margin requirements for repurchase agreements and other securities financing transactions, according to Yellen. “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,” Yellen said. In the wake of the financial crisis, new regulations known as the Basel rules have been established raising capital levels to ensure that banks have enough cash on hand to weather another crisis. These regulations are being implemented between 2015 and 2019. The Fed has said additional measure may be needed, however, to safeguard against banks that rely heavily on short-term funding. Short-term credit markets froze in 2008 when investors pulled their money from lenders such as Lehman Brothers, setting off a domino effect in which many financial institutions were unable to pay their debts. 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.
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