Janet Yellen Urges Additional Banking Sector Reforms To Ensure Financial Stability

Treasury Secretary Janet Yellen warned Thursday that financial regulations may have become too loose, potentially putting the U.S. financial system at risk.

What Happened: Speaking at the National Association for Business Economics 39th Annual Economic Policy Conference, Yellen highlighted the importance of financial stability and the need for continued progress in ensuring it.

The Secretary noted that a fragile system can cause economic downturns and significant losses in wealth. Yellen highlighted the history of federal financial regulation in the U.S., which has traditionally focused on the safety and soundness of banks, investor protection, and market integrity.

However, the 2008 global financial crisis revealed that the focus was too narrow, given the increased complexity and interconnection of today's financial system. To mitigate systemic risk, macroprudential policies were pursued to build a more resilient financial system.

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Despite the progress made since the crisis, Yellen stressed that there is more work to be done to address vulnerabilities in both the banking and nonbank sectors, highlighting the recent failures of Signature Bank and Silicon Valley Bank.

The Secretary suggested enhancing the resilience of the banking system and addressing vulnerabilities in nonbank financial intermediation, including money market and open-end funds, hedge funds, and digital assets.

In particular, Yellen recommended establishing a comprehensive regulatory framework for stablecoin issuers, including consolidated federal supervision, requirements for backing the coin, and capital and liquidity requirements.

Yellen also called for identifying and filling gaps in existing oversight authority for other crypto-assets and exploring broader policy issues around the future of money and payments, including the possibility of a central bank digital currency.

The Secretary’s comments surrounding oversight authority for crypto assets are reflective of comments made Wednesday by SEC Chair Gary Gensler, in which he described the crypto markets as the "Wild West," and called for more SEC employees to enforce the budding industry, which he said is plagued with non-compliance.

Yellen's speech highlighted the critical importance of financial stability, and the need for continued efforts to build a financial system that works for the American people, saying that it is clear that the recent interventions by the Fed, FDIC, and the Treasury in the banking sector aren't done.

Read also: Gensler Urges Congress To Increase Funding For SEC To Investigate Cryptocurrency Issues

Photo: International Monetary Fund on flickr