WASHINGTON — Federal regulators will take decisive action if the biggest banks fail to improve their living wills by October, Federal Reserve Board Chair Janet Yellen pledged to lawmakers on Tuesday.
Speaking on the first day of her semiannual monetary policy testimony, Yellen fielded questions on a range of issues, including cybersecurity safeguards at the Fed and diversity at the agencies.
But Senate Banking Committee members spent much of their time grilling the central banker on why most of the big banks failed regulators' evaluation of their resolution plans — and what the agencies would do if they did not fix their problems by the new deadline only four months away.
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Minneapolis Fed President Neel Kashkari fired back Monday at those who argue "too big to fail" has been adequately addressed by Dodd-Frank and other reforms, contending that the new structure is overly complex and goes against real-world market conditions.
June 20 -
A lack of liquidity wasn't what caused most of the largest U.S. banks to fail their living wills test, a Federal Deposit Insurance Corp. official said Thursday.
June 2 -
Regulators appear to have made the right call in failing most of the largest banks' living wills, but it's hard to tell given the dearth of publicly available information, a new government report suggests.
May 25 -
In declaring that five U.S. banks' resolution plans were "noncredible," regulators provided new details on exactly what each institution did wrong, as well as what Citi and others did right. Here's what they said.
April 13
"What I am asking here is for a commitment" to address problems if the banks do not improve their plans, said Sen. Elizabeth Warren, D-Mass.
Yellen replied that "there will be consequences" for banks that fail to improve.
"We are very serious about wanting to see these deficiencies remedied and well aware that we have at our disposal" tools, including instituting higher capital and liquidity requirements, Yellen said. "I cannot pre-commit today to tell you precisely what our response will be, and we will work closely with the FDIC as we have all along. But we are extremely serious about wanting to see progress and certainly will consider using those tools."
The Fed and the Federal Deposit Insurance Corp. have been criticized by lawmakers for going easy on the largest eight U.S. banks that were the first to file annual "living wills" detailing how they could be wound down in a crisis. It took the Fed and the FDIC more than nine months to come to a determination of whether the plans would be effective for those banks. The agencies jointly determined that five of those banks failed to present credible plans, disagreed about two others' living wills, and effectively gave one bank — Citigroup — a passing grade.
To lawmakers like Warren, the process has taken too long, while regulators have failed to penalize institutions that produce flawed plans.
"The banks have known this was coming since Dodd-Frank was passed in 2010," Warren said. "That is six years ago and they have been submitting living wills since 2013. There is no provision for all of the extensions that you have given them so far. If any of the banks fail the credibility test on their fifth try, they need to face some real consequences."
During the hearing, Yellen emphasized that banks had improved their plans.
"Those banks who've over the span of the last several years and in which they have been preparing living wills greatly increased their ability to be resolved in the event of trouble," she said.
Cybersecurity
Yellen was also asked about the industry's — and the Fed's — cybersecurity preparedness. Lawmakers noted reports that cyberthieves were able to steal money from a Bangladesh bank through the Federal Reserve Bank of New York. They also questioned if regulators should be doing more to force financial institutions to step up their efforts.
"I would just urge you that this is going to be an area that's going to exponentially grow in importance and both in terms of the Fed's internal expertise and ensuring that we are working more closely with the overall banking industry to up their game," said Sen. Mark Warner, D-Va.
Sen. Jack Reed, D-R.I., also asked whether the Fed can require bank boards to have an individual with cybersecurity expertise.
"I don't know that we have looked at that," Yellen replied. "We are certainly supervising financial-institution ability to address cyber threats."
Diversity
The Fed also came under fire for its lack of diversity within the agency and at the 12 regional banks.
"There is not a single [Fed] president who is either African-American or someone like me, Latino," said Sen. Bob Menendez, D-N.J., noting a recent report that found 83% of staff at the Fed is white. "That is fundamentally wrong."
In response to another question, by Sen. Sherrod Brown, D-Ohio, about the issue, Yellen said she and the Fed are committed to "achieving diversity within our workforce and within our leadership at absolutely all levels."
"I believe it's important to have a diversified group of policymakers who can bring different perspectives to bear," she added.
Regulatory Relief
Lawmakers also continued to press Yellen on granting regulatory relief for small institutions.
"I'm continually concerned about community banks and the level of regulation that match the risk that they pose to the economy and to their depositors and borrowers," said Sen. Jon Tester, D-Mont., adding that he is bothered by rapid consolidation among smaller banks.
Yellen said that consolidation may be partly because of the regulatory environment, but said there are a number of factors. "This is a challenging environment for banks, a low interest rate environment and profitability has also been important," she said.
Still, Yellen said the Fed remains "heavily focused on trying to find ways to relieve community banks of undue burden."
Yellen said she believes the central bank "will come out with meaningful proposals for relief and we are looking at something that might be a significant simplification of the capital regime for those community banks."
