The U.S. shadow banking system has only grown modestly in recent years, said Federal Reserve Governor Daniel Tarullo on Tuesday. In a speech to the Brookings Insitution, Tarullo said banks are more resilient and the financial system is "obviously safer." Much of the innovation in lending and payments does not appear to be an arbitrage against the stronger post-crisis regulatory regime. But Tarullo said this "grace period" may not last forever. The Fed governor said the greatest risks to financial stability remain reliance on short-term wholesale funding. "The risks associated with short-term wholesale funding in particular have more receded than disappeared," Tarullo said. In response, the Fed will be developing a regulation to establish minimum haircuts for securities financing transactions that are the lifeblood for shadow banks, he said.
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