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Inside Washington (06/13/2012)
  • WASHINGTON (6/14/12)--Federal Reserve Governor Daniel Tarullo on Tuesday offered details for reforming the shadow banking system--that collection of financial intermediaries such as hedge funds, finance companies and securities dealers without access to central bank liquidity or public sector credit guarantees. The first of three steps that regulators could take is to create greater transparency among the transactions and markets that compose the shadow banking system, Tarullo said. Second, the risk of runs on money market mutual funds should be reduced to improve the resiliency of those funds, he said. The Securities and Exchange Commission is considering several possible reforms--in addition to those it made in 2010--including a floating net asset value, capital requirements and restrictions on redemption. A third short-term priority is to address the settlement process for three-party repurchase agreements. An industry-led task force was established in 2009 to initiate some improvements to the settlement process, but Tarullo said the reforms are not sufficient. "The shadow banking system today is considerably smaller than at the height of the housing bubble six or seven years ago," Tarullo said. "And it is very likely that some forms of shadow banking most closely associated with that bubble have disappeared forever. But as the economy recovers, it is nearly as likely that, without policy changes, existing channels for shadow banking will grow, and new forms creating new vulnerabilities will arise" …
  • WASHINGTON (6/14/12)--JPMorgan Chase traders "did not have the requisite understanding of the risks they took" when making the trades that led to the firm's massive trading losses suffered in May, JPMorgan President/CEO Jamie Dimon told the Senate Banking Committee on Tuesday. The company's strategy for reducing the synthetic credit portfolio was poorly conceived and vetted, Dimon added. Also, its strategy was not carefully analyzed or subjected to rigorous stress testing, Dimon said. JPMorgan is "embarrassed" by the incident, but Dimon urged lawmakers to put the loss into perspective. "We will lose some of our shareholders' money--and for that, we feel terrible--but no client, customer or taxpayer money was impacted by this incident." At the end of the first quarter, the company held $190 billion in equity and more than $30 billion in loan loss reserves, Dimon said. Since the loss, the company has hired a new chief risk officer, chief financial officer, global controller and European head, and also established a new risk committee structure …
  • WASHINGTON (6/14/12)--Thomas Hoenig and Jeremiah Norton, both recently sworn in as members of the Federal Deposit Insurance Corp.'s (FDIC) board, said Tuesday they are concerned that new bank-capital rules may not sufficiently limit financial system risk (The Wall Street Journal June 13). FDIC and Office of the Comptroller of the Currency earlier this week approved draft rules based on an agreement reached by international regulators in Basel, Switzerland, about a year ago. Banks have 90 days to comment on the proposed rules, which are identical to those released last week by the Federal Reserve Board. Hoenig expressed concern that the proposal's complexity will make it costly to implement and increases its chances of being "gamed." Norton said the capital requirements under the Basel proposal might not be high enough for the largest U.S. banks …


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