Yellen Urges Caution on Financial Stability, Warns Against Easing Regulations – Reuters

By David Lawder

U.S. Treasury Secretary Janet Yellen emphasized the importance of ongoing efforts to maintain a resilient financial system during her address at a Treasury markets conference in New York. She highlighted the need for thoughtful regulation and cautioned against efforts to reverse bank capital requirements.

Yellen noted that reforms implemented after the financial crisis of 2007-2009 have bolstered the system’s ability to withstand challenges, including the COVID-19 pandemic and recent issues faced by regional banks. "Efforts to build and maintain a resilient financial system are ongoing. We can never simply declare victory," she remarked, speaking at the event organized by the Federal Reserve Bank of New York.

"A robust financial system is essential for a strong economy. This requires us to advocate for prudent regulation, especially in the face of pressures to roll back established policies," she added.

She criticized the previous administration for allowing the focus on financial stability to decline, leading to a weakened Financial Stability Oversight Council by the time she took office in 2021. Yellen noted that staffing reductions and decreased interagency collaboration left the government ill-equipped to identify and respond to financial stability risks, which could adversely affect American households and businesses.

Yellen has made it a priority to restore FSOC’s capabilities to ensure the financial system effectively supports businesses and consumers. Her efforts include focusing on maintaining safe financial institutions, enhancing financial market utilities, and ensuring safeguards for investors and consumers.

This framework enabled the Treasury to act swiftly to protect the banking system from contagion following the failures of two banks earlier in 2023, according to Yellen.

During the same event, Michael Barr, the Federal Reserve’s official responsible for bank oversight, urged banks to overcome concerns about stigma and utilize the central bank’s liquidity facility when necessary.

Reflecting on past comments regarding the Dodd-Frank Act, enacted in 2010 amid criticism that it would stifle innovation and growth, Yellen argued that appropriate regulation is essential for a resilient financial system that drives progress. She pointed out that fears regarding the competitiveness of the U.S. banking sector post-Dodd-Frank were unfounded, as the law’s requirements for higher-quality capital enabled banks to provide necessary credit during the pandemic.

Yellen also acknowledged that core weaknesses exposed by recent banking stresses must still be addressed. She advocated for increased supervisory attention on banks with unstable deposits and urged the implementation of regulations that consider unrealized losses on securities. Additionally, she called for changes that would improve banks’ preparedness for liquidity challenges, emphasizing the importance of diverse funding sources and the capacity to access the Federal Reserve’s discount window, along with regular assessments of this capability.