US bank deregulation ‘may have gone too far’, says Treasury Secretary

US Treasury Secretary Janet Yellen speaks at the National Association for Business Economics (NABE) at the Capitol Hilton in Washington, DC, on March 30, 2023. Photo by ANDREW CABALLERO-REYNOLDS / AFP

WASHINGTON  -Recent banking sector turmoil is a reminder that work on reforms remains unfinished, and there is a need to “consider whether deregulation may have gone too far,” US Treasury Secretary Janet Yellen said Thursday.

Yellen’s speech, at a National Association for Business Economics conference, comes a day after US regulators charged with overseeing Silicon Valley Bank (SVB) acknowledged that they shared in the blame for its swift failure.

SVB’s collapse in March following a bank run sparked a broader sell-off of banking stocks, while authorities including the Federal Reserve and Treasury embarked on a coordinated effort to prevent contagion.

While the failures of SVB and later Signature Bank did not trigger a financial meltdown, the “substantial interventions” required suggests more work needs to be done, Yellen said.

Referring to banking turmoil and the pandemic, she said: “These events remind us of the urgent need to complete unfinished business.”

These include efforts “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,” she added.

“We must also address new areas of risk,” she said, adding that any bank failure is a cause for serious concern.

For now, it is “important that we reexamine whether our current supervisory and regulatory regimes are adequate for the risks that banks face today. We must act to address these risks if necessary,” Yellen added.

Also on Thursday, US President Joe Biden called on banking regulators to reinstate tougher rules on midsized banks, saying that doing so would prevent future failures like that of SVB.

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But American Bankers Association President Rob Nichols warned that with reviews by the Fed and other agencies ongoing, “it is premature to call for rule changes by independent regulatory agencies” before determining the extent to which supervisors failed to fully utilize their tools.

“Allowing for a thoughtful and deliberate process will yield better and more lasting results,” Nichols said in a statement.

In her speech, Yellen said US authorities need to address vulnerabilities in the nonbank sector too, noting that “shadow banks” have grown in the past few decades.

She flagged money market funds as an area where vulnerabilities of the system to runs and fire sales have been “clear-cut.”

This week, US lawmakers accused regulators of failing to do enough to prevent SVB’s collapse, despite knowing it was over-exposed to the risk of rising interest rates.