WASHINGTON — Weeks after two banks collapsed, President Joe Biden on Thursday called on independent regulators to impose tougher rules on the financial system, telling them they could act under current law without additional action by Congress.
The recommended changes outlined by the White House attempt to clearly blame the Trump administration for weakening oversight of regional banks by issuing a fact sheet that said Biden’s predecessor “weakened many important common sense requirements and oversight.” “.
“The President urges banking regulators to consider reforms that reduce the risk of future banking crises,” White House press secretary Karine Jean-Pierre told reporters.
California-based Silicon Valley Bank and New York-based Signature Bank, which rocked financial markets and US voters alike, failed over the course of a weekend and required government intervention. Then another financial institution, First Republic Bank, received a $30 billion emergency cash injection from 11 major private banks.
Biden wants to revitalize and expand rules for mid-sized banks, which are less scrutinized than the industry giants. Government officials say US banks have stabilized since the Silicon Valley bank collapsed on March 10, when it introduced its recommended changes.
Once banks hold assets in excess of $100 billion, the government will ask them to hold more capital to absorb losses and face heightened stress tests to ensure they can withstand a potential crisis. They would also have to provide the government with “living wills” so that they can be terminated in the event of failure.
In addition, Biden wants regulators to oversee banks more aggressively and ensure community banks are not responsible for replenishing the federal bank deposit insurance fund.
Bank Policy Institute CEO Greg Baer criticized the government’s proposals, saying it would impose costs on the economy as bank failures were still under review.
“There’s a strong sense of readiness, fire, aim, about that,” said Baer, whose advocacy group represents the financial sector.
Rob Nichols, president and CEO of the American Bankers Association, called the move “premature.”
The Biden administration’s public push is part of a larger Biden effort to ensure that individual bank failures can be contained without triggering a chain reaction across the financial system.
Treasury Secretary Janet Yellen said in a speech on Thursday that regulations have been weakened in recent years as the shocks of the 2008 financial crisis receded, but that recent failures required swift government action to maintain public confidence.
“The failure of two regional banks this month shows that our deal is not over,” Yellen said at the National Association for Business Economics conference in Washington. “Regulations cost businesses just like fire codes cost property owners. But the cost of proper regulation pales in comparison to the tragic cost of financial crises.”
What seemed unique about the two recent bank failures was how quickly bank runs began in a digital age, jeopardizing accounts that surpassed the $250,000 limit for deposit insurance. Bank inventories were also hit as the Federal Reserve hiked interest rates to tame inflation.
Yellen not only focuses on banks, but also on rules for money market funds, hedge funds and cryptocurrencies.
“If there’s one place where the vulnerability of the system to runs and fire sales has been clearly defined, it’s in money market funds,” she said. Money market mutual funds contained $5.3 trillion in net worth as of February, according to the Securities and Exchange Commission.
She also called for stronger oversight of digital assets and cryptocurrencies, stating that “we need to identify and fill gaps in the existing authority for oversight of other crypto assets.” Yellen pointed to market volatility and the collapse of major crypto exchange FTX, which went bust in November, costing investors and customers billions in losses.
Biden has called for tougher penalties for executives at failed banks, including recovering compensation and facilitating their ban from working in the industry.
The root causes of the bank failures are still under investigation, and Yellen’s remarks warned that government officials should not preempt investigations that could lead to changes in regulations.
The Justice Department, the Fed, the SEC and several congressional committees have announced investigations into bank failures.
Lawmakers held hearings with regulators from the Fed, FDIC and Treasury Department this week. Both political parties blame Fed officials for not being quick to recognize the unique risk banks faced by holding an unusually large amount of uninsured deposits. Banks simultaneously invested in long-dated government bonds and mortgage-backed securities, which fell in value as interest rates rose.
One thing that made the Silicon Valley bank collapse unique was the “extraordinary scale and speed” of customers attempting to withdraw, Michael Barr, the Federal Reserve’s vice chairman for oversight, told a congressional committee on Wednesday.
Barr said the Fed’s bank collapse review will consider whether tighter regulations are needed, including whether regulators had the necessary tools. The Fed will also consider the need for tighter rules on liquidity — the bank’s ability to access cash — and capital requirements, which regulate the amount of funds a bank must hold.
A day before the Silicon Valley bank collapsed, customers attempted to withdraw $42 billion, sparking a rapid bank run that Barr said he’d never seen before. “We were all incredibly unprepared for the massive bank run that took place at the time,” he said.
• Boak reported from Baltimore.
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