Yellen prepares Wall Street for more wholesale funding rules from Fed

Tue Apr 15, 2014 9:13am EDT
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By Jonathan Spicer and Jason Lange

NEW YORK/ATLANTA (Reuters) - 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.   Continued...

U.S. Federal Reserve Chair Janet Yellen tours City Colleges of Chicago, College to Careers Program in Advanced Manufacturing at Daley College in Chicago, March 31, 2014. REUTERS/John Gress