That’s on top of the additional capital they are being forced to hold due to international standards called Basel III, and on top of Fed rules meant to limit leverage.
Yellen explains why: The U.S. and global economy still have not fully recovered from the last financial crisis. Furthermore, the so-called shadow banks that rely on wholesale funding have largely escaped new regulation.
So, Yellen says the Fed is thinking of two things. One may be to force big banks to increase their capital to the extent they rely on markets to fund themselves. The other may be to lift margin requirements for repo agreements and similar transactions.
To be sure, these considerations are at the early stage, and Yellen openly acknowledged there are tradeoffs. But it seems unlikely rules won’t go forward given such a prominent airing.
The Yellen speech more broadly fits into a theme of regulators. On the one hand, they are prodding banks to releverage, to take more chances to get the U.S. and global economy moving again. On the other hand, there’s a recognition that Dodd-Frank wasn’t remotely a panacea to prevent another 2008-like collapse, and tougher rules are needed.
There’s always a risk that regulators like Yellen are fighting the last war, but the nightmare of the last crisis still hasn’t gone away