Financial Services Regulation: Federal Reserve Board Governor Tarullo Discusses Regulatory Approach to “Shadow Banking” and Stable Funding

Sullivan & Cromwell LLP - August 3, 2016

Federal Reserve Board Governor Daniel Tarullo recently delivered a speech in which he warned of potential risks to financial stability due to so-called “shadow banking” activities and entities, focusing in particular on potential risks arising from the use of “runnable” short-term wholesale funding.  Governor Tarullo argued that no regulatory regime to protect financial stability could be “deemed complete” without a “well-considered approach” to regulating certain short-term funding activities subject to runs, including funding activities conducted by “shadow banking” institutions that may not be subject to prudential regulation.  He further suggested that developing and implementing this “well-considered” regulatory approach will require addressing five fundamental questions (discussed below) regarding its scope, structure, aims and possible consequences, some of which he suggested are not likely to be answered in the short term.