WASHINGTON (AP) — Federal Reserve Chair Janet Yellen said
Tuesday that the largest U.S. banks might need to hold additional
capital to withstand periods of financial stress.
Yellen told a
banking conference in Atlanta that current rules on how much capital
banks must hold to protect against losses don’t address all threats. She
said the Fed’s staff is considering what further measures might be
needed.
She said the Fed would review the likely effects of
imposing stricter rules on banks. Banks and their advocates have warned
that further tightening bank regulation would lead to reduced lending to
businesses and financial institutions and could slow economic growth.
Analysts
said Yellen’s message was similar to remarks that Daniel Tarullo, a Fed
governor and the board’s point person on bank regulatory issues, has
made in the past. They said it could be a sign that the Fed under Yellen
will take a more aggressive stance on bank regulation.
In her
speech, Yellen said further actions to address risks, such as requiring
firms to hold more capital, would likely apply only to the largest, most
complex banks. But she suggested that other requirements could be
applied more broadly to medium-size banks and non-bank financial
institutions.
Karen Shaw Petrou, an analyst who heads Federal
Financial Analytics in Washington, said Yellen also appeared to be
signaling a desire to ensure that in tightening rules for big banks,
regulators don’t just drive risky behavior into less regulated areas of
the financial system. These areas are often called the shadow banking
system.
"The threat is if all you do is regulate the big banks,
the risk will move to the non-banks," Petrou said. "Yellen is signaling
that the Fed will seek to address that problem."
Bert Ely, an
independent banking consultant in Alexandria, Va., said Yellen was
indicating that the Fed plans to address the risk that parts of the
financial system will exploit gaps in the rules.
"The more
requirements you put on the highly regulated banks, the greater is the
incentive to find ways around the tougher rules," Ely said.
In
2007 and 2008, risk-taking in a corner of shadow banking known as
subprime mortgages spread to other areas of the system and eventually
pushed the country into the worst recession since the Great Depression.
In
her remarks, Yellen said regulators must focus on ways to prevent
another financial crisis. She spoke via video to a financial markets
conference sponsored by the Fed’s Atlanta regional bank.
"In 2007
and 2008, short-term creditors ran from firms such as Northern Rock,
Bear Stearns and Lehman Brothers and from money market mutual funds and
asset-backed commercial paper programs," she said. "Together, these runs
were the primary engine of a financial crisis from which the United
States and the global economy have yet to fully recover."
Yellen
referred to a 2010 study by the Basel Committee on Banking Supervision.
The study, in assessing the long-term economic effects of imposing
stricter capital and liquidity requirements on banks that operate
globally, concluded that such changes would produce a net economic
benefit.
"While it would be a mistake to give undue weight to any
one study, this study provides some support for the view that there
might be room for stronger capital and liquidity standards for large
banks than have been adopted so far," she said.
Last week,
regulators approved requirements that will make the eight largest U.S.
banks add up to $68 billion in capital to comply with rules designed to
ensure that the banks could withstand severe losses.
The so-called
leverage ratio approved by the Fed and the other regulators will
require the largest banks to maintain capital well above the global
minimum levels against all assets on their books, not just those judged
to be the riskiest.
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AP Business Writer Marcy Gordon contributed to this report.
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