Federal Reserve Policy & Regulatory Changes Needed in Response to Silicon Valley Bank and Signature Bank Failures & Related Market Turbulence
The Federal Reserve’s deregulatory and light touch approach to regulation and supervision paved the way for the bank failures that have shaken the financial system this year and that led to extraordinary government intervention to preserve financial stability. Particularly notable were the agency’s decisions during the Trump administration to implement deregulatory legislation – S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 – in ways that went considerably beyond what the law required. But this was far from the only set of decisions that enabled greater risk taking by institutions at the expense of safety and stability for the public.
In this most recent banking crisis, faced with the possibility of dangerous spreading instability, the government stepped in to make depositors, who had deposits millions of dollars above the insurance limit, whole. It was a powerful reminder of both the public impact of the risky choices bank executives make, and the breadth of government support the system relies on and that bank executives profit from.
We need a serious reckoning with these realities and a robust response from the Fed and other regulators. They must see self-interested arguments by finance for rules that maximize short term gains and executive compensation – no matter the public cost – for what they are. Justice requires a much more robust system of regulation, oversight, accountability and affirmative obligations for financial companies – (along with public options for banking) – that fosters security and opportunity for people, communities, and the businesses that are the backbone of a more equitable economy.
The Fed must realign its policies and rules to reduce outsized risk in banks and the financial system and assert much more rigorous oversight over its supervised financial institutions, through appropriate levels of micro- and macroprudential supervision and regulation. Below we suggest a set of changes the Fed can make without Congressional action that would increase financial stability and put the welfare of the public ahead of the narrow interests of big banks and Wall Street.
The full policy paper can be downloaded here.