Former Fed Chair Yellen says ‘more work to be done’ for ensuring financial stability

Ensuring the stability of the nation’s financial system remains “a work in progress,” a former chairman of the Federal Reserve Board said Friday, asserting that regulators could use more tools to take action.

“There is more work to be done,” former Fed Chair Janet Yellen said during a roundtable sponsored by the American Economics Association (AEA), in Atlanta. Current Fed Chairman Jerome H. (“Jay”) Powell and past Chairman Ben Bernanke also participated in the panel. “I actually think in the United States, we have a shortage of macro-prudential tools,” she said.

Former FRB Chair Janet Yellen discusses regulator tools for ensuring financial stability during conference Friday.

Yellen, who served as Fed chair from 2014-18, agreed that the financial system has been made more resilient since the crisis of 10 years ago.

“If we were to see a threat like house prices rising, and we are concerned that a bubble is developing, many countries have tools that a financial stability board could invoke,” Yellen said. “They (the tools) wouldn’t be invoked because anyone is worried about the safety of a particular banking institution. The concern would be that escalating house prices and the potential for a collapse could cause a deep and long recession.”

Yellen noted that many countries, for example, place caps on loans-to-value ratios (LTV) in lending, acknowledging that Canada, the United Kingdom (through the Bank of England) and a number of Asian countries are doing exactly that. “We actually don’t have such tools in the United States, and that worries me,” she said.

Although the Fed received new tools under post-crisis legislation, she said if there were a problem with a systemically important non-bank (such as an investment banking organization), “we lost some of the emergency lending powers that were used during the downturn” to resolve problems. She pointed specifically to insurance giant American International Group (AIG), which was propped up by federal regulators using those emergency powers during the financial crisis.

A collapse of AIG, she said, “would have been disastrous at the time.”

Current Chairman Powell said he agreed with Yellen that the Fed no longer has “a lot of tools that we can move around as a cyclical matter.” He said the Fed has had to make up for that by using existing tools such as the stress test, and the high capital, liquidity and resolution requirements that are “always on” during the cycle.

“I think we are not strong on tools that we can turn off and on,” he acknowledged.

Powell said he felt good about what the Fed has done with the banks and where they are. “But there is more to be done in central clearing, and more to be done in capital markets generally,” he said (as Yellen nodded agreement).