FRB Chair Yellen Discusses Oversight of Large Financial Institutions

Board of Governors of the Federal Reserve System ("FRB") Chair Janet Yellen spoke at the Citizens Budget Commission. Her speech focused on the implementation of improvements since the financial crisis in the oversight of large financial institutions in the United States.

Chair Yellen distinguished between the "regulation" and "supervision" of systemically important financial institutions ("SIFIs"), and argued that both have improved since the financial crisis. With regard to "regulation," Chair Yellen cited five areas in which the FRB implemented rules to improve its oversight of financial institutions: (i) capital; (ii) liquidity; (iii) stress testing; (iv) orderly liquidation; and (v) enhanced prudential standards for SIFIs.

With regard to "supervision," Chair Yellen cited the FRB's improved methods for assessing the liquidity of and capital held by supervised institutions, as well as the establishment within the FRB of the Large Institution Supervision Coordinating Committee. However, Chair Yellen noted, she saw room for improvement in the risk management, internal controls and governance of large financial institutions. She added that the FRB would be watching those areas closely.

Finally, Chair Yellen cited research suggesting that "regulatory capture" is often inadvertent and occurs "when close contact and familiarity between individuals leads those enforcing the rules to sympathize with those they oversee." Chair Yellen reaffirmed the FRB's commitment to prevent inadvertent "regulatory capture."

See: Chair Yellen's Speech.