NEW YORK, Nov 20 (Reuters) - The United States may need to do more to “consolidate” the steps already taken to safeguard the financial system from damaging runs that sap liquidity and threaten the economy, the Federal Reserve’s top bank regulator said on Thursday.
Fed Governor Daniel Tarullo said risks remain despite improvements in the capital positions and management of large banks. The U.S. central bank and other financial regulators, he said, need to better understand any unintended consequences that could leave the system vulnerable to crises like that of 2008.
“Conceptual work” is needed on “how to specify the extent to which banks should be required to self-insure against liquidity risk by maintaining larger liquidity buffers and more closely matching assets with liabilities, and how to define the circumstances in which central banks should provide liquidity,” he told a conference hosted by The Clearing House.
“We will need to monitor developments in order to assess whether further action is needed to consolidate the progress we have made in promoting financial stability,” said Tarullo, the Fed’s point person on bank regulation.
Tarullo did not comment on monetary policy or the economy. Instead he outlined progress in bulking up banks’ capital and liquidity standards, flagging the concern that banks could hoard liquidity in times of stress.
He added, however, that regulators should take into account this context if firms fall below regulatory thresholds in times of stress. Such firms “should not be subject to automatic sanctions, but instead given an opportunity to come back into compliance in a way that does not expose either the firm or the system to greater stress,” Tarullo said. (Reporting by Jonathan Spicer; Editing by Bernard Orr)