In a speech delivered on July 12, 2016 to the Center for American Progress and Americans for Financial Reform Conference, Governor Daniel K. Tarullo discussed potential new approaches for the regulation of shadow banking (which he in part describes as “runnable funding”).  Specifically, in asking what form such regulation may take, Governor Tarullo indicated that a “non-exhaustive” list of potential forms includes: “outright prohibition, minimum margining requirements and practices, capital requirements, and taxation.”  The scope of Governor Tarullo’s remarks undoubtedly includes repos, as he gave the example of “[refusing] to roll over your repo tomorrow” in discussing runs on short-term funding markets.  Although Governor Tarullo did not assign any weight/preferences to the foregoing possible forms of regulation, the mere mention of “outright prohibition” of the repo market is something to note.  Contrast Governor Tarullo’s speech with Governor Jerome H. Powell’s remarks in late 2015 (see blog post here), which discussed the potential benefits of a central clearing option for the repo markets.

Governor Tarullo’s fifth question focused on whether such a comprehensive regulatory approach should include a mechanism involving the government (directly or indirectly) to create “more genuinely safe assets”.  The authors would like to point to the temporary repo Open Market Operations (OMOs) conducted by the Federal Reserve Bank of New York as a currently-employed mechanism that informs the answer to Governor Tarullo’s question.  The focus of the temporary repo OMOs may be to achieve the monetary policy objectives of the Federal Open Market Committee.  The temporary repo OMOs incidentally also result in the creation of safe assets via a government-sponsored mechanism.

Good Day.  Good Regulation?  DR2