Fed’s Cook says new regulations might not be needed to protect banks from crypto

As policymakers in Washington grapple with how to protect the banking sector from the cryptocurrency industry, at least one regulator says the best controls might already be in place.

Federal Reserve Governor Lisa Cook said the fact that several digital asset platforms have been able to fail without impacting the broader financial system is proof that regulators have the tools they need to prevent spillover from issues in the cryptocurrency and stablecoin markets.

“Because we haven’t seen the crypto crisis lead, thus far, to a financial crisis, that says that the regular banking regulations — regular examinations, examiners asking questions about this potential intersection between crypto and banking activities — those actually have stood up,” Cook said Wednesday afternoon during an event hosted by the Detroit Economic Club. “So, sometimes, you may not need, and I’m not saying that we don’t need, but we may not need a lot more different types of regulation. Maybe we just need to do the job that is already within our power to do.”

Federal Reserve Gov. Lisa Cook said Wednesday that the central bank and other banking regulators may have all the tools they require to ensure that volatility in the cryptocurrency market does not bleed into the mainstream financial system.

Ting Shen/Bloomberg

Cook’s comments on crypto regulation came during a question and answer session following a speech on the outlook on monetary policy and evolutions in the economy. Her prepared remarks largely focused on trends in labor productivity, particularly in the automotive sector.

During the session, Cook, who sits on the Fed’s financial stability committee along with Vice Chair Lael Brainard and Vice Chair for Supervision Michael Barr, addressed several topics related to the health and safety of the financial system.

Overall, she said, the system emerged from a brief pandemic-induced recession quickly and with minimal disruption. She credits this stability to policy changes enacted after the subprime mortgage crisis and subsequent recession in 2008.

“The financial system has held up. It held up during the pandemic recession. That was because of the Fed acting extremely quickly, having learned something from the [2008 financial crisis], from the great financial crisis,” she said. “There is adequate capital in the system and I think this is something that the Federal Reserve is satisfied with.”

Cook also addressed the housing market’s reaction to the Fed’s monetary policy changes this year, which drove the average mortgage interest rate above 7% in October and have led to a sharp decrease in demand in recent months. 

“It’s one way in which monetary policy has shown up, not exactly instantaneously, but readily. It’s an interest-sensitive part of the economy and we’re certainly aware of what is happening in the housing sector,” she said. “I want to, though, stress that this is not 2008. We’re in a very different place. Credit quality is different with respect to the mortgages that have been extended, for example. So, I think that the housing sector is in a much better place.”

Still, Cook said, a national undersupply of housing is a persistent issue that will have to be addressed, but doing so is largely beyond the Fed’s purview.

“The shortage didn’t start with the pandemic,” she said. “There’s some long-term trends that have led to this housing shortage — and hopefully, like other supply chains, that will be addressed.”

Cook is one of the newest members of the Fed Board of Governors, having just been sworn into office this past May. Prior to joining the Fed, she taught economics at Michigan State University, less than 90 miles from the Detroit Masonic Temple, where she spoke Wednesday afternoon.

When discussing the potential financial stability impacts of the current economic environment, Cook drew from a different chapter of her career: studying credit markets in post-Soviet Russia. That firsthand experience with runaway inflation, she said, has driven home the importance of stabilizing prices in the U.S. before inflation expectations become unanchored.

“What you don’t want is an inflationary psychology to take hold among people so that they start standing in lines a long time to hoard goods, or they start changing money unnecessarily and inefficiently,” she said. “I’ve been in a high-inflation environment and I certainly wouldn’t want that to happen here. That could be devastating for all parts of the economy.”

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