U.S. Treasury Secretary Janet Yellen's Warning on Banking Regulations

By Andrea Shalal and David Lawder

WASHINGTON (Reuters) – U.S. Treasury Secretary Janet Yellen urged the incoming Trump administration to avoid interfering with essential regulations governing American banks' capital levels, liquidity, and risk-taking.

Yellen, who has served under President Joe Biden since January 2021, acknowledged that the current oversight system isn't perfect, and it's reasonable to seek ways to lessen regulatory burdens. However, she cautioned against extreme measures that could disrupt necessary oversight and the existing system ensuring bank deposit safety due to a historical context of financial crises triggered by bank failures.

> "I don't want to say that exactly what we have is utterly sacrosanct and couldn't possibly be touched. But I do not think it's broken. We've got a good system," she stated in an interview with Reuters, as she prepares to pass the baton to Scott Bessent, President-elect Donald Trump's Treasury secretary nominee.

Trump's administration suggests potential substantial changes to the decades-old federal regulatory framework governing financial services, banking, and digital currency.

> "Bankers always complain about over-regulation," Yellen noted. "It's legitimate to look for areas where the burdens of regulation exceed the benefits and try to redress that. But appropriate regulation of capital, liquidity, risk-taking, and the like are critically important to a sound banking system and economy and should not be interfered with."

Yellen expressed concern regarding reports indicating that Trump's transition team was considering reducing, merging, or possibly eliminating top bank regulators but offered no insights into their plans.

> "We've seen what happens when banks are inappropriately supervised," she remarked, referencing the unexpected failures of Silicon Valley Bank and Signature Bank in March 2023, among others, which created the risk of a contagious financial crisis.

She emphasized the importance of proper supervision and regulation to significantly lower the risk of bank failures, mentioning deposit insurance as an essential component in ensuring system safety, soundness, and public confidence, along with the necessity for adequate liquidity access during bank troubles.

Financial Stability

Yellen stated that U.S. banks are performing "exceptionally well" despite concerns that the Dodd-Frank legislation from the 2008-2009 financial crisis would hinder their competitiveness. This legislation led to the establishment of the Financial Stability Oversight Council, the Federal Reserve's financial stability division, and the Treasury's Office of Financial Research to identify and evaluate threats to financial stability.

Having led the Fed from 2014 to 2018, Yellen acknowledged America's complex banking regulation system, which involves numerous federal and state agencies. She noted previous discussions about possible federal level consolidations, referring to the Office of Thrift Supervision's elimination following the global financial crisis, which did not result in adverse effects. However, she added that reforming the regulatory structure was not a primary focus of her agenda.