The Federal Reserve governor spoke today at the Federal Reserve Bank of San Francisco conference on challenges in Global Finance.

In his speech posted on the Fed's website, Tarullo discusses the regulatory reform agenda for a shadow banking system that "is considerably smaller than at the height of the housing bubble six or seven years ago."

While many of the key issues on how to regulate shadow are still being debated,  as the economy recovers, without policy changes, the existing channels for shadow banking will grow, and "new forms creating new vulnerabilities will arise."

In his speech, he suggests a two-pronged agenda: in the near-term regulators must address the  current channels where mispricing, run risk, and potential moral hazard are evident; and, over the longer term, regulators should continue the academic and policy debate on more fundamental measures to address shadow banking more broadly and proactively.

He said that regulators should create greater transparency within various transactions and markets that comprise the shadow banking system; such as the repo market, which today still remains a largely opaque segment of the financial markets.  

"At present there is no way that regulators or market participants can precisely determine even the overall volume of bilateral repo transactions--that is, transactions not settled using the triparty mechanism," said Tarullo.

The Treasury department's new Office of Financial Research is working to improve information about this market and the Securities and Exchange Commission is considering approaches to enhanced transparency in the closely related securities lending market.

Tarullo also highlights regulatory changes directed at curbing the risk of runs on money market funds. In 2008, investors withdrew nearly $200 billion from prime money market funds, about 10 percent of their assets, Tarullo said in his speech. "This contributed to severe funding pressures for issuers of commercial paper," he said. "The run ultimately prompted--and was stopped by--unprecedented interventions by the Treasury and the Federal Reserve to provide insurance and liquidity support to the industry."

The SEC is currently considering several possible reforms, including a floating net asset value, capital requirements, and restrictions on redemption. Deputy Governor Tucker of the Bank of England  has also recommended that supervisors consider setting new limits on banks' reliance on funding provided by money market funds.





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