Federal Reserve Chairman Jerome Powell said Thursday 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 have made large multinational banks more resilient to large-scale loan defaults, such as the bursting housing bubble that triggered 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 increase 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.”
During the Q&A session, he indicated that the rules needed to be updated to account for the speed at which a banking transaction could occur.
“Before, the bank was run by people standing in line at the cash register,” the Fed chairman continued.
He added: “This is very different from what we saw at a Silicon Valley bank,” where depositors used smartphones to transfer money instantly.
Powell explained that Fed supervisors noticed weaknesses in banks, including exposure to higher interest rates, but they operated within a very slow system to avoid problems.
