Trump Gets Yellow Light From Yellen on Bank Deregulation
Fed chairwoman defends bank regulation at Jackson Hole, but opens the door to changes
By Aaron Back
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Federal Reserve Chairwoman Janet Yellen delivered a wide-ranging defense of postcrisis financial regulation on Friday that nonetheless could have mildly positive implications for investors in bank stocks.
Speaking at the Jackson Hole summit, Ms. Yellen opened the door to at least one step that would provide substantial relief for Wall Street banks: simplifying the Volcker rule.
The rule, which bars institutions taking insured deposits from making speculative bets with their own money, has resulted in a massive downsizing of trading operations at major banks. Many on Wall Street say they agree with the rule in principle, but they argue that its enforcement is too complex, involving up to five different federal agencies.
A study last year by the Federal Reserve found that the rule has hurt the functioning of bond markets, so it isn’t entirely surprising that Ms. Yellen would be open to some changes. Still, her formal acknowledgment that the Volcker rule could be simplified is a clear positive for banks with large trading operations such as Goldman Sachs and J.P. Morgan Chase .
On the sensitive issue of capital requirements, though, Ms. Yellen was more circumspect. The White House’s financial deregulation plan, unveiled in June, pointed out that the biggest U.S. banks are required to hold more capital than their international peers, potentially making them less competitive. Gary Cohn, director of the White House Economic Council and former president of Goldman Sachs, publicly complained in February that U.S. banks are “way out front of where the European banks are in capital.”
On the sensitive issue of capital requirements, though, Ms. Yellen was more circumspect. The White House’s financial deregulation plan, unveiled in June, pointed out that the biggest U.S. banks are required to hold more capital than their international peers, potentially making them less competitive. Gary Cohn, director of the White House Economic Council and former president of Goldman Sachs, publicly complained in February that U.S. banks are “way out front of where the European banks are in capital.”
AMERICA FIRST
U.S. Banks hold more capital relative to total assets. End-2016 leverage ratios:
Ms. Yellen, however, highlighted the positive side of higher capital cushions, saying fast action in the U.S. to raise capital levels has “resulted in a return of lending growth and profitability among U.S. banks more quickly than among their global peers.”
While not conclusive, these comments suggest the Fed would look less favorably than the Trump administration on efforts to weaken capital rules. That matters because it is the Fed, through its annual stress-testing process, that effectively sets capital requirements for the biggest banks.
It remains unclear if Ms. Yellen will remain Fed chairwoman after her term ends in February. A more deregulation-minded individual like Mr. Cohn could be the person to take her place. But, for as long as she is in the seat, the Trump administration will get only a yellow light from the Fed to loosen constraints on Banks.
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