By Bill Poquette, Editor-in-Chief, BankNews Magazine
Answering critics who have suggested regulatory actions spawned by
the Great Recession are inhibiting economic growth, Federal Reserve
Chair Janet Yellen countered with a strong defense of the measures taken
to spur recovery in her keynote speech at the annual symposium
sponsored by the Federal Reserve Bank of Kansas City in Jackson Hole,
Wyo.
“The events of the crisis demanded action, needed reforms were
implemented, and these reforms have made the system safer,” she said.
“Now — a decade from the onset of the crisis and nearly seven years
since the passage of the Dodd-Frank Act and international agreement on
the key banking reforms — a new question is being asked: Have reforms
gone too far, resulting in a financial system that is too burdened to
support prudent risk-taking and economic growth?”
The effects of capital regulation on credit availability have been investigated extensively, Yellen explained.
“Some studies suggest that higher capital weighs on banks’ lending,
while others suggest that higher capital supports lending,” she said.
“Such conflicting results in academic research are not altogether
surprising. It is difficult to identify the effects of regulatory
capital requirements on lending because material changes to capital
requirements are rare and are often precipitated, as in the recent case,
by financial crises that also have large effects on lending.
“Given the uncertainty regarding the effect of capital regulation on
lending, rulemakings of the Federal Reserve and other agencies were
informed by analyses that balanced the possible stability gains from
greater loss-absorbing capacity against the possible adverse effects on
lending and economic growth, Yellen continued. “This ex ante assessment
pointed to sizable net benefits to economic growth from higher capital
standards–and subsequent research supports this assessment. The steps to
improve the capital positions of banks promptly and significantly
following the crisis, beginning with the 2009 Supervisory Capital
Assessment Program, have resulted in a return of lending growth and
profitability among U.S. banks more quickly than among their global
peers.”
The Federal Reserve chair conceded that while material adverse
effects of capital regulation on broad measures of lending are not
readily apparent, credit may be less available to some borrowers,
especially homebuyers with less-than-perfect credit histories and,
perhaps, small businesses.
“In retrospect,” said Yellen, “mortgage borrowing was clearly too
easy for some households in the mid-2000s, resulting in debt burdens
that were unsustainable and ultimately damaging to the financial system.
Currently, many factors are likely affecting mortgage lending,
including changes in market perceptions of the risk associated with
mortgage lending; changes in practices at the government-sponsored
enterprises and the Federal Housing Administration; changes in
technology that may be contributing to entry by nonbank lenders; changes
in consumer protection regulations; and, perhaps to a limited degree,
changes in capital and liquidity regulations within the banking sector.
These issues are complex and interact with a broader set of challenges
related to the domestic housing finance system.”
Credit appears broadly available to small businesses with solid
credit histories, according to Yellen, who conceded again that
indicators point to some difficulties facing firms with weak credit
scores and insufficient credit histories.
“Small business formation is critical to economic dynamism and
growth,” she said. “Smaller firms rely disproportionately on lending
from smaller banks, and the Federal Reserve has been taking steps and
examining additional steps to reduce unnecessary complexity in
regulations affecting smaller banks.”
Addressing regulation of the financial markets, Yellen noted that
many participants have expressed concerns about the ability to transact
in volume at low cost — that is, about market liquidity, particularly in
certain fixed-income markets such as that for corporate bonds.
“Market liquidity for corporate bonds remains robust overall,” she
argued, “and the healthy condition of the market is apparent in low
bid-ask spreads and the large volume of corporate bond issuance in
recent years.”
There may be benefits to simplifying aspects of the Volcker rule,
Yellen acknowledged, which limits proprietary trading by banking firms,
and to reviewing the interaction of the enhanced supplementary leverage
ratio with risk-based capital requirements.
“At the same time, the new regulatory framework overall has made
dealers more resilient to shocks, and, in the past, distress at dealers
following adverse shocks has been an important factor driving market
illiquidity,” she pointed out. “As a result, any adjustments to the
regulatory framework should be modest and preserve the increase in
resilience at large dealers and banks associated with the reforms put in
place in recent years.
“Substantial progress has been made toward the Federal Reserve’s
economic objectives of maximum employment and price stability, in
putting in place a regulatory and supervisory structure that is well
designed to lower the risks to financial stability,” Yellen said, “and
in actually achieving a stronger financial system.
“Our more resilient financial system is better prepared to absorb,
rather than amplify, adverse shocks, as has been illustrated during
periods of market turbulence in recent years,” Yellen added. “Enhanced
resilience supports the ability of banks and other financial
institutions to lend, thereby supporting economic growth through good
times and bad.”