Fed Heeds Banks’ Warning on Where Next Crisis May Come From

Bloomberg reports:

JPMorgan Chase & Co. and BlackRock Inc. have argued for years that a key response to the last financial crisis could help fuel the next one. Global regulators are starting to heed their warnings.

At issue is the role of clearinghouses -- platforms that regulators turned to following the 2008 meltdown to shed more light on the $700 trillion swaps market. A pivotal goal was ensuring that losses at one bank don’t imperil a wide swath of companies, and the broader economy.

Now, Federal Reserve Governor Daniel Tarullo is quizzing Wall Street after big lenders and asset managers said clearinghouses pose their own threats, said three people with knowledge of the discussions who weren’t authorized to speak publicly. Among the concerns raised by financial firms: Relying on clearinghouses shifts risk to just a handful of entities, and the collapse of one could lead to uncapped losses for banks.

“You’ve concentrated the point of failure,” Thomas Hoenig, the vice chairman of the Federal Deposit Insurance Corp., said in an April 1 interview. His agency is responsible for winding down failed financial firms.

Great moments of leverage.