Sept 26 (Askume) – U.S. Treasury Secretary Janet Yellen on Thursday called for continued action to make the financial system resilient, including thoughtful regulation and action against those who violate bank capital requirements.
Speaking at a Treasury markets conference in New York, Yellen said reforms implemented after the 2007-2009 financial crisis helped the financial system withstand turbulence including the COVID-19 pandemic and recent regional bank difficulties.
“The work of building and maintaining a resilient financial system is never over. We can never declare victory,” Yellen said at a conference hosted by the New York Fed.
He said, “A resilient financial system is vital to a strong economy. Strengthening the financial system requires a focus on thoughtful supervision, including addressing the challenges posed by those advocating loose policies and regulations.”
Yellen accused the Trump administration of allowing the government’s focus on financial stability to erode, resulting in the decade-old Financial Stability Oversight Council being “severely weakened” when she took office in 2021, staff numbers reduced to single digits, and membership on the International Financial Stability Council Oversight Committee reduced to single digits.
“Simply put, we lack critical tools to identify and respond to financial stability risks,” he said.
Yellen said she is working to rebuild the capacity of the Financial Stability Board to ensure the financial system can serve businesses, households and support prosperity.
It focuses on safe and sound financial institutions, financial market utilities, central clearing counterparties, and the protection of investors and consumers.
Yellen said the framework would help the Treasury Department take steps to protect the banking system from a crisis in the spring of 2023 following the collapse of Silicon Valley Bank and Signature Bank.
At the same event, Fed Director of Bank Supervision Michael Barr said Thursday that banks should put aside stigma concerns and use the central bank’s discount window liquidity facility when it makes sense for them.
“Domestically, there are those who strongly oppose Dodd-Frank, arguing that its regulations will impede innovation and economic growth,” Yellen said of the 2010 financial reform law. “I and many others argue the opposite: that proper regulation is critical to supporting a resilient financial system that is the engine of innovation and growth.”
Yellen said warnings that Dodd-Frank would make U.S. banks uncompetitive proved wrong, while the high-quality capital required by the law allowed banks to lend to needy households and businesses during the pandemic.
Focus on weaknesses
Key vulnerabilities exposed by banking stress still need to be addressed by 2023, he said.
“We need more oversight of banks with less stable deposits, and we need to take unrealized losses on securities into our account,” Yellen said.
“We also need to make changes that allow banks to better respond to liquidity stress, such as ensuring they have multiple sources of emergency funding, and in particular that they (the Fed) have the ability to borrow at the discount window, which should be capacity-tested periodically.”
