Tags: Federal Reserve | Sandra Pianalto | Financial | Stability

Fed's Pianalto: More Transparency Would Aid Financial Stability

Friday, 31 May 2013 10:27 AM

Greater transparency has helped the Federal Reserve make U.S. monetary policy more effective and could enhance financial stability by deepening public trust in the quality of banks, a senior Fed official said on Friday.

"Credibility is crucial for financial firms and for supervisors, just as it is for the monetary authority," Cleveland Federal Reserve President Sandra Pianalto told a conference on financial stability hosted by the Fed.

"Credibility accumulates when there is public confidence and market confidence that rules are clear and are being followed — by the supervisors as well as by the financial firms," she said.

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The Fed has been forced to hold interest rates near zero since late 2008 and launch an unprecedented campaign of asset purchases to shield the economy from a severe recession, following a financial crisis caused by reckless speculation by banks on the subprime U.S. housing market.

Congress imposed new financial rules which were introduced under Dodd-Frank legislation in the aftermath of that shock, and supervisors now conduct stress tests to ensure big banks have sufficient capital to withstand sharp market falls.

But Pianalto suggested widening the scope of these probes in an effort to provide greater insight into a bank's resilience.

"Stress tests could be broadened to explicitly consider the effects of a bank's stress on its most important counterparties. This would be especially useful if many banks each rely on the same small set of counterparties for certain kinds of transactions," she said.

Fed officials have repeatedly voiced concern over the liquidity risk that could stem from a panic in wholesale funding markets and is working with the industry and other supervisors to develop minimum leverage ratios for large financial firms.

"Another way to improve information transparency is to provide the public with more information about the quality of bank assets. For example, regulators could require disclosure of material information on a firm's portfolio risk structure," she said.

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