Thursday, February 22

Yellen says a stable financial system is critical to the economic strength of the United States

Treasury Secretary Janet L. Yellen will tell lawmakers Tuesday that the United States has had a “historic” economic recovery from the pandemic, but that regulators must vigorously safeguard the financial system from a host of looming risks to preserve the gains of the bottom three years .

Yellen will provide 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 .

As the turmoil in the banking system has largely abated, the Financial Stability Oversight Council, led by Yellen, has been examining how it monitors and responds to risks to financial stability. Like other government bodies, the board did not anticipate or warn regulators about the problems affecting several regional banks.

“Our continued economic strength depends on a strong and resilient U.S. financial system,” Yellen said in her prepared remarks.

Last year’s banking collapses resulted from a confluence of events, including the failure of banks to adequately prepare for rapidly rising interest rates. As interest rates rose, Silicon Valley Bank and other banks absorbed huge losses, creating panic among depositors who rushed to withdraw their money. To prevent a more widespread run on the banking system, regulators took control of Silicon Valley Bank and Signature Bank and invoked emergency measures to assure depositors that they would not lose their funds.

Bank failures – and government bailouts – have spurred debate over whether more should be done to ensure customer deposits are protected and whether banking regulators can adequately monitor risk.

Yellen is expected to face questions about what has been done over the past year to safeguard the financial system and outline preparations to address future threats. The International Monetary Fund said in a report last week that expectations of falling interest rates had led to greater demand for risky financial assets and that some sectors, such as commercial real estate, continued to face the prospect of default at due to the decline in office property values.

The Treasury Secretary is expected to tell lawmakers that the Financial Stability Oversight Council, which submitted its annual report to Congress late last year, has focused on banks’ ability to absorb losses, as well as improving the process of liquidation of failing banks in an increasingly interconnected financial system. You will note that other types of financial institutions also pose risks, and you want to highlight the Securities and Exchange Commission’s scrutiny of hedge funds and money market funds.

The Biden administration has also focused on long-term threats. Yellen will say regulators continue to focus on climate-related financial stability risks and will call on them to advance disclosure rules that allow investors and lenders to consider climate change when making decisions. Cybersecurity and the emergence of artificial intelligence are also risks on regulators’ radar.

“The Board is closely monitoring the growing use of artificial intelligence in financial services,” Yellen will say, adding that the potential cost-cutting benefits of the new technology could lead to new cybersecurity threats.

Despite these concerns, the Treasury secretary will offer an optimistic assessment of the U.S. economy, saying that economic growth is strong while inflation has declined significantly. He will describe the job market as healthy and note that American household wealth has increased significantly since 2019.

“Households are now putting their additional income and accumulated savings back into the economy,” Yellen will say.