Yellen Sets No Deadline on Short-Term Wholesale Funding Fix

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WASHINGTON — Federal Reserve Board Chair Janet Yellen on Wednesday offered few clues when regulators would move ahead with issuing a proposal to address risks tied to short-term wholesale funding.

"I'm afraid I can't give you a detailed timetable when we will move forward with that rule," said Yellen at a press conference following a two-day Federal Open Market Committee. She declined to say if a proposal could be unveiled before the end of this year.

Instead, she once again gave her public support for taking "some action to diminish the incentives for heavy reliance on short-term funding."

"We still see that as one of the risks to the financial system that wasn't really addressed in the risk-based capital requirements that we put out, or in the liquidity coverage ratio that's out for proposal," said Yellen.

She also echoed one approach that has been aired by Fed Gov. Daniel Tarullo to impose a capital requirement tied to a bank's use of wholesale funding.

Yellen has previously endorsed applying higher capital requirements on the largest banks to stem potential risks, while also suggesting that the scope of regulatory tools available aren't sufficient to deal with concerns.

Top Fed officials have been making the case since 2012 to reform short-term wholesale funding markets to eradicate a key vulnerability in the financial system that allowed runs to occur during the 2008 financial crisis.

But no specific time frame has been offered by regulators, except to say an initial proposal would be coming out "soon."

Short-term wholesale funding markets provide financial intermediaries with funds that supplement retail deposits and long-term debt issuance. Such funds include large time deposits, certificates of deposit, repurchase agreements, and commercial paper.

The Dodd-Frank Act did not specifically address continued risks related to the so-called shadow banking system, which has typically fallen outside of the bounds of regulation. But regulators have been pushing aggressively to address supervisory gaps when it comes to tri-party repo markets and short-term wholesale funding to prevent potential fire sales from ever crippling the financial system again.

Both the Financial Stability Oversight Council, headed by Treasury Secretary Jack Lew, and the Office of Financial Research have made the issue a top priority of the 2014 reform agenda.

The FSOC is planning to hold a closed session meeting on June 24 on the short-term wholesale funding market, according to a meeting notice.

The Fed has already spent considerable time weighing additional measures they could roll out to address risks tied to the short-term wholesale funding markets.

In April, Yellen said Fed staff are "actively considering" additional measures that could be used to fix the problem.

"Some of these measures — such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding — would likely apply only to the largest, most complex banking organizations," Yellen said.

Additionally, to capture risk elsewhere, other measures, like minimum margin requirements for repurchase agreements and other securities financing transactions, could apply broadly on a marketwide basis.

Yellen has said the Fed is "carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation."

The central bank's liquidity injection has often been an overlooked intervention by policymakers, and thus far, an unresolved aspect of the reform effort.

Former Fed Chairman Ben Bernanke has previously said such liquidity injections were "at least as important, if not more important," actions regulators took to stabilize the financial system — a sentiment that Yellen has echoed.

"Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover," she said.

Tarullo has gone so far as to say it would be premature to call victory on the financial reform effort if regulators failed to address risks to short-term wholesale funding.

"This is the major problem that remains, and I would suggest that additional reform measures be evaluated by reference to how effective they could be in solving it," he said in a speech in May.

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