Tarullo Sees Link Between Monetary Policy, Risk Regs

Economic analyses used in monetary policy decisions can be used to find “vulnerabilities” in financial institutions, Federal Reserve Board governor Daniel K. Tarullo said in testimony before the Senate Banking Committee yesterday.

“Indeed, there are some important synergies between systemic risk regulation and monetary policy, as insights garnered from each of those functions informs the performance of the other,” Tarullo said, according to prepared text of his testimony released by the Fed.

“Close familiarity with private credit relationships, particularly among the largest financial institutions and through critical payment and settlement systems, makes monetary policy makers better able to anticipate how their actions will affect the economy,” he said. “Conversely, the substantial economic analysis that accompanies monetary policy decisions can reveal potential vulnerabilities of financial institutions.”

While improvements in the financial regulatory framework may involve expansion of Fed responsibilities, Tarullo said expansion would be “incremental and [a] natural extension of the Federal Reserve’s existing supervisory and regulatory responsibilities,” and reflect the “relationship between financial stability and the roles of a central bank.”

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