Yellen: Federal Reserve working to make future banking crises less likely and less damaging

The Federal Reserve has worked hard to correct the mistakes exposed by the 2008 financial crisis, Fed Chair Janet Yellen said Tuesday.

Fed cannot eliminate the possibility of a future banking crisis, Yellen said. But she said the central bank can make them less likely and less damaging by limiting excessive risk-taking and making sure that the nation's biggest banks are better prepared to weather future problems.

Before the crisis, the Fed focused too much on regulating individual firms and did not pay enough attention to ensuring the stability of the entire financial system, she said

The steps the Fed has implemented include requiring banks to hold more capital to cushion against losses and testing them annually to see whether they can survive a severe economic downturn.

Yellen's remarks came in a speech in New York to the Citizens Budget Commission. Copies of the speech were made available in Washington.

The financial crisis, which turned an economic downturn into the worst recession since the 1930s, caused "great hardship for millions of individuals and families," Yellen said.

Among the mistakes made that led to the crisis was a failure on the part of big banks and their regulators to guard against excessive risk-taking.

"Government agencies, including the Fed, failed to recognize the extent of the risks or how severely they could damage the financial system and the economy," Yellen said.

The bank holding companies that the Fed regulates need to understand the important oversight responsibilities of their boards of directors, she added.

"It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner," Yellen said. "Too often in recent years, bankers at large institutions have not done so, sometimes brazenly."

Critics of the Fed have complained that the central bank is sometimes too close to the institutions it regulates.

Addressing that concern, Yellen said that Fed officials understand the need to guard against "regulatory capture" by the institutions it oversees.

"The risk of regulatory capture is something the Fed takes very seriously and works very hard to prevent," she said, stressing that Fed employees need to feel safe speaking up when they have concerns about possible bias toward a regulated bank