Federal Reserve Chairman Jerome Powell said today that the US central bank may need to tighten its oversight of the US financial system following the failure of three of the largest US banks this spring.
In a pre-arranged speech at a banking conference in Madrid, Powell said tighter rules introduced in the aftermath of the 2007-2008 financial crisis made large multinational banks more resilient to large-scale loan defaults, such as the bursting housing bubble that led to that crisis. .
But the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank exposed various vulnerabilities that the Fed is likely to address with new proposals, Powell said.
Powell did not provide any details, but other Fed officials said banks should hold more capital in reserve to protect against loan losses.
Such proposals may face opposition from the banking sector and some Republican members of Congress, who argue that the Fed had the tools to prevent a bank failure but did not use them.
Powell said one of the reasons regulators ignored the threats to the three banks was “the natural human inclination to fight the last war.”
The 2008 financial crisis was triggered by massive defaults after the housing bubble burst.
But Silicon Valley failed for a variety of reasons: the rapid rise in interest rates caused its bond values to plummet as it paid lower interest rates on new bonds.
“These developments point to the need to strengthen our oversight and regulation of institutions the size of Silicon Valley,” Powell said. “I look forward to evaluating proposals for such changes and implementing them when appropriate.”
Source: AB