After four years of dangerous deregulations during the Trump administration and the weaknesses in the financial system revealed by the 2020 pandemic-caused market and economic stress (2020 pandemic), it is imperative that banking regulation and supervision be materially strengthened and that the Federal Reserve works to minimize risks to financial stability. While the 2020 pandemic remains an ongoing tragedy, it was nonetheless a live stress test of the post-Dodd Frank financial reform architecture and the ecosystems that developed in response to the implementation of that law. This is a unique opportunity for regulators like the Fed’s Vice Chair for Supervision to analyze how that architecture and those ecosystems performed.

As is well known, the banking sector has become more complex and concentrated and is facing new sources of risks that have yet to be fully understood and addressed. Importantly, credit and liquidity provided by the banking sector has become more in demand from the growing and increasingly interconnected nonbank “shadow banking” financial sector, especially in periods of market stress such as the 2020 pandemic. Additionally, the too-big-to-fail problem is not only alive and well, but is growing larger, more dangerous, and harder to address, threatening future systemic failures and bailouts.

The incoming Vice Chair for Supervision should address those challenges, enhance the resiliency of the banking and financial systems, and promote a banking system that works for all Americans by:

• performing a comprehensive, 360-degree, all-inclusive, data-driven review of:
  1. the post-financial crisis regulatory reforms,
  2. the deregulatory actions that affected them, and
  3. the current and emerging threats to the banking system, including those from the nonbank financial sector;
• strengthening of capital and liquidity standards to reduce the likelihood of large bank failure and taxpayer bailouts;
• enhancing requirements around bank resolution preparedness so large banks can be shut down and/or be taken apart and sold off piece-by-piece more easily in the event they do fail;
• assessing emerging and previously un- or under-addressed risks – such as risks from climate, financial technology companies, and cryptocurrencies – and putting in place supervisory programs and regulations that address those risks;
• refocusing supervisory efforts to prioritize safety, soundness, and financial stability rather than “efficiency;”
• strengthening supervisory consequences for the largest banks to increase incentives for appropriate conduct by those responsible, boards of directors and senior management in particular;
• modifying the merger application assessment process to more appropriately consider risks to financial stability and the convenience and needs of affected communities; and
• broadening the provision of banking products and services through the finalization of the Community Reinvestment Act-related rulemaking and promoting competition by and usage of community-focused financial institutions.

Financial stress and the response by the Federal Reserve to address it inevitably are exacerbated when appropriate safeguards are not in place, as in the 2020 pandemic. This affects the lives of all Americans, especially low-income and economically marginalized communities of color. Exacerbated market and economic stress increase the likelihood of making recessions deeper and longer, and actions taken by the Federal Reserve to support markets and the economy contribute to inflated asset prices that can increase wealth gaps.

There is a substantial agenda for the Vice Chair for Supervision to undertake over the coming years. The right set of actions are needed now to get supervision and regulation of the U.S. banking system back on the path to finishing the job started by the Dodd-Frank Act to address the too-big-to-fail problem, help to promote greater resiliency of our financial system including to emerging risks, and promote a financial system that will provide support for an economy that works better for all Americans.

You can find the full memo here.