Fed Aims Further Probe into Banks’ Books

Daniel Tarullo, governor on the Federal Reserve Board, testified before a US Senate committee that regulators should have access to higher quality data when monitoring financial institutions and systemic risks to the US economy. Tarullo spoke before the Senate Committee on Banking, Housing and Urban Affairs. He said the Federal Reserve is collecting additional loan-level data on firms’ risk-management systems to give supervisors insight on the concentration of risk and the interconnectedness of the firms. Specifically, he said, the Fed is aggregating data on banks’ largest exposures to larger banks and other institutions. The Fed is doing similar data gathering on securitization risk exposures. “Our experiences with supervision, monetary policy, and financial market monitoring suggest that market data gathering and market oversight responsibilities must continuously inform one another,” Tarullo said. He added that the Fed is looking to change information requests from supervised firms as it develops new analytical tools. At the moment, it is exploring how to develop better measures of leverage and maturity transformation. A key feature in the recent economic crisis was the reliance on short-term sources of capital to purchase long-term assets. The relationship between the maturity structure of the firms’ assets and liabilities became uneven. Although regulators have been monitoring these levels since the Great Depression, in recent years the practice grew exponentially. “Our ability to monitor the size and extent of maturity transformation has been hampered by the lack of high-quality and consistent data on these activities,” Tarullo said. “Better data on the sources and uses of maturity transformation outside of supervised banking organizations would greatly aid macro-prudential supervision and systemic risk regulation.” Going ahead, he said, the Fed would require more frequent data from the firms than the usual quarterly reports. “We envision developing a robust set of key indicators of emerging risk concentrations and market stresses that would both supplement existing supervisory techniques and assist in the early identification of early trends that may have systemic significance and bear further inquiry,” Tarullo said. Write to Jon Prior.

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