Fed’s Daniel Tarullo says shadow banking creates risks

SAN FRANCISCO, Tue Jun 12, 2012 – A top Federal Reserve official on Tuesday renewed a call for tighter rules governing the so-called shadow banking system, in which financial firms exchange large amounts of cash, to prevent a repeat of the panic that provoked the financial crisis of 2007-2009.

Fed Governor Daniel Tarullo did not comment on the outlook for the economy or monetary policy in the speech, which covered similar ground to remarks he made last month.

Tarullo said that despite financial reforms, the shadow banking system has the potential to destabilize the broader financial system.

“The shadow banking system … has only been obliquely addressed, despite the fact that the most acute phase of the crisis was precipitated by a run on that system,” Tarullo told a conference organized by the San Francisco Fed.

In the wake of the crisis and the painful recession that followed, the Fed has taken on a bigger role in financial oversight and Tarullo has been a leading voice on the topic.

He said regulators and scholars need to do more work on financial institutions that behave like banks but are outside the scope of bank regulators.

“We should act now to address some obvious sources of vulnerability in the financial system,” he said.

Tarullo repeated his support for proposals to bolster the soundness of money market mutual funds. He endorsed a suggestion that supervisors set limits on banks’ reliance on funding provided by money market funds.