Federal Reserve Vice Chairman Janet Yellen said financial markets should be regulated more tightly to reduce the risk of 2008-like credit crises.
“Experience -- most importantly, our recent financial crisis -- as well as a growing body of academic research suggests that interconnections among financial intermediaries are not an unalloyed good,” Yellen said today in a speech in San Diego. “Certain types of externalities, such as those arising from incomplete information or a lack of coordination among market participants” can be “devastating during a crisis,” she said.
U.S. regulators have sought to prevent excessive risk taking in financial markets since the 2008 credit freeze led to the worst U.S. recession since the 1930s. The Fed during the past four years has cut its benchmark interest rate to near zero and is buying bonds to reduce borrowing costs, spur growth and combat unemployment.
“A lack of complete certainty about potential outcomes is not a justification for inaction, considering the size of the threat encountered in the recent crisis,” Yellen said at the American Economic Association’s annual meeting.
Regulators could make financial markets more resilient by setting higher capital requirements for so-called systematically important global banks and mandating that standardized derivatives be cleared by a central counterparty, she said. Financial institutions should also disclose more of their trades to central authorities, she said.
Yellen didn’t comment on the outlook for the economy or monetary policy.
Regulators must carefully weigh the benefits and costs of new rules, mindful that close ties among financial institutions helps them to diversify their risks, Yellen said.
The Fed last month moved to subject two dozen foreign banks with at least $50 billion of global assets to stricter U.S. capital rules. The central bank also proposed that most of the banks be forced to comply with more-stringent liquidity rules and pass stress tests analyzing how they would fare in a severe economic downturn. The plan would take effect in July 2015.