Former Fed chief Yellen warns of dangers of loosening bank regulation

09:24 | 26/10/2018
WASHINGTON: Former Federal Reserve chair Janet Yellen warned on Thursday (Oct 25) of a "huge deterioration" in corporate lending standards that could spark or worsen another economic crisis.
former fed chief yellen warns of dangers of loosening bank regulation
File photo of former Federal Reserve chair Janet Yellen. (AFP/Brendan Smialowski)

In an interview with The Financial Times, Yellen said the lessons of the 2008 crisis appeared to be fading amid pressure from companies on lawmakers and agencies providing oversight.

"When I see what is happening politically with lobbying and the pushback on the regulators, and the priorities of some of the regulators, I am really concerned we are on the verge of forgetting about the financial crisis and the need for stronger regulation," Yellen said.

President Donald Trump has led the charge to weaken and eliminate regulations in all areas, including banking, which he said went too far and were choking off the financing companies need to expand and boost the economy.

Congress reformed the post-crisis Dodd-Frank banking law to limit the size of banks that were subject to the toughest scrutiny, while financial regulators at the Federal Reserve and Treasury Department have eased oversight.

In a recent decision, regulators removed Prudential Financial from the list of institutions that could pose a broader risk to the banking system, sparing the company from enhanced standards.

And the Fed next week will hold a board meeting to discuss new rules to "modify" those enhanced standards.

But Yellen said the loosening of oversight and standards could come back to bite the US economy, especially as indebted companies continue to access more and more credit - something called leveraged lending.

"I am worried about the systemic risks associated with these loans," Yellen told the newspaper. "There has been a huge deterioration in standards; covenants have been loosened in leveraged lending."

And while banks have been required to hold more capital in reserve against risky loans, she said they often were repackaged and sold to other investors.

The repackaging of questionable home loans was a key factor that sparked the 2008 financial meltdown, leading to a global recession.

Yellen said there remained "a lot of weaknesses in the system," and instead of remedying them, officials were trying to remove the regulations.

The former Fed chair again criticised Trump's repeated attacks on her replacement, Jerome Powell, saying it was "frightening" to contemplate what the reaction would be if the economy should slow.

Trump has called the Fed's policy of gradual interest rate increases - three this year - "crazy" and the "biggest threat" ahead of midterm congressional elections on Nov 6.

AFP

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