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An Argument for Microprudential Responsibility

In a recent speech, Federal Reserve Governor Daniel Tarullo argued that “we are all macroprudentialists now.” Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University and a former Senate staffer and SEC attorney, took issue with that statement, arguing instead that the approach could instead contribute to financial instability. Peirce highlighted the FSOC’s recent request for comment regarding the asset management industry’s effect on the stability of the broader financial system. She argued that the dangers suggested in the request “pale in comparison to the risks [the FSOC] could create by adding a new macroprudential regulatory layer to asset management.”

She contends that such a move could lessen the diversity that currently exists in the industry, thereby increasing the risks the regulators are trying to alleviate. Regardless of whether regulators make “good choices” or “bad choices,” she argues that “making asset managers follow a single formula makes it more likely that the actions of one manager-such as asset sales to meet redemptions-would reverberate throughout the industry.” Additionally, regulating asset managers like banks will similarly lessen differences between the two and assist in transmitting shocks to the system from one area to the other more easily. Instead, Peirce argues that “regulators should emphasize microprudential responsibility” in which “[a]sset managers, governed by their legal responsibilities to their clients, need to plan for bad events.” She contends that responsibility is “not a task that can be outsourced to government regulators.”