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Fed Vice Chair Yellen: Progress Made, but More Work Needed on Global Reform

Fed Vice Chair YellenDuring a June 2 speech in China, Federal Reserve Vice Chair Janet Yellen summarized "considerable progress" since 2008 toward building a more resilient global financial system, and she offered her perspective on what remains to be done regarding global financial regulatory reform.

Financial crisis exposed shortfall
Yellen discussed "Regulatory Landscapes: A U.S. Perspective" at the International Monetary Conference in Shanghai. Regulatory reform efforts over the past few years can be divided into three categories, Yellen said: "strengthening the basic bank regulatory framework, reducing the threat to financial stability posed by systemically important financial institutions [SIFIs], and strengthening core financial markets and infrastructure." The financial crisis, she noted, "revealed that banking firms around the world did not have enough high-quality capital to absorb losses during periods of severe stress." These issues will be addressed in part by the Basel III reforms as well as the continued efforts of the Basel Committee, Yellen said.

The financial crisis also highlighted the need for international bank rules to focus more on the potential threat to financial stability caused by SIFIs, particularly those that may be considered "too big to fail," Yellen said. Along with the Basel Committee, Federal Reserve actions have played a key role in reducing the likelihood of failure for these institutions, Yellen said.

Focusing on SIFIs
"In this arena," she explained, "the efforts of the Federal Reserve and the global regulatory community have focused principally on (1) producing stronger regulations to reduce the probability of default of such firms to levels that are meaningfully below those for less systemically important financial firms, and (2) creating a resolution regime to reduce the losses to the broader financial system and economy upon the failure of a SIFI."

In particular, the Fed in December 2011 proposed a broad set of enhanced prudential standards for large U.S. bank holding companies. Yellen noted that the Fed also now performs rigorous annual stress tests and capital plan reviews of the largest banking companies to ensure that the companies can keep functioning and lending during periods of severe economic and financial stress.

U.S. and global regulators have worked to strengthen the capacity of financial markets and infrastructure to absorb shocks, such as the financial crisis, and to reduce the damage to the financial system and the economy if a major financial firm fails.

Looking ahead, Yellen said global financial regulators need to address three areas of "unfinished business":

  • Strengthening the basic bank regulatory framework
  • Addressing the problems caused by SIFIs and institutions that are "too big to fail"
  • Reducing the risks caused by the shadow banking system and financial markets.

June 20, 2013


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