Yellen: Poor values may undermine bank safety

Federal Reserve Chair Janet Yellen lashed out at the culture in the nation’s biggest banks on Tuesday saying “there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.”

In a speech in New York City, Yellen, who as head of the Federal Reserve is the nation’s leading bank supervisor, said that the Fed expects banks to follow the law and act ethically. “Too often in recent years, bankers at large institutions have not done so, sometimes brazenly,” she said.

The remarks come amid ongoing investigations and settlements by big banks in key areas of their businesses, including mortgages, currency trading and setting interest rates. They appear to be her strongest comments yet on the issue, going further than previous speeches and other Fed officials in suggesting a pattern.

Yellen’s comments come as the issues of bank regulation and financial system reforms are very much alive in the new Republican-controlled Congress. During Yellen’s congressional testimony last week, some GOP lawmakers complained that the Dodd-Frank financial reform act had gone too far and was holding the economy back by curtailing lending. From the Democratic side, Yellen and the Fed have taken heat for being too lenient on the big banks.

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Yellen addressed some of those issues, saying for example that the Fed took the concept of regulatory capture – in which government bank supervisors grow too close to the banks they oversee – very seriously and that the Fed works to prevent it. Addressing an issue for which Senator Elizabeth Warren (D-Ma.) had strongly criticized the Fed, Yellen also said that banks’ so-called resolution plans still had shortcomings. Those plans, mandated by Dodd-Frank, tell regulators how a bank can be taken apart and sold off in the event of a financial crisis.

But to the critics of Dodd-Frank, Yellen said the recent increase in bank supervision and higher capital and liquidity requirements, “have significantly improved the strength and stability of large financial institutions and the financial system.”

It’s unclear whether Yellen’s strong words mean any changes for the big banks or how the Fed could even respond. The Chair’s comments that shortcomings “may be pervasive” and could undermine banks’ “safety and soundness” is at least a stern warning and perhaps lays the groundwork for further action.

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