Michael S Barr: Deregulating in a financial boom - what could go wrong?

Thank you for the opportunity to speak to you. The U.S. economy relies on a strong and stable banking system that extends credit to households and businesses. America's prosperity as well as the day-to-day needs of people and their efforts to plan for and build a better future depend on it. Today I want to share with you a few thoughts on the Federal Reserve's role in overseeing the banking system and supporting financial stability, and concerns that I have about how the Fed and other banking regulators are weakening regulation and supervision of banks. I've spoken before about the risk of deregulation, but now that it is coming to pass, I want to highlight the combined effects of these deregulatory steps on the safety and soundness of banks and risks to the stability of the financial system. Considerable, sometimes bitter, experience has shown that the safety and soundness of banks is crucial to the jobs, financial security, and hopes and dreams of everyone in America. Deregulation can provide a short-term sugar high in the economy, but it can also lead to long-term costs for society.

Achieving appropriate bank regulation and supervision is a balancing act. Banks need room to grow so that their lending can support innovation and aspiration throughout the economy. At the same time, long experience has shown that without proper safeguards, banks striving to innovate in pursuit of higher profits may take excessive risks. When banks get in trouble, their downfall threatens businesses and households, putting the viability of communities, and sometimes even the entire economy, at risk. That is the legacy of the Great Depression, the savings and loan crisis of the 1980s, and the Global Financial Crisis that occurred nearly 20 years ago. Though it can feel like these events are in the distant past, it is important to remember the damage they did to the economy and the pain that they caused, shattering the lives of millions of people. Research that attempts to quantify the costs of these episodes, and consider the causes, is a helpful place to turn to make sure we have learned from these experiences to avoid repeating mistakes and to promote a healthy economy.