A top U.S. regulator said Monday that additional regulation will be needed to address threats to the financial system originating outside Wall Street banks.
“[W]e should expect further reforms will certainly be needed down the road,” Federal Reserve vice chairman Stanley Fischer said in prepared comments for a conference in Stone Mountain, Georgia.
He suggested that a forthcoming rule targeting the eight largest U.S. banks could also be applied to non-banks considered systemically important. The rule, which has not yet been proposed in the U.S., would require banks to finance themselves using certain levels of equity and debt that could easily be written down in the case of an emergency to prevent sparking a disorderly collapse.
“We must remain vigilant for changes in the system that increase systemic risk, and we should make appropriate changes to regulation and the structure of regulation as necessary,” Fischer said.
Fischer warned last week that regulation of non-banks is a “cat-and-mouse game,” with firms incorporating themselves outside of regulators’ authority to avoid rules.
The so-called shadow banking sector, which includes all finance outside of banks with insured deposits, accounts for roughly two-thirds of all credit assets in the U.S., Fischer claimed.
Shadow banks include large insurance firms, government-sponsored-enterprises like Fannie Mae and Freddie Mac, hedge funds and other asset managers, and other financial firms.
Under the 2010 Dodd-Frank financial reform law, regulators have the authority to identify firms and activities they consider “systemically important” — that is, potential threats to the financial system if they fail — and to impose more stringent regulations on them.
The Financial Stability Oversight Council, the body of regulators entrusted with determining which firms meet those criteria, has designated four firms as systemically important: The finance arm of General Electric, and the insurers Prudential, MetLife, and American International Group.
The Council is currently investigating the possibility of stepped-up regulations of asset managers, a process Fischer said Monday was part of the response to evolving dangers to the financial system. The Federal Reserve is represented in the Council by chairwoman Janet Yellen.
Firms have resisted the additional regulations to various degrees, claiming that they will raise the cost of doing business for their customers.
Fischer did not comment on monetary policy or the economy in his remarks.
