Fed Chair Janet Yellen said she would not yet decide whether to employ regulatory tools to reduce the size and and risk of “too big to fail” banks, ahead of an Oct. 1 statutory deadline.
Yellen noted Tuesday that the banks would almost certainly require federal assistance, if there were to be sudden tremors in financial markets.
She would not, however, comment on how the Fed intends to move forward, if those firms don’t submit adequate resolution plans this fall. Those outlines, known as “living wills” are required to be credible in under four months by prior regulatory determinations and the Dodd-Frank Act.
“I can’t pre-commit today to telling you precisely what our response will be,” Yellen said before the Senate Banking Commitee, in response to Elizabeth Warren (D-Mass.) “We will work closely with the FDIC as we have been all along,” Yellen added, referring to the Federal Deposit Insurance Corporation. “But we are extremely serious about wanting to see progress and using those tools.”
Warren has, in the past, criticized the Fed’s rulings on living wills, at points pressing Yellen to explain why the Fed wouldn’t call some plans “not credible,” when the FDIC was doing just that.
A joint determination was required for regulators to start taking steps to address “too big to fail”–when bankrupt financial firms can’t be resolved without substantial government interference or massive disruption to markets, as was the case last decade. In April, the Fed and the FDIC finally made that joint determination for the plans of five banks—Bank of America, JP Morgan Chase, Wells Fargo, New York Mellon, and State Street.
“I would not say, at this point, that all of them are prepared for resolution under bankruptcy,” Yellen told Sen. David Vitter (R-La.) on Tuesday.
In making the case to Yellen, to commit now to using Dodd-Frank mechanisms, Sen. Warren pointed out that the largest banks “have been submitting living wills since 2013.”
“There is no provision in the law for all of the extensions that you have given them so far,” Warren said. “If any of these banks fail the credibility test on their fifth try, they need to face some real consequences.”
Yellen responded that “there will be consequences.” In a separate round of questioning, however–with Sen. Bob Corker (R-Tenn.)–the Fed Chair listed some of the possible consequences, then downplayed their possibility.
“Dodd-Frank does say that the FDIC and the Fed can impose higher capital requirements, higher liquidity requirements, or ultimately structural changes,” Yellen said. “I don’t expect to have to go there.”
Earlier this year, Dodd-Frank rules on“too big to fail” were described as insufficient by the architect of George W. Bush’s bailout, Neel Kashkari. The ex-Troubled Asset Relief Program overseer urged Congress to address the matter.
“[N]o rational policymaker would risk restructuring large firms and forcing losses on creditors and counterparties using the new tools in a risky environment,” Kashkari said, “let alone in a crisis environment like we experienced in 2008.”
