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Yellen: U.S. Banks Are Still a Risk to Financial Stability

Fed chief Janet Yellen tells lawmakers big U.S. financial firms are behind on putting in place key safeguards to prevent a repeat of 2008.

By David Francis

November 4, 2015, 12:39 PM

As the economy gains strength, the near-collapse of the U.S. financial system after the fall of Lehman Brothers in 2008 is fading from the memories of most Americans. On Wednesday, Federal Reserve chief Janet Yellen warned the United States is still at risk of something similar happening again.

Testifying before the House Financial Services Committee, Yellen said “substantial compliance and risk management issues” remain at some of the larger financial firms that the Fed regulates. She didn’t get into specifics, but her message to lawmakers was clear: Banks are healthier than they were at the start of the Great Recession, but they still aren’t in tip-top shape — and that poses a risk to the U.S. economy.

“While we have seen some evidence of improved risk management, internal controls, and governance … compliance breakdowns in recent years have undermined confidence,” Yellen said in prepared testimony. She was speaking specifically of 16 large financial companies, including the biggest U.S. banks, that are overseen by the Fed.

“[This] could have implications for financial stability, given the firms’ size, complexity, and interconnectedness,” Yellen said.

Public comments made by the normally cagey Yellen are carefully dissected by Wall Street and policymakers around the world, looking for hints of the Fed’s view of the underlying health of the U.S. economy. Her remarks Wednesday show that she and her colleagues at the Fed still aren’t satisfied that federally mandated safeguards to prevent a repeat of the panic of 2008 are in place. At the start of the Great Recession, the federal government had to step in to save the largest U.S. banks with tens of billions of dollars in bailout funds, needed after the subprime mortgage bubble popped.

Yellen also said “no decision at all has been made” about a looming interest rate hike. The cost of borrowing has been near zero since 2008 and has not gone up since 2006. As in other recent public comments by the Fed chief, Yellen hinted one could be coming as soon as next month, but the timing was still uncertain.

“We thought it could be appropriate to adjust rates at our next meeting,” Yellen said under questioning from lawmakers. She added the Fed would move “in a timely fashion — if the data and the outlook justify such a move.”

Photo credit: Alex Wong/Getty Images