(Adds comments from Mr. Tarullo in final paragraph.)
By Michael R. Crittenden
Central bankers should consider what role financial stability should play when making monetary-policy decisions, both in preventing and responding to crises, Federal Reserve Gov. Daniel Tarullo said Friday.
Speaking in New York, Mr. Tarullo suggested there was "ample justification" for central bankers to consider financial stability when making decisions about monetary policy because of the large-scale effect a financial crisis can have on growth and unemployment.
"We need to consider carefully the view that central banks should assess the effect of monetary policy on financial stability and, in some instances, adjust their policy decisions to take account of these effects," he said in a speech.
Mr. Tarullo, the Fed's point man on financial regulation, also reiterated concerns he has expressed previously about oversight of the so-called shadow-banking system. While regulators have made progress on addressing the problem of "too-big-to-fail" firms, efforts to address risks posed by short-term funding markets have lagged.
"Except for the liquidity requirements agreed to in the Basel Committee, however, the liability side of the balance sheets of financial firms has barely been addressed in the reform agenda," Mr. Tarullo said.
He laid out a laundry list of international regulatory efforts he expects to see completed or having had progress in the coming months, expressing confidence regulators will be able to finalize efforts to impose capital surcharges on systemically important banks. Regulators should also finish work within the next six months on designating systemically important nonbanks, such as insurance companies, he said.
One area where he urged caution, however, is a liquidity rule known as the "net stable funding ratio" that has been in a state of limbo as regulators decide whether to press forward with the changes. Intended to keep banks from relying too heavily on short-term funding to help finance longer-term loans, the rule has been criticized by the banking industry.
Mr. Tarullo said more analysis should be done before the rule is finalized.
"I think we may be better advised to take the opportunity of this review to examine whether there are approaches that might address more directly the vulnerabilities for the financial system created by large nondeposit, short-term funding dependence at major financial institutions," he said.
In response to a question from an audience member at an event sponsored by Cornell University's international law journal, Mr. Tarullo said central bankers face a challenge of balancing policy remedies to a systemic strain when the economy itself is still fragile.
"We're still in a slow-growth environment" in the U.S., Mr. Tarullo said.
Mr. Tarullo also said regulators have "tentatively discussed" proposals to require minimum so-called haircuts for participants in securities financing transactions. He said one means of doing so would be to attach the requirements to instruments or transactions, rather than firms, but offered little other detail.
--Christian Berthelsen contributed to this article.
Write to Michael R. Crittenden at [email protected]