by Treasury Secretary Janet L. Yellen will tell lawmakers on Tuesday that the United States has had a “historic” economic recovery from the pandemic, but that regulators must carefully safeguard the financial system from a series of looming risks to preserve the profits for the last three years. .
Yellen will deliver the remarks in testimony before the House Financial Services Committee nearly a year after the Biden administration and federal regulators took aggressive steps to stabilize the country’s banking system following the abrupt bankruptcies of Silicon Valley Bank and Signature. Bank.
While turmoil in the banking system has largely subsided, the Financial Stability Oversight Council, headed by Yellen, has been reviewing how it tracks and responds to risks to financial stability. Like other government bodies, the board failed to anticipate or warn regulators about the problems that brought down several regional banks.
“Our continued economic strength depends on a strong and resilient U.S. financial system,” Yellen said in her speech. prepared comments.
Last year’s banking collapses arose from a confluence of events, including the failure of banks to adequately prepare for rapidly rising interest rates. As interest rates rose, Silicon Valley Bank and others absorbed huge losses, creating panic among depositors who rushed to withdraw their money. To prevent a more widespread run on the banking system, regulators took control of Silicon Valley Bank and Signature Bank and invoked emergency measures to assure depositors that they would not lose their funds.
The bank failures (and government bailouts) sparked debate about whether more needed to be done to ensure customer deposits were protected and whether banking regulators could adequately control risk.
Yellen is expected to face questions about what has been done in the past year to safeguard the financial system and design preparations to confront future threats. The International Monetary Fund said in a report last week that expectations of falling interest rates had led to increased demand for risky financial assets and that some sectors, such as commercial real estate, continued to face the prospect of defaults due to the fall in the value of office properties.
The Treasury secretary is expected to tell lawmakers that the Financial Stability Oversight Council, which submitted its annual report report to congress Late last year, there has been a focus on banks’ ability to absorb losses, as well as improving the process of liquidating failed banks in an increasingly interconnected financial system. He will note that other types of financial institutions also pose risks and plans to point to scrutiny of hedge funds and money market funds by the Securities and Exchange Commission.
The Biden administration has also focused on longer-term threats. Yellen will say regulators continue to focus on climate-related financial stability risks and will ask them to move forward with disclosure rules that allow investors and lenders to consider climate change when making decisions. Cybersecurity and the rise of artificial intelligence are also risks that are on regulators’ radar.
“The board is closely monitoring the growing use of artificial intelligence in financial services,” Yellen will say, adding that the potential cost-cutting benefits of the new technology could come with new cybersecurity threats.
Despite those concerns, the Treasury secretary will offer an upbeat assessment of the U.S. economy, saying economic growth is strong while inflation has declined significantly. He will describe the labor market as healthy and note that the wealth of American households has increased considerably since 2019.
“Families are now reinvesting their additional income and accumulated savings into the economy,” Yellen will say.
