US Fed chief defends post-crisis regulations

Federal Reserve chair Janet Yellen arriving for a dinner at the Jackson Hole economic symposium in Moran, Wyoming, on Thursday. She made it clear in her speech that she believes that while some improvements could be made to the banking system, they s
Federal Reserve chair Janet Yellen arriving for a dinner at the Jackson Hole economic symposium in Moran, Wyoming, on Thursday. She made it clear in her speech that she believes that while some improvements could be made to the banking system, they should be modest, not structural.PHOTO: BLOOMBERG

Banking rules safeguard United States economy and make system safer, says Yellen

JACKSON HOLE • Federal Reserve chair Janet Yellen has offered a forceful defence of the broad banking regulations enacted after the 2008 financial crisis, saying the rules safeguard the United States economy against another crisis and rejecting assertions from President Donald Trump and top aides that they should be rolled back.

Dr Yellen's speech, delivered to an annual gathering of central bankers, finance ministers and economists, comes as Mr Trump is considering whether to reappoint her to a four-year term as head of the US central bank.

Dr Yellen, 71, made it clear in her speech yesterday that she believes tighter regulations and standards have made the banking system safer and that while some improvements could be made, they should be modest, not structural.

"The evidence shows that reforms since the crisis have made the financial system substantially safer," she said, according to prepared remarks.

Mr Trump has waffled on whether he would re-nominate Dr Yellen to the post. He has said he likes her cautious approach to raising interest rates, but her decision to make clear that she is not in favour of rolling back the banking rules could put a wide chasm between her and the White House.

There are numerous banking regulators who have input on how the financial system is overseen, but none is as powerful or as influential as the head of the Fed.

Dr Yellen's speech reflected on the government's response to the Great Recession.

MORE RESILIENT

Our more resilient financial system is better prepared to absorb, rather than amplify, adverse shocks, as has been illustrated during periods of market turbulence in recent years.

DR JANET YELLEN, on how tighter regulations, far from stifling economic growth, had actually helped the economy in part by making the financial system safer.

A financial crisis in 2008 and 2009 caused a global panic, with some of the world's largest financial companies wobbling or toppling and the US government injecting hundreds of billions of dollars into the financial system to prevent a collapse.

In 2008, the Bush administration and Congress passed a law that allowed the government to inject money into the banking system to try to arrest the crisis.

In 2010, the Obama administration and Congress passed a law that imposed new consumer protection rules, required banks to hold bigger cushions against losses, put new limits on their ability to take risk, and tried to establish a process to help wind down large financial companies. Mr Trump has said these changes went too far, calling the law a "disaster" that has made it hard for consumers and businesses to access credit and restricted economic growth.

One of his arguments, supported by many banks, is that requiring banks to hold more capital to cushion against losses makes it harder for them to lend money.

Dr Yellen addressed these criticisms head-on in her speech, saying the research is mixed but that Fed officials believe that there were "sizeable net benefits to economic growth from higher capital standards". She acknowledged, though, that some borrowers could see a decrease in access to loans because of the rules.

Some changes to individual regulations may be warranted, she said, specifically mentioning possible relaxation of the Volcker Rule limit on banks' equity trading, and further relaxation of rules that apply to medium-sized and smaller banks.

She did not mention monetary policy in her prepared remarks.

WASHINGTON POST, REUTERS

A version of this article appeared in the print edition of The Straits Times on August 26, 2017, with the headline 'US Fed chief defends post-crisis regulations'. Print Edition | Subscribe