Yellen: Largest banks still have risk-management problems

Federal Reserve Chair Janet Yellen said Wednesday that the largest banks in the United States still have “substantial” issues managing risk and complying to regulations designed to keep them strong.

Yellen told a congressional hearing that the 16 largest, most systemically crucial financial institutions policed by the Fed, including eight US banks, four foreign banks, and four non-bank financial institutions, had improved their capital foundations and risk management in recent years.

The financial condition of the 12 so-called LISCC firms “has strengthened considerably since the crisis,” she said, especially under tougher rules instituted to avoid a repeat of the 2008 near-collapse of the US financial system.

Nevertheless, she said, “while we have seen some evidence of improved risk management, internal controls, and governance at the LISCC firms, they continue to have substantial compliance and risk-management issues.”

“Compliance breakdowns in recent years have undermined confidence in the LISCC firms’ risk management and controls and could have implications for financial stability, given the firms’ size, complexity, and interconnectedness.”

“The LISCC firms must address these issues directly and comprehensively.”

Yellen’s comments came in prepared remarks for a hearing Wednesday on Fed banking regulation by the House of Representatives Committee on Financial Services, which comes amid pressure from conservatives in Congress to ease the tough post-crisis banking rules.

She suggested that, despite the tougher capital and risk management rules, systemic risks remain among 12 large institutions monitored by the Fed’s Large Institution Supervision Coordinating Committee (LISCC).

They include eight top US banks considered systemically important, or “too big to fail”; four foreign banks with large and complex US operations, three US insurers and one other non-bank , GE Capital.

Yellen said supervision of the 12, compared to smaller banks, is “oriented toward both the safety and soundness of the individual firms, and the stability of the financial system as a whole.”

“We recognize that we cannot eliminate the possibility of a large financial institution’s failure,” she said.

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