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April 26, 2013

Regulators See Risk in Wall Street's Use of Short-Term Funding

The short-term funding markets that major Wall Street banks rely on and which were a source of volatility during the 2008 financial crisis continue to pose risks to financial stability, a group of top federal regulators warned Thursday.

The Financial Stability Oversight Council, created in the wake of the crisis to identify areas of market risk, cited a number of potential financial system vulnerabilities, including cyberattacks and natural disasters, and a low interest-rate environment, which is fueling investment in riskier assets.

Regulators singled out companies that invest in mortgage-backed securities, saying mortgage real-estate investment trusts are “highly” exposed to interest-rate risk, as well as short-term funding.

The report—the council’s third since its creation by the 2010 Dodd-Frank financial-overhaul law—serves as a reminder of how much remains unfinished in fixing well-known sources of market vulnerability. For the third year in a row, FSOC cited short-term funding markets and money-market mutual funds as trouble spots.”

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Read full Wall Street Journal article here

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