Janet Yellen, the U.S. Secretary of the Treasury, recently expressed the need to strengthen bank regulations and supervisory rules again in light of the Silicon Valley Bank (SVB) bankruptcy incident. This essentially signals a major overhaul of the 'Dodd-Frank Act,' which was relaxed during the Donald Trump administration. The White House and financial authorities are expected to soon unveil additional regulatory measures targeting mid-sized banks.
In a speech released on the 30th (local time) ahead of the National Association for Business Economics event, Secretary Yellen stated, "This incident reminded us of the urgency to complete unfinished work," adding, "We need to finalize reforms after the financial crisis, review whether deregulation has gone too far, and repair regulatory gaps revealed by recent shocks."
She noted that it is noteworthy that the bankruptcies of SVB and Signature Bank did not escalate into a worst-case scenario like the 2008 global financial crisis, attributing this mainly to "the reforms we implemented after the crisis." However, she emphasized, "In both cases, the government had to intervene substantially to ease specific pressures in the financial system," which "means more work needs to be done in the regulatory sector."
In particular, Secretary Yellen criticized the previous Trump administration for having "decimated" the strengthened financial regulations and supervision established after the global financial crisis. She pointed out, "When President (Joe Biden) and I took office in January 2021, we inherited a Treasury Department's financial stability apparatus that had been decimated," adding, "The Financial Stability Oversight Council (FSOC) under the Treasury Department was less than one-third of its size five years ago."
Shortly after the financial crisis, the U.S. strengthened regulations by enacting the Dodd-Frank Act, which required banks with assets over $50 billion to undergo annual stress tests for soundness. However, in 2018, the Trump administration drastically reduced the scope to banks with assets over $250 billion, effectively weakening this as well. This is the background behind the recent accountability debates and political disputes surrounding financial authorities following the SVB incident.
Secretary Yellen also emphasized the importance of reviewing whether the current supervisory system is appropriate and hinted at plans to re-strengthen the loosened regulations. She said, "Every time a bank fails, it causes serious concern," adding, "Regulatory requirements have been relaxed in recent years. It is appropriate to assess the impact of these deregulation decisions and take necessary measures in response."
On this day, Secretary Yellen did not mention specific regulatory strengthening measures separately. Earlier, the Wall Street Journal (WSJ) reported, citing sources, that the White House would recommend authorities prepare strong regulatory proposals for mid-sized banks with assets ranging from $100 billion to $250 billion. The recommendations are expected to include strengthening capital and liquidity standards and expanding the scope of banks subject to stress tests.
Secretary Yellen acknowledged that "regulations impose costs from the perspective of businesses," but added, "These costs are minimal compared to the tragic costs of the financial crisis." She also mentioned that around 8 million Americans lost their jobs and $10 trillion in household assets disappeared around the time of the 2008 global financial crisis. Furthermore, she reaffirmed that if signs of further contagion from the SVB incident appear, the government is prepared to use depositor protection tools once again.
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