Yellen: Too-Big-To-Fail is Not Black and White Issue

Federal Reserve Chair Janet Yellen said on Tuesday that while the federal government has made “great progress” toward eliminating  “too-big-to-fail” institutions, the issue is not black and white.

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“We have a system that is much safer and sounder. It is much more resilient. It has much more capital. It has much more liquidity, and it’s better off,” she said.

Yellen’s remarks came during an appearance in front of the House Financial Services Committee, where she fielded a range of questions from members of Congress, including queries regarding the consumer-accounts scandal that recently came to light at Wells Fargo (NYSE:WFC) and the stability of the U.S. financial system. Members voiced concern over whether the regulatory environment in the U.S. has become too restrictive in light of the 2008 financial crisis.

To that point, Yellen said her assessment of the country’s financial institutions, and the industry as a whole, shows that the U.S. has “a safer” banking system now than it did leading up to the crisis. Because of that, she and her colleagues at the central bank have outlined a proposal to eliminate undue burden on smaller, regional banks, that would set them apart from larger, more systemically-important financial institutions. That proposal was unveiled by Fed Governor Daniel Tarullo on Monday.

Under the proposed plan, banks with less than $250 billion in assets, whose business models don’t involve significant foreign or non-banking activities, would no longer be subjected to the qualitative portion of the Fed’s annual stress test. The purpose of the stress tests is to identify whether financial institutions could withstand the shock from a hypothetical financial crisis.

In addition, the Fed’s plan would reduce reporting requirements associated with the stress testing, though those smaller institutions would still be subject to qualitative evaluation.

“We think our normal supervisory process where we would look at capital planning processes is adequate and many are meeting expectations, and this is a big burden we can relieve these firms of,” Yellen said.

Though the Fed proposes eliminating certain oversights on those smaller banks, Yellen assured members of Congress that the central bank continues to closely monitor institutions that could wreak havoc on the financial markets and the economy. To illustrate that point, five of the nation’s large banks including Wells Fargo and Bank of America (NYSE:BAC), are working to submit new capital plans to the Fed by October 1. Yellen said if shortcomings that were identified through the stress tests have not been remedied, the Fed stands ready to impose higher capital and other standards.

“We’ve been very specific with the five firms in indicating what the deficiencies are…we will carefully and quickly review the submissions…to see if those deficiencies have been remedied,” she said.