Yellen Seeks to Avert ‘Capture’ by Banks

Jakarta Globe, Bloomberg, Ian Katz, Mar 04, 2015

U.S. Federal Reserve Chair Janet Yellen holds a news conference
at the Federal Reserve in Washington. (Reuters/Kevin Lamarque)

US Federal Reserve Chair Janet Yellen, countering criticism from members of Congress, said the central bank was trying to avoid being too cozy with the Wall Street firms it supervises and wants to ensure that regulators aren’t afraid to confront the financial industry.

“The risk of regulatory capture is something the Federal Reserve takes very seriously and works very hard to prevent,” Yellen said in remarks prepared for a speech in New York on Tuesday night.

“It is important that anyone serving the Fed feel safe speaking up when they have concerns about bias toward industry, and that those concerns be addressed.”

The Fed has been criticized by Democratic lawmakers, including Senator Elizabeth Warren of Massachusetts, who say it’s deferential to large banks.

The issue was the subject of a Senate hearing in November following allegations by Carmen Segarra, a former examiner at the Federal Reserve Bank of New York, who said her colleagues had been too soft on Goldman Sachs.

At the hearing, Warren told New York Fed President William C. Dudley that he needs to fix a “cultural problem” or “we need to get someone who will.”

The Fed has also come under fire from Republicans, including Richard Shelby of Alabama, the Senate Banking Committee chairman, who called for more Fed transparency and greater congressional oversight at a hearing Tuesday.

Yellen, in her speech to the Citizens Budget Commission, also took aim at ethical lapses at large banks supervised by the Fed.

Follow the law

“We expect the firms we oversee to follow the law and to operate in an ethical manner,” she said.

“Too often in recent years, bankers at large institutions have not done so, sometimes brazenly.”

Such incidents “raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness,” she said.

Global regulators, including the Fed, are trying to tighten oversight of financial benchmarks that are used to price everything from student loans to mortgages, oil and currencies.

The world’s largest banks have paid billions of dollars to settle allegations of rigging Libor and other interest rates. Six firms, including Citigroup and UBS, paid $4.3 billion in November to settle probes into the manipulation of foreign-exchange rates.

Forest versus trees

Yellen spoke broadly about efforts to ensure financial stability, saying the Fed is focusing more on the “forest” of the financial system rather than the “trees” of individual banks.

“We cannot eliminate the possibility of another crisis, but we can make a crisis less likely and less damaging by limiting excessive risk-taking by firms we oversee and by helping ensure that the most systemically important firms are better prepared to weather a crisis,” she said.

The Fed this week will announce the first results of this year’s so-called stress tests of the biggest banks, which are intended to see if they can maintain adequate capital cushions and keep lending in a hypothetical crisis scenario.

“In the decades of relative financial stability leading up to the crisis, it is fair to say that the Fed focused too much on individual firms and not enough on their role in the financial system and the implications of those firms’ operations for financial stability,” Yellen said.

Yellen said the financial system has become safer since the crisis.

The “high-quality liquid assets” of the largest US banks have increased by about one-third since 2012, and their reliance on short-term wholesale funding has “dropped considerably.” The amount and quality of capital, and the strength of liquidity at large banks, are “greatly improved.”

Risk management

She said the Fed sees “some evidence of improved risk management, internal controls, and governance at large firms. But large firms still have room for improvement in this area, and supervisors will be watching closely.”

Banks’ so-called living wills, annual hypothetical plans for a fast and orderly bankruptcy, “still have a number of shortcomings,” she said.

The Fed “expects these institutions to make substantial progress in the coming months, which will leave firms and the government better-positioned to manage the failure of a large institution.”

Bloomberg

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