NEW YORK – Federal Reserve Chair Janet Yellen pushed back firmly – but politely – against a stance from one of the regional Fed bank presidents that the largest U.S. banks need to be broken up, saying that the Dodd-Frank Act has made banks and the financial system safer than before the crisis.
Speaking in a panel presentation here, Yellen was asked whether she shares Minneapolis Fed Bank president Neel Kashkari's view that the largest banks are still "too big to fail" and therefore must be broken up by either the Fed, Congress or both. She defended the steps policymakers have made since the crisis to ensure there will be no need for bailouts again.
"We have been very focused since the financial crisis, and the Dodd-Frank Act has directed us to pay attention and try to put in place policies that will deal with 'too big to fail,'" Yellen said. "So I certainly share President Kashkari's concern with 'too big to fail.' I feel more positive on the progress we have made."
Yellen argued that the Fed has "greatly enhanced the safety and soundness" of the banking system, including requiring more and higher quality capital, higher liquidity, rigorous stress testing and other innovations. Yellen also cited 'considerable progress" made in streamlining the resolution process for the biggest banks and coordinating efforts with other central banks and bank regulators worldwide.
"I certainly have not arrived at the conclusion that my colleague has," Yellen said. "I'm pleased with the way things are going."
But when asked later whether Kashkari – who only began his post as president of the Minneapolis Fed late last year – ought to be espousing such a view when regional bank presidents traditionally only participate directly in monetary policy matters, Yellen defended him. She said that the Federal Reserve intentionally has been established as a decentralized central bank with a diversity of opinion and research interests.
"When Congress decided on the structure of the Federal Reserve, they purposely chose a decentralized structure," Yellen said. "[Regional presidents] all engage in the research on topics that are of interest to them, that they think are important, and we've encouraged that. Diversity of opinion is a positive attribute – we don't want to fall into groupthink and I think it's within his purview to look at these issues."
Yellen's comments came as the Minneapolis Fed on Monday held a conference on the issue of ending "too big to fail," with academics and former regulators laying out varied visions for taking a more aggressive stance on the largest banks and their risk to the financial system. In remarks opening the panel, Kashkari – who oversaw the Troubled Asset Relief Program in the Bush administration and ran for governor of California as a Republican in 2014 – said breaking up the banks would free Congress to limit the regulatory burdens on smaller banks.
"My hope is that if we can truly address the risks posed by the large banks, then perhaps we can relax some of the burdens that small banks are facing as they are caught under the regulatory net," he said.
Speaking on the panel, Paul Volcker, who headed the Fed in the 1980s and initiated a program of aggressive and unpopular interest rate hikes aimed at curbing rampant inflation, emphasized that the central bank relies on a certain measure of public support in order to function.
"We wouldn't have survived without a lot of public support," Volcker said. "People were unhappy, with malaise and inflation rates going up by couple of percent every quarter … and I think they gave us some rope."
Bernanke likewise said that the Fed has always been political – or at least subject to political pressures – and to a certain extent has to simply use its best judgment to prevail.
"The Fed has always had political pressures of various kinds, the Fed is trying to do the right thing, and sometimes the right thing is not what everybody agrees on. All the Fed can do is try to do the right thing for the economy … and be as transparent as possible," he said.