Fed chief defends controls on banks
Yellen rejects GOP bid to repeal law
JACKSON HOLE, Wyo. — Federal Reserve Chairman Janet Yellen on Friday defended the web of regulations the Fed helped enact after the 2008 financial crisis, saying it helped restore the banking system’s health and disputing criticism that the rules have hurt lending.
Yellen said the Fed is prepared to adjust the regulations as needed to help financial institutions. But in a speech to an annual conference of central bankers in Jackson Hole, she implicitly rejected efforts by Republicans, including President Donald Trump, to scrap the 2010 Dodd-Frank law as a threat to the economy.
“Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” Yellen said.
“The events of the crisis
demanded action, needed reforms were implemented and these reforms have made the system safer,” she said.
The Fed chairman refrained from remarking on the state of the economy or on the possible future course of interest rates. Investors had been awaiting her speech for any signals about what the Fed might do when it meets next month. The central bank has been gradually raising its benchmark short-term rate, but most Fed watchers expect no rate increase before December at the earliest.
Overhanging Yellen’s speech was the possibility that it marks her final appearance in Jackson Hole as Fed chairman. Her term will end in February, and Trump has made clear he is considering replacing her. One candidate he has mentioned is Gary Cohn, a former Goldman Sachs senior executive who leads Trump’s National Economic Council.
Some saw Yellen’s forceful defense Friday of the regulatory structure imposed on banks since the 2008 crisis as further lessening the likelihood that Trump will reappoint her.
Sal Guatieri, senior economist at BMO Capital Markets, said Yellen’s speech “puts her at odds with Trump’s deregulation mandate, which could weigh against her remaining as chair when her term expires early next year.”
Paul Ashworth, chief U.S. economist at Capital Economics, said that “Yellen’s passionate defense of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House” and that it probably makes it less likely that Trump will renominate her.
At the same time, tensions emerged between Cohn and Trump. In an interview published Friday in the Financial Times, Cohn said he considered quitting the White House over the president’s widely condemned response to violence at a white nationalist rally in Charlottesville, Va. Cohn said he ultimately chose not to leave because of the duty he feels to his job.
In her speech, Yellen noted that the U.S. and global financial systems were “in a dangerous place 10 years ago,” with severe strains that led to the collapse of investment bank Lehman Brothers, the government takeover of mortgage giants Fannie Mae, the Federal National Mortgage Association, and Freddie Mac, the Federal Home Loan Mortgage Corp., and the requirement that taxpayers bail out the largest banks.
The Fed chairman pointed out that despite all the government support to banks, the downturn devolved into a recession, with the loss of 9 million U.S. jobs and millions of Americans losing homes to foreclosures. She said the resulting recovery has been painfully slow and that policymakers have had to devise ways to prevent another financial crisis.
Yellen said the DoddFrank Act has produced a far safer banking system, especially with banks required to hold much higher levels of capital, the cushion against losses from bad loans.
“The United States, through coordinated regulatory action and legislation, moved very rapidly to begin to reform our financial system,” Yellen said, “and the speed with which our banking system returned to health provides evidence of the effectiveness of that strategy.”
In addition to higher capital requirements, Yellen said, the financial system has been fortified by regulations requiring that the biggest banks undergo annual stress tests to ensure that they have enough capital to withstand any future severe downturn.
She said the Fed is open to modifying current regulations, especially to ease restrictions on smaller banks that didn’t contribute to the 2008 crisis. She also suggested that the so-called Volcker Rule, which limits the ability of banks to trade their own investments, might need to be modified.
Republicans have long opposed the Dodd-Frank law, which was enacted by Democrats in Congress with the support of President Barack Obama.
“Her underlying message is clear: Don’t forget the lessons of the past. The next crisis is coming, and we need these stronger rules to stay in place,” Harm Bandholz, chief U.S. Economist at UniCredit Bank AG in New York, wrote in a note to clients.
During last year’s campaign, Trump called the Dodd-Frank law a “disaster” that had held back lending, hiring and the overall economy.
He promised early in his presidency to do “a big number” on it. Trump has named officials to key posts in regulatory agencies who would be expected to carry out his deregulatory effort. He has, for example, nominated Randal Quarles to the key post of Fed vice chairman for bank supervision. Quarles has been critical of certain aspects of Dodd-Frank.
The Republican- led House has passed legislation that would overturn many of the Dodd-Frank provisions. The legislation has not advanced in the Senate, however. Information for this article was contributed by Martin Crustinger, Marcy Gordon and Paul Wiseman of The Associated Press; by Jeanna Smialek and Craig Torres of Bloomberg News; and by Binyamin Appelbaum of The New York Times.