Fed Toughens Up Short Term Debt Funding

The Federal Reserve plans to curtail banks’ reliance on short-term debt funding, and its capital surcharges for the biggest banks will be tougher than globally agreed rules, a top Fed official says.

In his clearest statement of the Fed’s plans so far, Governor Dan Tarullo said the central bank is working on three different sets of measures after unreliable funding became a major cause of the 2007-09 financial crisis.

“We believe that more needs to be done to guard against short-term wholesale funding risks … volumes are still large relative to the size of the financial system,” Tarullo said in notes prepared for testimony at a hearing in the Senate Banking Committee on Tuesday with other regulators.

Wholesale funding markets, in which banks lend each other money for short periods, sometimes lasting only days, were a key factor in the demise of investment bank Lehman Brothers, when panic quickly spread at the height of the 2007-09 crisis.

The Fed will require the largest banks, which are identified as so-called systemically important financial institutions, to hold more equity capital proportionally to the amount they rely on short-term funding, Tarullo said.

via CNBC

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