–Still Have to Determine Appropriate Capital For Systemically Key Firms

CHICAGO (MNI) – Chicago Federal Reserve President Charles Evans
said Thursday the central bank is developing a system to help alert it
to systemic risks, a process that will include stress test results.

In prepared remarks to open the annual international banking
conference sponsored by the Chicago Fed and the International Monetary
Fund, Evans noted that with the passage of the Dodd-Frank Act, the role
of macroprudential regulation has been elevated significantly.

“We are moving toward a new regulatory landscape with an emphasis
on financial system stability,” he said.

Evans added that in addition to being involved in the effort to
revise global capital standards, the Fed is also developing processes to
better enable it to identify and address emerging risks, particularly
risks with systemic implications.

“This ‘quantitative surveillance mechanism’ (QSM) will incorporate
data from markets, individual firms, and supervisors, and it will
accommodate the results of stress testing in the future,” he said.

However, Evans said while the Dodd-Frank Act might have shifted
focus to macroprudential regulation, there are many questions on
implementation that regulators must still answer.

These include the determinants and appropriate levels of capital
required of systemically important firms; how should they vary over the
business cycle; should contingent capital be required; what instruments
will qualify as contingent capital; and what data is needed to allow
adequate monitoring of the activities of systemically important
institutions.

It is obvious that a better job needs to be done of identifying
cross-border linkages and their associated risks, Evans said.

“Greater coordination across regulatory frameworks could be
tremendously helpful in this effort.”

Evans, who will be a voter on the Federal Open Market Committee
next year, did not comment on either monetary policy or the economy.

** Market News International Chicago Bureau: 708-784-1849 **

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