Has Bank Deregulation “gone too far”? Yellin says, “Yes.”

by Eddie Tiernan
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On Thursday, Treasury Secretary Janet Yellen issued a warning, stating that recent volatility in the banking sector might be a sign that efforts to pull back regulations put in place during the 2008 financial crisis have “gone too far.”

With the shocking failure of Silicon Valley Bank and Signature Bank in early March, Yellen said that extra safeguards may need to be put in place in remarks prepared for delivery to the National Association for Business Economics.

According to a transcript of her remarks, she said, “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.”
After the Great Recession, Congress authorized substantial changes to the financial system that remade the banking sector. However, in 2018, lawmakers passed a bipartisan bill removing some of those banking restrictions, which was widely celebrated by small and medium-sized financial institutions.

The repeal reduced oversight on some large financial institutions, gave consumers access to free credit freezes, and helped smaller banks by relaxing the Volcker Rule’s prohibition on the use of customer deposits to fund the institutions’ own investing activities.

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Also, the legislation doubled the size of the financial institution that must conduct mandatory stress testing from $50 billion to $250 billion.

According to The Washington Post, which cites “two persons familiar with the negotiations,” the Biden administration is planning to ask federal banking regulators to impose new limits on midsize banks. The Trump administration is not likely to push Congress to roll back the deregulations that were passed in 2018.

To mitigate the damage from the failures of SVB and Signature Bank, regulators have moved quickly to insure the safety of all deposits, including those in excess of the $250,000 maximum covered by the FDIC. The Federal Reserve has introduced a new safety net for financial institutions, allowing them to more easily and profitably meet demand for withdrawals from deposits.

This was done in an effort to prevent clients from fleeing to the “too big to fail” banks at the expense of smaller, regional banks in the United States.

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