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Yellen Says Higher Capital Rules May Be Needed for Big Banks

Federal Reserve Chair Janet Yellen
Federal Reserve Chair Janet Yellen said staff members at the Fed “are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets.” Photographer: Andrew Harrer/Bloomberg

Federal Reserve Chair Janet Yellen said additional capital may be required for large U.S. banks whose source of funding could be at risk during a financial crisis.

A study by the Basel Committee on Banking Supervision “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,” Yellen said in prepared remarks for a speech in Stone Mountain, Georgia. “Tightening risk-based capital and liquidity requirements would, on net, provide economic benefits.”

Yellen said staff members at the Fed “are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets.” Yellen spoke in comments to be transmitted via video to the Federal Reserve Bank of Atlanta’s financial markets conference.

Some “measures -- such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding -- would likely apply only to the largest, most complex banking organizations.”

Margin Requirements

Other measures -- “such as minimum margin requirements for repurchase agreements and other securities financing transactions -- could, at least in principle, apply on a marketwide basis,” Yellen said. In setting rules, regulators will be “carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation.”

Yellen said she was particularly concerned that reforms to bank regulation not just bolster capital but that they also ensure liquidity because “in 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns, and Lehman Brothers, and from money market mutual funds and asset-backed commercial paper programs.”

“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.

She said liquidity standards developed by the Basel Committee on Banking Supervision, while they are “important steps forward,” fail to “fully address the financial stability concerns associated with short-term wholesale funding.”

The Fed has increased monitoring of asset prices for evidence of bubbles that would pose a threat to financial stability, and has “a few areas” of concern, including farmland prices, Yellen told senators in February. The Fed uses regulation and supervision to address problems and “will continue to be vigilant,” she told the Senate Banking Committee.

The Fed chair didn’t address the current economy or monetary policy in her remarks.

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