Yellen warns bank deregulation may have 'gone too far' after SVB failure
Janet Yellen suggests regulators may need to tighten rules for banks amid industry-wide turmoil
Does the US need more regulations following the banking crisis?
Former Federal Reserve Vice Chair Randal Quarles and Cornerstone Research senior adviser William Silber give their take on how the government should responding to bank failures on 'Kudlow.'
Treasury Secretary Janet Yellen warned on Thursday that weeks of turmoil within the banking industry could be a sign that efforts to roll back regulations put in place after the 2008 financial crisis have "gone too far."
In remarks prepared for delivery to the National Association for Business Economics, Yellen indicated that additional guardrails may need to be put into place following the stunning collapse of Silicon Valley Bank and Signature Bank earlier in March.
"These events remind us of the urgent need to complete unfinished business: to finalize post-crisis reforms, consider whether deregulation may have gone too far and repair the cracks in the regulatory perimeter that the recent shocks have revealed," she said, according to a copy of the speech.
YELLEN SAYS US WILL TAKE MORE ACTION TO PROTECT SMALLER BANKS IF NEEDED
Treasury Secretary Janet Yellen testifies before a hearing of the House Committee on Ways and Means on the administration's proposed budget for fiscal year 2024, on Capitol Hill in Washington, D.C., on March 10, 2023. (BRENDAN SMIALOWSKI/AFP via Getty Images / Getty Images)
Congress approved a sweeping overhaul of the financial system in the years after the Great Recession that reshaped the banking industry. But lawmakers passed a bipartisan bill in 2018 dismantling parts of those banking rules – a move regarded as a big victory for small and midsize banks at the time.
The rollback eased regulation on some big banks, granted consumers the right to free credit freezes and provided relief to smaller banks by softening the Volcker Rule, which prohibited banks from making their own investments with customers’ deposits.
It also raised the asset threshold at which banks face mandated stress tests to $250 billion from $50 billion.
FUND MANAGERS WORRY SYSTEMIC CREDIT CRUNCH COULD CRASH US MARKETS
The Biden administration is reportedly preparing to call for federal banking regulators to impose new rules on midsize banks, according to The Washington Post, citing two people familiar with discussions. However, the White House appears unlikely to ask Congress in the immediate future to reverse the changes included in the 2018 deregulation law.
Employees walk in front of a sign outside of the shuttered Silicon Valley Bank (SVB) headquarters on March 10, 2023, in Santa Clara, California. (Justin Sullivan/Getty Images / Getty Images)
"Regulatory requirements have been loosened in recent years," Yellen said on Thursday. "I believe it is appropriate to assess the impact of these deregulatory decisions and take any necessary actions in response."
Regulators have rushed to contain fallout after the collapse of SVB and Signature Bank, including protecting all deposits at the institutions – even those holding funds that exceeded the FDIC's $250,000 insurance limit. The Fed also launched a new emergency backstop for lenders to help them meet deposit withdrawals under favorable terms.
The moves were intended to staunch a flow of funds from small and regional U.S. lenders as customers rushed to banks deemed too big to fail.
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However, banks are still feeling the sting from the industry-wide turmoil.
"It is notable that neither of these events triggered the worst-case scenario – a financial meltdown like we saw in 2007 and 2008," Yellen said. "In large part, this was due to the post-crisis reforms we put in place. But in both cases, the government had to deliver substantial interventions to ease the pressure on certain parts of the financial system. This means that more work must be done."