Yellen says Federal Reserve considering tougher rules for big banks
WASHINGTON -- The Federal Reserve is considering tougher rules for big banks to keep credit flowing in case of another financial crisis, Fed Chairwoman Janet L. Yellen said Tuesday.
Although officials from the Fed and regulatory agencies approved more stringent requirements for the eight largest banks last week, Yellen said additional measures might be needed to keep short-term credit markets from freezing up during stressful financial conditions.
“In 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns and Lehman Bros., and from money market mutual funds and asset-backed commercial paper programs,” Yellen said in a video speech to the Federal Reserve Bank of Atlanta’s financial markets conference.
“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,” she said.
The near market meltdown in 2008 led to an international accord to require banks to hold more and higher quality capital to offset potential losses.
Last week, U.S. officials went further than the international rules. Federal regulators approved phased-in requirements forcing the nation’s biggest banks to raise a total of about $68 billion in additional capital.
On Tuesday, Yellen said Fed officials are “actively considering additional measures” that could further reduce risks to so-called short-term wholesale funding markets. Those markets help provide the liquidity that keeps the financial system working.
Some changes, such as requiring firms to hold even more capital, “would likely apply only to the largest, most complex banking organizations,” Yellen said.
But the Fed also could enact other measures that would apply to all financial firms, she said.
A 2010 study by the Basel Committee on Banking Supervision, which sets international standards, found economic benefits to requiring banks to hold more capital and have more liquid assets that could be used to weather short-term funding crises, Yellen said.
“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.
But Yellen acknowledged there were potential problems with forcing banks to hold more capital. Bank executives have complained the requirements would reduce the money available to lend to businesses and individuals.
Fed officials are “carefully thinking through questions about the trade-offs associated with tighter liquidity regulation,” Yellen said.