Yellen pushes back on GOP banking deregulation plan

Yellen pushes back on GOP banking deregulation plan
© Keren Carrion

Federal Reserve Board Chair Janet Yellen is pushing back on Republican efforts to ease certain post-recession regulations on banks intended to keep them stable through crises.

Yellen told the Senate Banking Committee that “we can never be confident that there won’t be another” panic on Thursday morning, just weeks after she predicted there wouldn't be another financial crisis in our lifetimes. She also asked lawmakers to maintain requirements targeted by Republicans for how much cash major banks must hold.

Yellen also called on lawmakers to preserve the main framework federal regulators use to test a "systemically important" bank’s ability to continue lending during a financial crisis. Several major financial institutions lacked the capital to operate during the 2008 crisis triggered by a collapse in risky mortgage-backed securities.

“Our stress-testing regime is forcing banks to greatly improve their risk management and capital planning,” Yellen said. “It’s given us assurance that even if there is a very significant downturn in the economy, they will be able to function and provide for the credit needs of the economy.”

Yellen’s testimony, perhaps her last before her term ends in 2018, comes as Republicans attempt to roll back the Dodd-Frank Wall Street Reform Act. The House in June passed a sweeping bill to strip away much of the 2010 law, and the Treasury Department soon after released an expansive report detailing major parts it would like to scrap.

The upper chamber is unlikely to take up the House bill, and Senate Banking Committee leaders said they’re focused on bipartisan measures to reduce regulations on community banks, which are seen as less risky and have fewer federal violations, and fix federal housing finance.

Yellen said Thursday that she supports adjusting the threshold that determines which big banks are subject to stricter regulations. Under Dodd-Frank, banks with $50 billion or more in assets are deemed “systemically important” and must submit to more stringent federal stress tests and capital requirements.

These “systemically important financial institutions” (SIFIs) can later be taken over by the federal government and dismantled before they collapse using orderly liquidation authority (OLA), an account funded by regulatory fees paid by banks.

Lawmakers and regulators across ideological lines have expressed interest in changing the $50 billion threshold, but disagree on a new amount and how to change it. Republicans have suggested modifying the threshold to reflect a bank’s risk portfolio more than its total value.

Yellen said lawmakers shouldn’t remove capital requirements for banks or OLA, but said adjusting the $50 billion threshold to ease burdens on smaller banks makes sense.

“I wouldn’t be in favor of reducing capital for the most systemic banks,” Yellen said. “For those banks, it’s critically important to maintain those capital standards.”

Yellen also said that it’s “essential” for Congress to keep OLA, one of several parts of Dodd-Frank that some Republicans have floated repealing through budget reconciliation. GOP leaders are looking at that legislative method to pass ObamaCare repeal and tax reform over a potential Democrat filibuster, but could add in Dodd-Frank rollbacks that receive universal Republican support.

Yellen did, however, express support for modifying the "Volcker Rule," a regulation banning banks from making certain risky investments with their own capital. Federal Reserve Governor Jerome Powell suggested in June the Fed could focus the rule on firms with major investment practices while reducing the compliance burden for smaller banks.