The job of the new Federal Reserve vice-chair of supervision is clear: keep the financial system stable. The harrowing experience of the 2008 financial crisis demonstrated the costs of failing to do this task properly. The much more successful navigation of the coronavirus pandemic by big US banks — supported by monetary largesse — showed, by contrast, what can be gained from stricter regulation of a sector that is so fundamental to the wider economy. For that reason former Treasury official Sarah Bloom Raskin is a welcome choice by president Joe Biden for the nomination.
If confirmed, the appointment ought to mean an end to the erosion of post-financial crisis regulations by her predecessor Randy Quarles, appointed by former president Donald Trump. In a supposed “tailoring” of the rules to the specific circumstances of banks, the Fed made it possible for midsized lenders to reduce their capital and liquid reserves — the buffers they keep in case of adverse conditions. Many banks, too, could then avoid the “stress tests” that had become a fundamental plank of post-crisis regulation, assessing whether banks could cope with a sharp downturn in the wider economy.
This process has weakened the banking system and made it more vulnerable. With signs of excess risk-taking and irrational exuberance in a bubbly market, as well as the Fed beginning a process of monetary tightening, this easing should firmly go into reverse. There is no need for further regulation at the moment, just a need to return to the lower thresholds and enforce the existing rules properly. In common with other large economies, the US has never used its existing countercyclical buffer, a requirement to increase capital levels in good times.
