Yellen says a stable financial system is key to US economic strength
Treasury Secretary Janet L. Yellen will tell lawmakers on Tuesday that the United States has had a “historic” economic recovery from the pandemic, but regulators must vigilantly protect the financial system from a range of looming risks to sustain gains over the past three years to keep .
Ms. Yellen will deliver the comments in testimony to the House Financial Services Committee, nearly a year after the Biden administration and federal regulators took aggressive steps to stabilize the nation's banking system following the abrupt failures of Silicon Valley Bank and Signature Bank.
While turmoil in the banking system has largely subsided, the Financial Stability Oversight Council, led by Ms. Yellen, has been examining how it monitors and responds to risks to financial stability. Like other government agencies, the council did not anticipate the problems faced by several regional banks or warn regulators.
“Our continued economic strength depends on a solid and resilient American financial system,” Ms. Yellen said in her message comments prepared.
Last year's bank failures resulted from a combination of circumstances, including the failure of banks to properly prepare for the rapid rise in interest rates. As interest rates rose, Silicon Valley Bank and others absorbed huge losses, causing panic among savers who rushed to withdraw their money. To prevent a broader attack on the banking system, regulators took control of Silicon Valley Bank and Signature Bank and invoked emergency measures to assure depositors they would not lose their money.
The bank failure – and government bailout – sparked debate over whether more needed to be done to ensure customer deposits were protected and whether bank regulators were able to properly monitor risks.
Ms. Yellen is expected to answer questions about what has been done over the past year to protect the financial system and prepare to deal with future threats. The International Monetary Fund said in a report last week that expectations for falling interest rates had led to increased demand for risky financial assets and that some sectors, such as commercial real estate, continued to face the prospect of bankruptcies due to the falling value of office real estate.
The Treasury Secretary is expected to tell lawmakers that the Financial Stability Oversight Council has submitted its annual report report to Congress late last year, emphasis was placed on banks' ability to absorb losses, along with improving the process of winding down failing banks in an increasingly interconnected financial system. She will note that other types of financial institutions also pose risks and plans to point to the Securities and Exchange Commission's oversight of hedge funds and money market funds.
The Biden administration has also focused on longer-term threats. Ms. Yellen will say regulators continue to focus on climate-related financial stability risks and will call on them to press ahead with disclosure rules that allow investors and lenders to consider climate change when making decisions. Cybersecurity and the rise of artificial intelligence are also risks on the radar of regulators.
“The council is closely monitoring the increasing use of artificial intelligence in financial services,” Ms. Yellen will say, adding that the potential cost-saving benefits of the new technology could come with new cybersecurity threats.
Despite these concerns, the Treasury Secretary will provide an optimistic assessment of the US economy, saying economic growth is strong while inflation has fallen significantly. She will describe the labor market as healthy and note that the household wealth of Americans has increased sharply since 2019.
“Families are now putting their extra income and accumulated savings back into the economy,” Ms. Yellen will say.