Federal Reserve may tighten financial rules after US bank failures, Powell says #Federal #Reserve #tighten #financial #rules #bank #failures #Powell

WASHINGTON (AP) — Federal Reserve Chair Jerome Powell said Thursday that the central bank may have to tighten its oversight of the American financial system in the wake of the failure of three large U.S. banks this spring.

Powell said in prepared remarks delivered at a banking conference in Madrid that tougher regulations put in place after the 2007-2008 financial crisis have made large multinational banks much more resilient to widespread loan defaults, such as the bursting of the housing bubble that led to that crisis.

But the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank exposed different vulnerabilities that the Fed will likely address through new proposals, Powell said.

FILE - The President of European Central Bank, Christine Lagarde, delivers a speech at the European Parliament in Strasbourg, France, Wednesday, Feb. 15, 2023. European Central Bank President Christine Lagarde warned Tuesday that inflation is holding its grip on the economy and underlined that the bank intends to raise rates high enough to “break this persistence." (AP Photo/Jean-Francois Badias, File)

European Central Bank President Christine Lagarde is warning that inflation is holding its grip on the economy.

Swiss National Bank's (SNB) Chairman of the Governing Board Thomas Jordan gestures during a media briefing at the Swiss National Bank in Zurich, Switzerland, on Thursday, June 22, 2023. Switzerland's central bank raised its key interest rate Thursday as it seeks to combat inflation and said “it cannot be ruled out” that more hikes will be necessary. (Michael Buholzer/Keystone via AP)

Switzerland’s central bank says it’s time to review rules aimed at preventing disastrous bank collapses.

A person walks in front of an electronic stock board showing Japan's Nikkei 225 index at a securities firm Friday, June 23, 2023, in Tokyo. Asian shares sank sharply Friday after several central banks around the world cranked interest rates higher in their fight against inflation.(AP Photo/Eugene Hoshiko)

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A man pulls a trolley with goods in a street market in Eminonu commercial district in Istanbul, Turkey, Friday, June 16, 2023. The Turkish central bank faces a key test Thursday June 22, 2023, on turning to more conventional economic policies to counter sky-high inflation after newly reelected President Recep Tayyip Erdogan gave mixed signals about an approach that many blame for worsening a cost-of-living crisis. (AP Photo/Francisco Seco)

Turkey’s central bank has delivered a large interest rate increase, signaling a shift toward more conventional economic policies to counter sky-high inflation.

He did not provide details, but other Fed officials have said banks should be required to hold more capital in reserve to guard against loan losses.

Such proposals are likely to face resistance from the banking industry and some congressional Republicans, who argue that the Fed had the necessary tools to prevent the bank collapses but failed to use them.

One reason regulators missed the threats to the three banks was “the natural human tendency to fight the last war,” Powell said.

The 2008 financial crisis occurred because of widespread defaults after the housing bubble burst. But Silicon Valley Bank failed for different reasons: A rapid increase in interest rates sharply lowered the value of its bond holdings, because they paid out lower interest rates than newer bonds.

“These events suggest a need to strengthen our supervision and regulation of institutions of the size of SVB,” Powell said. “I look forward to evaluating proposals for such changes and implementing them where appropriate.”

In a question and answer session, he indicated that the rules needed to be updated to account for how quickly a bank run could happen.

“A bank run used to be people standing in line at an ATM,” the Fed chief said. “That’s very different from what we saw at Silicon Valley Bank,” with depositors using smartphones to move money instantly.

Fed supervisors had spotted bank vulnerabilities, including exposure to rising rates, but were working within a system that moved too slowly to head off trouble, Powell said.

“The supervisors were on the right issues, but they were operating under a standard playbook where you escalate things fairly carefully, fairly slowly,” he said.

An ongoing review of Fed supervision would “try to find ways to be more agile and, where appropriate, more forceful,” Powell said.

Banks with $100 billion to $250 billion in assets — which included all three failed banks — were freed from some requirements in 2018 under legislation passed by Congress and rules issued by the Fed.

Last week, Powell faced significant pushback from Republicans during House and Senate hearings over the potential for tighter rules. Michael Barr, the Fed’s top regulator, has said the central bank might require larger banks to hold more capital in reserve.

Yet GOP members of Congress charge that such requirements would limit banks’ ability to lend and slow the economy.

Powell said during those hearings that a proposal might be issued next month. But he repeated Thursday that any new rules would require a public comment process and would be phased in over time, meaning they might not come into effect for several years.

“The bank runs and failures in 2023 … were painful reminders that we cannot predict all of the stresses that will inevitably come with time and chance,” Powell said. “We therefore must not grow complacent about the financial system’s resilience.”