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BPEA Article

Congruent financial regulation

Editor's Note:

The paper summarized here is part of the spring 2021 edition of the Brookings Papers on Economic Activity, the leading conference series and journal in economics for timely, cutting-edge research about real-world policy issues. Research findings are presented in a clear and accessible style to maximize their impact on economic understanding and policymaking. The editors are Brookings Nonresident Senior Fellow and Northwestern University Professor of Economics Janice Eberly and Brookings Nonresident Senior Fellow and Harvard University Professor of Economics James StockSee the spring 2021 BPEA event page to watch paper presentations and read summaries of all the papers from this edition.

The turmoil that roiled financial markets after the first COVID-19 lockdowns in March 2020 underscores the need to better coordinate regulation of economically similar financial activities, whether inside or outside the banking system, according to a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 25.

Andrew Metrick

Janet L. Yellen Professor of Finance & Management - Yale University

The paper—Congruent financial regulation by Andrew Metrick of Yale University and Daniel Tarullo of Harvard University—notes that banks last year proved to be a source of stability thanks to the more-rigorous standards enacted after the 2007-2009 financial crisis. But, they write, financial markets and less-regulated non-bank institutions (such as hedge funds, brokerage firms, and money market mutual funds) remain vulnerable in the United States’ patchwork regulatory system, so much so that at the start of the pandemic “the Federal Reserve felt it had no choice but to use its emergency powers to create an astonishing range of market-supporting measures.”


Viral Acharya

C.V. Starr Professor of Economics - New York University, Stern School of Business

Non-bank financial institutions and associated funding markets “constitute a large and growing component of the global financial system,” the authors write. “But regulation has not kept up with this growth.” For instance, money market mutual fund participation in repo transactions (a form of short-term borrowing collateralized by Treasury securities) cleared through the lightly regulated Fixed Income Clearing Corporation has risen from nothing before 2017 to more than $250 billion in early 2020.

Graph showing the growth in unregulated transactions between 2017 and 2020.

Congress appears unlikely to make regulation more consistent by consolidating financial regulatory agencies or by strengthening the authority of the Treasury-led Financial Stability Oversight Council (FSOC)—and both actions would raise significant policy issues in any case, they authors write. Thus, the agencies should collaboratively work toward an “overarching congruence principle.”

“Our proposed principle would be applied through imposing regulation based on the substantive nature of the intermediation. … It calls for regulation to be congruent, not necessarily identical,” they write.

The authors examine two case studies to illustrate the role played by non-bank financial institutions: the financing of non-prime mortgages (mortgages for borrowers with weak credit records) and the Treasury securities market at the start of the COVID pandemic. And they offer an example of how their congruence principle could work in the repo market. They would align bank-capital requirements with the rules for margining at clearinghouses and haircuts for bilateral repo transactions.

FSOC has 11 member-agencies, and the authors acknowledge that the “prospect of protracted inter-agency negotiations is hardly encouraging.” But, they conclude, “inter-agency processes in which the Treasury and Fed have the legal authority to take leadership is superior to the currently available alternatives.”

“You don’t have to have a kumbaya moment among all 11 FSOC members,” Metrick said in an interview with The Brookings Institution.

The authors write that the freezing of financial markets last March suggests there is “enough consensus to sustain momentum for a regulatory response.”

“I have more optimism now—not huge optimism—that something could get done than at any point in the past,” Metrick said.


David Skidmore authored the summary language for this paper. Becca Portman assisted with data visualization.


Metrick, Andrew and Daniel Tarullo. 2021. “Congruent Financial Regulation.Brookings Papers on Economic Activity, Spring, 143-181.

Acharya, Viral. 2021. “Comment on ‘Congruent Financial Regulation’.Brookings Papers on Economic Activity, Spring, 182-186.

Shin, Hyun Song. 2021. “Comment on ‘Congruent Financial Regulation’.Brookings Papers on Economic Activity, Spring, 186-193.

Conflict of Interest Disclosure

The authors did not receive financial support from any firm or person for this article or from any firm or person with a financial or political interest in this paper. They are currently not officers, directors, or board members of any organization with an interest in this paper. Discussant Hyun Song Shin is an Economic Adviser and Head of Research at the Bank for International Settlements, which had the right to review his work.


The views expressed by the authors, discussants and conference participants in BPEA are strictly those of the authors, discussants and conference participants, and not of the Brookings Institution. As an independent think tank, the Brookings Institution does not take institutional positions on any issue. Please contact Haowen Chen ( if you have any questions.

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