The Fed May Have Gone Too Far With Bank Deregulation

Janet Yellen, the US Treasury Secretary, plans to make a statement Thursday on the recent turmoil in the banking sector as a reminder of the need to "consider whether deregulation may have gone too far," and the need to proceed with reforms as soon as possible.

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A day after Silicon Valley Bank (SVB) regulators whose responsibility it was to oversee acknowledged that they shared a great deal of fault for the bank's swift collapse, Yellen delivered prepared remarks at a National Association for Business Economics conference on Friday.

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There was a large sell-off of banking stocks triggered by the collapse of SVB in March following a bank run, as well as a coordinated effort to prevent contagion by a number of government regulatory agencies, including the Federal Reserve and Treasury.

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Yellen's remarks suggest that, despite the "substantial interventions" required after SVB and later Signature Bank failed, more work remains.

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She commented on the recent turmoil in the financial sector and the pandemic, saying: "These events are a reminder to us that we still have important tasks to complete."

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According to a report from the Economic Policy Institute, among these measures would be "modifying or closing holes in the regulatory perimeter since the recent shocks, taking into account whether deregulation has gone too far, and fixing the cracks exposed by recent shocks in the regulatory perimeter," she stated.

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“There are also new areas of risk that we need to address," she explained, adding that there should be no compromise on the safety of banks.

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In the immediate term, Yellen said it is "important that we reexamine our existing supervisory and regulatory regimes and take steps to address these risks if necessary." For now, however, Yellen believes it is important to reexamine our supervision and regulatory regimes.

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"Shadow banks" have grown over the past few decades, according to her, which means US authorities need to address vulnerabilities in the nonbank sector as well.

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A section of the system that has been deemed "clear-cut" as being vulnerable to runs and fire sales has been identified as money market funds.

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It has been brought to the attention of US lawmakers this week that regulators have failed to do enough to prevent the collapse of the SVB, despite the fact that they knew it was overexposed to interest rate risk.