Home/ Industry / Banking/  Janet Yellen Says Bank Rules Might Have Become Too Loose

Treasury Secretary Janet Yellen said that regulators might need to tighten banking rules after the collapse of Silicon Valley Bank and Signature Bank, arguing that the recent turmoil is a sign that efforts to bolster the financial system are incomplete.

Speaking at an economics conference Thursday, Ms. Yellen questioned whether the regulatory system she helped build after the 2008 financial crisis was adequate to protect financial stability. Regulators this month extended emergency assistance to banks and stepped in to protect all depositors at SVB and Signature.

“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," Ms. Yellen said.

She spoke at the National Association for Business Economics, which was presenting her with an award in memory of former Federal Reserve Chair Paul Volcker. Before becoming Treasury secretary, Ms. Yellen held top jobs at the Fed, including serving as its chair.

Since SVB and Signature failed, some former regulators have said Washington might have focused too much on the biggest banks after the 2008 financial crisis. In 2018, lawmakers from both parties voted to raise to $250 billion from $50 billion the asset threshold at which banks automatically face strict stress tests and other rules.

The Federal Reserve is now reconsidering a number of its rules for banks with assets between $100 billion and $250 billion. The White House on Thursday also called for tougher rules for midsize banks.

“Regulatory requirements have been loosened in recent years. I believe it is appropriate to assess the impact of these deregulatory decisions and take any necessary actions in response," Ms. Yellen said.

More broadly, Ms. Yellen said the fallout from the recent banking turmoil—as well as from the market volatility in the spring of 2020, when the Covid-19 pandemic struck the U.S.—had been successfully mitigated.

“In large part, this was due to the post-crisis reforms we put in place," she said. “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."

Ms. Yellen also laid out the work she and federal regulators are doing to address risks they see outside of banks. Under Ms. Yellen, the Financial Stability Oversight Council—an interagency forum created after the financial crisis—is preparing to change its rules so it can more easily subject institutions such as money-market funds to enhanced federal supervision.

Ms. Yellen said that money-market funds, hedge funds and stablecoins, a type of digital asset typically pegged to the dollar, each present the risk of creating fire sales of assets that could fuel instability. For instance, she said, if investors try to pull out of money-market funds en masse, that can force sales of underlying assets, potentially destabilizing those markets.

“The financial stability risks posed by money market and open-end funds have not been sufficiently addressed," she said.

FSOC has restarted a group studying hedge funds, Ms. Yellen said, adding that the group could make policy recommendations. The Treasury has also asked Congress to pass legislation that would regulate stablecoin issuers more like banks. And Ms. Yellen said she would continue to accelerate hiring efforts at the FSOC, which she said had been decimated because of staff turnover before she took office.

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