FRB Plows on with Short-Term Funding Limits, Adds New Non-Bank Enticement

In our Monday daily briefing, FedFin alerted clients to a major speech given Friday by FRB-NY President Dudley. In this report, we assess this ground-breaking speech in detail to provide clients with a forward-looking assessment of its U.S. and global impact. Mr. Dudley expands on actions he wants in two critical areas – repos and MMFs – but also goes on to argue that even these reforms may not be sufficient to limit the systemic risk arising from undue reliance on short-term wholesale funds. He thus outlines options here, building on several recent speeches by FRB Governor Tarullo and ongoing Federal Reserve analytical work. FedFin has noted (see Client Report 2013-3) that we expect legislation this year from Sen. Brown (D-OH) and others that would impose a specific GDP-based funding cap on the largest U.S. BHCs. Mr. Dudley’s speech adds more fuel to this campaign, supporting in theory limits along these lines. However, he for the first time also suggests broader reforms that would expand central-bank liquidity facilities to non-bank financial intermediaries if their activities meet social-welfare criteria.    

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