If confidence disappears, banks call back credit, balance sheets shrink and a difficult readjustment is needed, with negative effects on financial and economic stability. In particular, the buildup of big leverage within the financial system can unwind swiftly, causing more stringent general financing conditions. So what needs to be done?
As you know, EGRPRA requires the federal banking agencies to conduct a decennial joint review of our regulations to identify those that are outdated, unnecessary, or unduly burdensome. At the third outreach meeting this past spring, I suggested that we could regard the EGRPRA review as a success only if it leads to significant reduction in regulatory burden for smaller banks.