2017-08-25 15:33:03
Yellen Warns Against Erasing Regulations Made After the Financial Crisis

GRAND TETON NATIONAL PARK, Wyo. — Janet Yellen, the Federal Reserve chairwoman, delivered a broad rebuttal on Friday to Republican criticism that financial regulation is impeding economic growth.

Ms. Yellen said changes since the global financial crisis, which began a decade ago, have significantly improved the resilience of the financial system.

“The events of the crisis demanded action, needed reforms were implemented and these reforms have made the system safer,” Ms. Yellen said in remarks prepared for delivery Friday morning at an annual monetary policy conference here.

The speech amounted to a warning to the Trump administration, which is pressing regulators to loosen or remove some of those regulatory changes.

“Already, for some, memories of this experience may be fading — memories of just how costly the financial crisis was and why certain steps were taken in response,” Ms. Yellen said.

Ms. Yellen’s forceful support for financial regulation may complicate her prospects for renomination as Fed chairman. Ms. Yellen’s four-year term ends in February, and President Trump has said he is considering whether to name someone else in her place. Gary D. Cohn, Mr. Trump’s chief economic adviser, whom Mr. Trump has described as a candidate for Ms. Yellen’s job, is an architect of the administration’s regulatory plans.

Ms. Yellen rarely spoke about regulatory issues during the early years of her tenure as chairwoman, but she has addressed the topic with regularity since Mr. Trump became president. She has argued consistently that changes were needed after the financial crisis and that those changes should not be reversed.

On Friday, she cautioned several times against overconfidence in the health of the financial system. She noted, for example, that policy makers gathered here a decade ago were optimistic about the resilience of the system — which was even then in the process of falling apart. One goal of the changes enacted since the crisis is to guard against problems that regulators do not anticipate.

Ms. Yellen said large banks have shifted to a more stable mix of financing. The share that comes from equity investors, known as capital, has roughly doubled, while the share that comes from the least stable source, short-term wholesale borrowing, has decreased roughly by half. “Reforms have boosted the resilience of the financial system,” she said. “Banks are safer.”

She said a variety of indicators suggest that investors share the Fed’s assessment.

Ms. Yellen said there was no clear evidence that increased regulation had been causing broad or deep reductions in the availability of loans, but she said it was more difficult to assess whether there might be smaller impacts.

“Credit may be less available to some borrowers, especially home buyers with less-than-perfect credit histories and, perhaps, small businesses,” she said.

She emphasized that these potential downsides need to be weighed against the benefit of reducing the risk of future crises, which would certainly cause large declines in the availability of credit for much broader groups of borrowers. Small negative effects may be less important than a lower risk of large negative effects.

“Enhanced resilience supports the ability of banks and other financial institutions to lend, thereby supporting economic growth through good times and bad,” she said.

Ms. Yellen extended an olive branch to the Trump administration, saying that the Fed was committed to reviewing the impact of regulations and that it saw specific areas with room for improvement. Fed officials have said repeatedly that they would like to reduce the regulatory burden on smaller financial institutions.

“The Federal Reserve is committed to evaluating where reforms are working and where improvements are needed to most efficiently maintain a resilient financial system,” she said.

Ms. Yellen said regulators also should review restrictions on investment activity by banks, including the so-called Volcker Rule that limits speculative investments.

But there are clear limits on how far she thinks the Fed should go.

Randal Quarles, nominated by Mr. Trump last month as the Fed’s vice chairman for supervision, said at his confirmation hearing that there is a need to relax some of the strictures placed on the financial industry since the crisis. He mentioned specifically the Fed’s annual stress testing of large banks.

Ms. Yellen said Friday that stress tests “has contributed to significant improvements in risk management.”

And she rejected the idea that there is a need for broad reductions in regulation.

“Any adjustments to the regulatory framework should be modest and preserve the increase in resilience at large dealers and banks associated with the reforms put in place in recent years,” Ms. Yellen said.