WASHINGTON, March 30 (Reuters) – U.S. Treasury Secretary Janet Yellen stated on Thursday that banking regulation and supervisory guidelines must be re-examined within the wake of the Silicon Valley Financial institution (SIVB.O) and Signature Financial institution (SBNY.O) failures to make sure present banking system dangers are addressed.
In remarks ready for supply to the Nationwide Affiliation for Enterprise Economics, Yellen additionally referred to as for stronger regulation of the rising non-bank, or “shadow financial institution”, sector, together with cash market funds, hedge funds and crypto property.
Yellen stated a 2018 roll-back of financial institution capital necessities and stronger supervision for smaller and mid-size banks with property beneath $250 billion must be re-examined.
“Any time a financial institution fails, it’s trigger for critical concern. Regulatory necessities have been loosened lately. I imagine it’s acceptable to evaluate the affect of those deregulatory selections and take any obligatory actions in response,” Yellen stated.
She added that regulatory reforms put in place after the 2008 monetary disaster have helped the U.S. monetary system climate shocks, together with the COVID-19 pandemic.
“However the failures of two regional banks this month exhibit that our enterprise is unfinished,” Yellen stated. including that the monetary system was considerably stronger than it was 15 years in the past.
“That is maybe finest illustrated by the truth that we have seen relative stability within the general banking sector this month, at the same time as issues grew about particular establishments,” she stated.
However Yellen stated it was necessary that U.S. regulatory authorities look at whether or not the present supervisory and regulatory regimes “are enough for the dangers that banks face in the present day. We should act to handle these dangers if obligatory.”
Yellen’s remarks contained no particular proposals and he or she acknowledged that tighter regulation imposes prices and care must be taken to make sure the well being and competitiveness of neighborhood and regional banks. However she added that such prices “pale compared to the tragic prices of monetary crises.”
Yellen repeated feedback final week that the Treasury, Federal Reserve and Federal Deposit Insurance coverage Company had been ready to once more use the identical instruments they used to guard depositors within the SVB and Signature Financial institution failures.
“And we might be ready to take extra actions if warranted,” she added, with out specifying steps that could possibly be taken.
NON-BANK RISKS
Yellen referred to as for extra regulation to handle dangers emanating from non-bank establishments, together with liquidity dangers, and stated guidelines mustn’t permit dangers to shift elsewhere within the monetary system to keep away from regulation.
Cash market mutual funds and open-end funds are nonetheless vulnerable to runs, Yellen stated, which the Securities and Trade Fee has sought to handle via new regulatory proposals.
In hedge funds, which had practically $10 trillion in gross property in 2021, Yellen stated she had issues about using leverage by some funds, which may drive them right into a place of conducting “hearth gross sales” of property together with Treasury securities throughout occasions of stress – gross sales that might spill over to different monetary system members.
The multi-regulator Monetary Stability Oversight Council’s restored Hedge Fund Working Group will proceed to observe dangers and develop coverage suggestions, Yellen stated.
She additionally stated the Biden administration is constant to check the potential for systemic dangers from digital property, an effort that started earlier than the collapse of cryptocurrency alternate FTX.
Of specific concern are stablecoins, which spend money on reserve property to keep up a secure worth towards the greenback. Like conventional funds, they is also pressured into asset hearth gross sales in occasions of stress, she stated.
“A run on one stablecoin can result in panicked runs on different stablecoins – inflicting even broader selloffs,” Yellen stated, including that Congress ought to move laws to ascertain a complete prudential regulatory framework for stablecoin issuers and for different digital property.
Yellen additionally stated {that a} failure by Congress to boost the debt restrict, resulting in a default on U.S. obligations, was one other monetary danger that “may upend the lives of thousands and thousands of Individuals and people world wide.”
Reporting by David Lawder; Enhancing by Chizu Nomiyama and Paul Simao
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