Replumbing Our Financial System: Uneven Progress

The financial crisis of 2007–09 has spurred significant ongoing changes in the “pipes and valves” through which cash and risk flow through the center of our financial system. These include adjustments to the forms of lender-of-last-resort financing from the central bank and changes the infrastructure for the wholesale overnight financing of major dealer banks, particularly through the tri-party repo markets. Significant changes in the regulation of money-market funds are under consideration. The Dodd-Frank Act mandates the central clearing of standardized over-the-counter derivatives, although a pending exemption of foreign exchange derivatives remains to be decided. The vulnerability of major dealers to runs by prime-brokerage clients is also an issue to be addressed. I focus on U.S. financial plumbing and on areas where financial stability remains a concern.