daniel k tarullo : thinking critically about nonbank financial intermediation speech by mr daniel k tarullo, member of the board of governors of the federal reserve system, at the brookings institution, washington dc, 17 november 2015. * * * the financial crisis highlighted two major vulnerabilities in the u. s. financial system. first was the magnitude of the too - big - to - fail problem. second was the size and fragility of the socalled shadow banking system and the extent to which shadow banking activities not subject to prudential regulation were integrated with the regulated banking sector. in the intervening years, much has been done to address too - big - to - fail. with regard to shadow banking concerns, the specific forms related to mortgage lending that linked the regulated and unregulated sectors, such as the notorious structured investment vehicles ( sivs ), collapsed during the crisis. changes in capital, accounting, and other regulatory standards make these arrangements very unlikely to reappear. moreover, the kind of very large nonbank financial firms whose failures deepened the crisis are now subject to consolidated prudential regulation and supervision. so, in a quite direct sense, the answer to the question posed by this conference of whether we are safer than before the crisis is easy to answer in the affirmative. of course, “ safer ” does not necessarily mean safe enough. with respect to the largest banks, we continue to pursue the aim of promoting orderly resolution through evaluation of their resolution plans and through a long - term debt requirement, as proposed a few weeks ago. in addition, the banking agencies will be proposing a net stable funding ratio rule, aimed at assuring adequate medium - term liquidity, in the next few months. and the federal reserve is currently engaged in a review of its annual stress testing and capital planning exercises, one goal of which is to reflect better the range of risks confronted by these institutions. with respect to shadow banking, the subject of my remarks today, the circumstances are somewhat different. while the specific pre - crisis linkages to the regulated sector have been removed or better regulated, the possibility of other connections remains. more generally, risks to financial stability may arise anew from activities mostly or completely outside the ambit of prudentially regulated firms. shadow banking is not a single, identifiable “ system, ” but a constantly changing and largely unrelated set of intermediation activities pursued by very different types of financial market actors. indeed,

as visible by downward revision for the next year, as well. overall, while current recession is not a central scenario, the risk thereof is not out of the window. against this background, policymakers are faced with delicate trade - offs - how to address the risk of stalled recovery / recession, while curbing the rising inflation? fiscal and monetary policy again are expected to play their role in mitigating social costs, although now in a more complex environment than during the pandemic, which calls for different division of labour. in a higha€ “ inflation 2 / 4 bis - central bankers'speeches environment, monetary and fiscal policy cannot work hand in hand to support demand, as they did when the pandemics emerged. now central banks do not have leeway to focus on other objectives beyond their traditional remit. they have to remain focused on their mandate of medium - term price stability, which requires gradual normalization of monetary policy. short - term effects of the crisis have to be addressed by using fiscal policy tools, which given the tight fiscal space need to be well - targeted and time - bound. another argument that supports the above is that despite normalization, monetary policy will remain accommodative as observed by historically low real policy rates. overly expansionary fiscal policy may de - anchor inflation expectation and further fuel inflation. so far, some of the central banks have " looked through " these supply side factors, while others, where labour markets have been tight and economy has been gaining steam or inflation expectations have risen, have already started the tightening cycle. the tightening of monetary policy in the advanced world may lead to headwinds for emes that may well have no choice but adjust their monetary policy stance. not doing so risks capital outflows and currency depreciations, further fueling inflation. emerging europe already witnessed 300 million us $ outflow since the beginning of the war, though it is far smaller than in march 2020 when they amounted 1. 7 billion us $. while calibrating monetary policy, we also have to be mindful of the price effects of some structural forces such as green transition and globalization, which may put upward price pressures. in the past, globalisation enabled rapid trade integration of many countries, lifting up their growth potential and putting persistent downward pressure on inflation. now, with globalisation under threat, price pressures are upward. overall, in an environment of rising inflation and limited policy space, blanket support should give way to more targeted