United States Federal Reserve chair Janet Yellen has flagged the possibility of “the largest, most complex banking organisations” holding larger amounts of capital.
In a pre-recorded video last week, Ms Yellan said the Basel Committee’s Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR) do not fully address the financial stability concerns associated with short-term wholesale funding.
“These standards tend to focus on the liquidity positions of firms taken in isolation, rather than on the financial system as a whole,” she said.
“They only apply to internationally active banks, and not directly to shadow banks, despite the fact that liquidity shocks within the shadow banking system played a major role in the crisis.
“Furthermore, the current versions of the LCR and NSFR do not address financial stability risks associated with so-called matched books of securities financing transactions."
Federal Reserve staff are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets, Ms Yellan said.
“Some of these measures - such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding - would likely apply only to the largest, most complex banking organisations,” she said.
“Other measures - such as minimum margin requirements for repurchase agreements and other securities financing transactions - could, at least in principle, apply on a market-wide basis.”
In designing such measures, the Fed is carefully thinking through questions about the trade-offs associated with tighter liquidity regulation.