Financial system reform is “essential” and should be a catalyst for information exchanges between markets and regulators, Federal Reserve Board governor Daniel K. Tarullo said yesterday.
“Market forces will operate more efficiently with information about banks that has usually remained largely hidden from investors in anything but the most aggregated form,” Tarullo told the Council of Institutional Investors, according to prepared text of his remarks released by the Fed.
“The regulatory system will operate more effectively if the supervisory process integrates market information which should, as a result of innovations such as a resolution mechanism, be even more sensitive to the conditions of financial firms.”
He noted that external criticism, while “not always right,” offers an opportunity for “rigorous discussion” that could be “uncomfortable” for regulators, but in the end “can help contain financial instability in the future.”
Additionally, Tarullo called for regular stress tests and releasing relevant information.
“Releasing such information could assist investors in the difficult task of valuing loan portfolios that at present are not very transparent,” he said. “Second, releasing details about assumptions, methods, and conclusions would expose our supervisory approach to greater outside scrutiny and discussion. Whether the result is critique or validation of our approach, the reaction of informed investors and analysts to our assumptions and methods would be beneficial.”
