Yellen calls for financial stability vigilance, warns against rolling back regulation

By David Lawder

(Reuters) -U.S. Treasury Secretary Janet Yellen called on Thursday for continued work to ensure a resilient financial system, including pursuing thoughtful regulation and pushing back against those who want to roll back bank capital requirements.

Yellen, in remarks to a Treasury markets conference in New York, said reforms instituted after the 2007-2009 financial crisis have helped the system weather turbulence including the COVID-19 pandemic and more recent regional bank difficulties.

"Work to build and maintain a resilient financial system is never over. We'll never be able to just declare victory," Yellen told the conference hosted by the Federal Reserve Bank of New York.

"A resilient financial system is critical to a strong economy. And strengthening it requires insisting on thoughtful regulation, including in the face of challenges from those who advocate to roll back policies and regulations," she added.

Yellen blamed the Trump administration for letting the government's focus on financial stability deteriorate, leaving the decade-old Financial Stability Oversight Council "severely weakened" when she took office in 2021, with staff cut to single digits and interagency coordination scaled back.

"Put simply, we were without crucial tools to identify and help respond to risks to financial stability. This meant we faced an increased likelihood that risks would materialize into negative impacts on American households and businesses," she said.

Yellen said she has worked to rebuild FSOC's capabilities to ensure the financial system could serve businesses, households and support prosperity.

This included a focus on safe and sound financial institutions, financial market utilities, central clearing counterparties and protections for investors and consumers.

This framework helped enable Treasury to take steps to protect the banking system from contagion in the spring of 2023 after the failure of Silicon Valley Bank and Signature Bank, Yellen said.

At the same event, Michael Barr, the Federal Reserve's point man on bank oversight, said on Thursday that banks should put aside stigma worries and use the central bank's discount window liquidity facility when it makes sense for them.

"At home, there were some who strongly opposed the Dodd-Frank Act, arguing that its regulation would hold back innovation and economic growth," Yellen said, referring to the 2010 financial reform law. "I and many others have insisted on the opposite. Appropriate regulation is critical to supporting a resilient financial system that serves as an engine for innovation and growth."

Warnings that Dodd-Frank would leave the U.S. banking sector uncompetitive failed to be realized while higher-quality capital required by the law allowed banks to extend credit to households and businesses that needed it during the pandemic, Yellen said.

ADDRESSING WEAKNESSES

Core weaknesses revealed by 2023 banking stresses still need to be addressed, she said.

"We need greater supervisory attention on banks with less stable deposits, and we need regulations that account for unrealized losses on securities," Yellen said.

"We also need changes so that banks are better prepared for liquidity stress, such as making sure that they have diverse sources of contingency funding and especially that they have the capacity to borrow at the (Federal Reserve's) discount window and periodically test this capacity."

(Reporting by David Lawder; Editing by Sam Holmes and Bill Berkrot)