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Fed's Tarullo: short-term bank funding should be top regulatory focus

Federal Reserve Board Governor Daniel Tarullo gestures as he testifies before a Senate Banking, Housing and Urban Affairs Committee hearing
Federal Reserve Board Governor Daniel Tarullo gestures as he testifies before a Senate Banking, Housing and Urban Affairs Committee hearing

WASHINGTON (Reuters) - Five years after Lehman Brothers collapsed, regulators' top priority should be cracking down on systemic threats posed by short-term bank funding, a U.S. Federal Reserve official said on Friday.

Banks rely less on risky, short-term funding than they did prior to the financial crisis, but the practice still poses a risk to the banking system, said Fed Governor Daniel Tarullo, the agency's point person on financial regulation.

"Although the amounts of short-term wholesale funding have come down from their pre-crisis peaks, this structural vulnerability remains," Tarullo said in remarks prepared for a speech at Yale University.

"The use of such funding surely has the potential to increase again during periods of rapid asset appreciation and ready access to leverage."

U.S. regulators have rushed to revamp the way they oversee the biggest banks after the 2007-2009 financial crisis.

Tarullo on Friday urged officials to shift their focus away from bank-specific oversight and more toward rooting out systemic risks which could bring about a repeat of the crisis.

In addition to beefing up capital requirements and cracking down on short-term funding, Tarullo said regulators are looking at ways to prevent banking activities from migrating away from regulated entities and into so-called "shadow banks."

"It would be preferable to confront these issues now, before too much of this migration has occurred, than to wait until the problem manifests itself in growing systemic risk," he said.

The countercyclical buffer provision in the international Basel III accord - which tells banks to ramp up capital in boom times - was quite a "blunt" tool, Tarullo also said, but could still serve as part of supervisory practices.

(Reporting by Emily Stephenson and Douwe Miedema; editing by Krista Hughes)

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