Yellen: Asset Managers Pose Different Risks Than Banks -- Update
By Ryan Tracy and Pedro Nicolaci da Costa
WASHINGTON--Federal Reserve Chairwoman Janet Yellen and another top Fed official defended the prospect of stricter regulation for large, nonbank financial firms like asset managers as Washington looks to rein in risks emerging outside the traditional banking sector.
Ms. Yellen, testifying before a Senate panel on Thursday, said bringing large asset managers in for tougher supervision would be justified if their failure could threaten financial stability. Before imposing stricter rules on non-banks, Ms. Yellen said regulators first need to do a detailed analysis "to really identify clear ways in which the failure of these firms" would pose risks to the financial system.
But if the failure of one firm could cause a systemwide crisis, "that's a reason for them to be designated and subject to risk standards and potentially capital and liquidity standards that would reduce the odds that they could fail," Ms. Yellen said.
Her comments were echoed earlier Thursday by Fed. Gov. Daniel Tarullo, the Fed's regulatory point man, who said there is a "need to broaden the perimeter of prudential regulation" beyond the banking system. Regulators must look for threats posed by risky financial activities regardless of whether banks are involved, he said.
The concerns come as U.S. officials begin to worry about risks building outside the banking system, which has been the primary focus of postcrisis rules. Since 2008, regulators have attempted to tighten bank rules by forcing them to raise additional capital and reduce leverage. Concern is now growing among regulators that such restrictions are forcing financial activity into the "shadow banking" sector and outside the purview of regulators.
Much of the Fed's regulatory responsibilities relate to overseeing large banks, but the 2010 Dodd-Frank financial law also gave the Fed broader powers to supervise and impose capital requirements on any nonbank firm designated as " systemically important" by the Financial Stability Oversight Council. The FSOC, which includes the heads of the Fed, Treasury Department and other financial regulators, has already designated Prudential Financial Inc., American International Group Inc. and the financing arm of General Electric Co. and has begun to evaluate the risks of asset managers like BlackRock, Inc. and Fidelity Investments.
Ms. Yellen, responding to questioning from Sen. Kelly Ayotte (R., N.H.), declined to say which firms the oversight council is examining most closely, but said "there is no one size fits all" approach to analyzing the risks associated with an industry. "Certainly asset managers have very different characteristics than banking organizations," Ms. Yellen said.
On Wednesday, Ms. Yellen and others on the oversight council also said they are monitoring whether new business practices by firms outside the banking systems pose "emerging threats," issuing a report that mentioned nonbank mortgage-servicing companies and asset managers as areas to watch. The report cited in particular certain guarantees that asset managers make as part of their securities lending businesses, which aid investors in hedging and short selling. Asset managers make these financial guarantees without holding capital against them as a bank would, the report noted. A person familiar with the regulators' thinking said the concern mentioned in the report wasn't related to any particular type or size of asset management firm.
The potential for more regulation of large asset managers has worried the industry, which argues that it is already regulated and Fed oversight isn't appropriate. It has also raised eyebrows among officials at the Securities and Exchange Commission, which already regulates investment funds that the managers oversee.
The Fed is "intent on increasing the scope of their authority and power well beyond banks," SEC Commissioner Michael Piwowar said in an interview. "It's clear that they're not going to be satisfied until they have success in fulfilling what some are calling a 'Noah's ark' approach of picking two large companies in every industry" and subjecting them to stricter oversight.
Ms. Yellen and Mr. Tarullo have also said the Fed is considering broader rules focused on particular financial activities, such as margin requirements for short-term wholesale funding transactions.
Both also said they were less concerned about risks posed by small institutions, with Mr. Tarullo suggesting that regulators could use an even higher threshold -- $100 billion in assets instead of the existing $50 billion--to consider banks "systemically important."
"It would be worthwhile to have a policy discussion of statutes that might be amended explicitly to exclude community banks," Mr. Tarullo said, citing the Volcker rule and incentive compensation requirements of Dodd-Frank.
Write to Ryan Tracy at firstname.lastname@example.org and Pedro Nicolaci da Costa at email@example.com
(END) Dow Jones Newswires 05-08-141445ET Copyright (c) 2014 Dow Jones & Company, Inc.