Treasury Official Views Fed-SEC Efforts on Consolidated Supervised Entities

In remarks at a London seminar on new financial frontiers, David Nason, Treasury official for financial institutions, said that the recasting of the Fed into a market stability regulator is in the future. For the near term, there is the question of the proper regulatory oversight of investment banks, especially the largest firms regulated under the SEC's consolidated supervised entities regime. The Fed and the SEC are currently working constructively together while the primary dealers have access to the Federal Reserve's liquidity facilities.

This is appropriate, said the Treasury official, since the Fed needs to have information about institutions to which it is lending. What happens next after that facility eventually closes, however, is a more difficult policy question. ``We are in the first act of what is a multi-act play,’’ observed the Assistant Secretary.

As the process unfolds, some principles seem clear. For example, financial firms with permanent access to a government backstop must be regulated in the same way as all other institutions that have access to this backstop. Similarly, as markets have become inter-connected, it is necessary to have some type of oversight to ensure that broader issues of market stability are considered adequately.

If bank-like regulation is expanded to a wider range of firms, he reasoned, two outcomes are possible. First, innovation and risk-taking could decline to levels below what the market would normally allow. Second, a false sense of security could be provided to market participants, potentially leading to less market discipline and even greater financial instability. Both of these outcomes are unattractive, he noted, but so is the status quo. Thus, change, in one form or another, is likely.