Janet Yellen is still getting her feet wet as chairman of the Federal Reserve. A speech on Tuesday morning may only act to create more confusion from the banks. At least that will be the case if investors only read the basic headlines.
A video recording was played at a financial markets conference sponsored by the Federal Reserve Bank of Atlanta, and the top angle is that there is room for yet even stronger capital rules for the nation's largest banks.
Yellen talked up the possibilities of the large systemic (too big to fail) banks and institutions being able to strengthen their balance sheets even more and even higher than what regulators have required to date.
Strong bank capital rules remain the foundation of bank regulation. But capital requirements as currently constructed are generally based on credit and market risks from the asset side of the balance sheet and from off-balance-sheet transactions. They do not directly address liquidity risk.
On future capital strengthening requirements, Yellen said:
Federal Reserve staff are actively considering additional measures that could address these and other residual risks in the short-term wholesale funding markets. Some of these measures — such as requiring firms to hold larger amounts of capital, stable funding, or highly liquid assets based on use of short-term wholesale funding — would likely apply only to the largest, most complex banking organizations. Other measures — such as minimum margin requirements for repurchase agreements and other securities financing transactions — could, at least in principle, apply on a marketwide basis. In designing such measures, we are carefully thinking through questions about the tradeoffs associated with tighter liquidity regulation that will be discussed at this conference.
As a reminder, it was just in the past 10 days or so that the largest banks were required to take on billions of additional capital. Some banks may not be too happy that Yellen's angle may include even further capital to be set aside that cannot really earn money for shareholders nor work its way into the financial markets or the broader economy.
FULL YELLEN SPEECH
Filed under: Banking & Finance