Fed’s Tarullo: Economists’ Plan Would Curb Securitization

Friday, 17 Sep 2010 04:12 AM

 

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Federal Reserve Governor Daniel Tarullo said a proposal by Yale University economists to charter a new type of bank to reduce financial-system risks may restrict the asset-backed securities market too much.

“While it is obvious that too much credit was created through ABS and associated instruments in the years preceding the crisis, it seems at least reasonable to question whether the best policy response is this dramatic a change in the regulatory environment,” Tarullo said today during a panel discussion in Washington.

Tarullo commented on a paper by Yale professors Gary Gorton and Andrew Metrick that says an overhaul of regulation this year doesn’t adequately address companies in the “shadow banking system.” The firms played a part in the credit crisis by converting risky assets such as subprime mortgages into seemingly low-risk, short-term securities.

The two economists propose reducing the risk of bank runs by creating a new category of banks that would buy all securitized loans and then issue their own debt to sell to investors.

The plan “would significantly restrict all asset-backed securitization,” Tarullo said in prepared remarks at the Brookings Institution, a public-policy research group. It “would require non-trivial changes in bank regulatory policy, as well as the significant extension of discount window access to a new kind of institution.”

Economic Outlook

Tarullo, 57, didn’t comment on the outlook for the economy or monetary policy. As a governor, he has a vote at each meeting of the Federal Open Market Committee, which gathers on Sept. 21 in Washington. Tarullo was appointed to the central bank by President Barack Obama in January 2009.

Tarullo is playing a lead role in overhauling the Fed’s supervision of financial firms after lawmakers including Senate Banking Committee Chairman Christopher Dodd said lax oversight by the central bank helped cause the financial crisis.

Gorton and Metrick said in their paper that the financial crisis was centered in the shadow banking system, which includes investment banks, money-market mutual funds and mortgage brokers. Regulation of the institutions was “light or non- existent.”

While new financial industry oversight “takes some important steps in the regulation of shadow banking, there are still large gaps where it is (almost) silent,” they said.

© Copyright 2014 Bloomberg News. All rights reserved.

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