Federal Reserve Chairwoman Janet Yellen criticized the ethics of bankers at big firms Tuesday evening, saying that recent scandals raise “legitimate questions” about whether bankers’ behavior threatens the safety of their businesses.
Speaking about financial regulation at an event in New York City, Yellen said that “we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly,” according to prepared text of the speech.
Taken together, those incidents raise the issue of “whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness,” Yellen added.
She did not single out any particular bank’s misbehavior. Just in recent weeks, however, the British megabank HSBC has acknowledged that it allowed customers at its Swiss arm to dodge taxes and the U.S. bank Morgan Stanley agreed to settle a Department of Justice probe into faulty mortgages for $2.6 billion.
For a federal regulator to criticize the ethics of private sector business executives is unusual, but not unheard-of. Yellen’s comments echoed those of Fed governor Daniel Tarullo, who warned in October that if banks did not foster a better sense of ethical responsibility, they would face stepped-up “punishments.”
Yellen also touched on another sensitive topic for the Fed, namely the problem of regulatory capture. Regulatory capture is the phenomenon of supervisors becoming too close or beholden to the businesses they are supposed to regulate. The Fed has faced a number of accusations recently that it, and especially the Federal Reserve Bank of New York that oversees Wall Street banks, is overly deferential to big banks.
The risk of regulatory capture “is something the Federal Reserve takes very seriously,” Yellen said.
“We enforce strict ethics rules and promote strong values among our employees, among them a commitment to public service,” she added. “It is important that anyone serving the Fed feel safe speaking up when they have concerns about bias toward industry, and that those concerns be addressed.”
The Fed announced in November that its Board of Governors would conduct a review of whether it or the regional banks suffered from regulatory capture, and that its inspector general would also carry out a review. The results of that process are not yet known.
Despite her criticisms of Wall Street, Yellen’s speech Tuesday night portrayed the Fed’s efforts to prevent another financial crisis in a positive light.
The central bank head touted the number of significant rules that have been implemented in the wake of the 2008 financial wreck, including requirements for the banks to maintain higher capital and liquidity levels, the stress tests examining their financial strength, and improved supervision by the Fed and other regulators.
Yellen stopped short of saying that the problem of “too big to fail” banks has been solved, but argued that the problem has been reduced.
“We cannot eliminate the possibility of another crisis, but we can make a crisis less likely and less damaging,” Yellen said.
