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 "We should be doing more to improve large financial firms'
disclosures about how reliant they are on short-term funding, and
how susceptible they may be to liquidity crises," Kara Stein, a
Democratic commissioner at the Securities and Exchange Commission,
said in an interview with Reuters.
"Improving disclosures about short-term funding will empower the
markets to help prevent the next liquidity crisis," said Stein, who
joined the SEC last summer.
The short-term lending market is a part of the financial sector
known as "shadow banking," a loosely defined set of lending
activities that occur outside of banks.
In securities lending arrangements, mutual funds, insurance
companies and other large investors typically lend out their
securities to earn extra money.
Brokerages such as Goldman Sachs or Morgan Stanley borrow those
securities and then pledge them as collateral to money market funds
in exchange for cash, in a financing transaction known as a
"repurchase" or "repo" agreement.
During the financial crisis, the short-term lending market
temporarily dried up after Lehman Brothers collapsed, stoking fears
among banks and decreasing lending activity.
Money market fund investors who had exposure to Lehman and other
banks fled for the exits, causing one prominent fund to "break the
buck" — meaning that its net asset value dropped below $1 a share — and prompting the federal government to offer a financial
backstop for money funds to stop the bleeding.
The 2010 Dodd-Frank Wall Street reform law does little to address
risks to the short-term lending market. Stein's comments come as
several regulators including the SEC and the Federal Reserve are
eyeing their own reforms.
The Fed is drafting a proposal that would force banks that rely on
such short-term funding to hold more capital. Federal Reserve
Governor Dan Tarullo has often spoke about the need for more
oversight to protect against runs on banks.
The SEC, meanwhile, is working to complete a rule that aims to
reduce investor run-risk on money market funds.
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One option on the table is to force some prime money market funds to
have their share prices float, rather than stay fixed at a dollar
per share.
In addition, the Office of Financial Research, which was created
under the Dodd-Frank law to do more sophisticated monitoring of the
financial system, recently raised concerns about systemic risks that
could be posed by securities lending and other short-term borrowing
activities.
"Lack of data related to securities lending transactions and the
reinvestment of cash collateral limit the effective monitoring of
securities lending activities," the office wrote in its 2013 annual
report.
Stein did not describe how a final money market fund rule should be
drafted.
However, she said the rule targeting fund run risk is "just one part
of the short-term lending market" and should not be all that
regulators do in this space.
She urged the SEC to work more closely with other regulators on the
issue.
"We need to be thinking about other parts of this market that should
be reformed to prevent another financial crisis," she said.
"The SEC oversees the broker-dealers who are integral to securities
lending and the corporate issuers doing the borrowing, so we need to
be working with our fellow regulators to address the risks of
short-term funding."
(Reporting by Sarah N. Lynch; editing by
Karey Van Hall and Leslie Adler)
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