Yellen: Mega-banks might need to hold more capital

Federal Reserve Chair Janet Yellen said last week that the largest U.S. banks might need to hold additional capital to withstand periods of financial stress.

Yellen told a banking conference in Atlanta that current rules on how much capital banks must hold to protect against losses don’t address all threats. She said the Fed’s staff is considering what further measures might be needed.

She said some such measures would likely apply to only the largest and most complex banks. Yellen said the Fed would review the likely effects of imposing stricter rules on banks. Banks and their advocates have warned that further tightening bank regulation would lead to reduced lending to businesses and financial institutions and could slow economic growth.

The Fed chair said bank regulators must focus on this area to try to prevent a recurrence of the 2008 financial crisis, which nearly toppled the banking system and led to a devastating recession.

Yellen spoke via video to a financial markets conference sponsored by the Fed’s Atlanta regional bank.

“In 2007 and 2008, short-term creditors ran from firms such as Northern Rock, Bear Stearns and Lehman Brothers and from money market mutual funds and asset-backed commercial paper programs,” she said. “Together, these runs were the primary engine of a financial crisis from which the United States and the global economy have yet to fully recover.”

Yellen referred to a 2010 study by the Basel Committee on Banking Supervision. The study, in assessing the long-term economic effects of imposing stricter capital and liquidity requirements on banks that operate globally, concluded that such changes would produce a net economic benefit.

“While it would be a mistake to give undue weight to any one study, this study provides some support for the view that there might be room for stronger capital and liquidity standards for large banks than have been adopted so far,’’ she said.

Last week, regulators approved requirements that will make the eight largest U.S. banks add up to $68 billion in capital to comply with rules designed to ensure that the banks could withstand severe losses.

The so-called leverage ratio approved by the Fed and the other regulators will require the largest banks to maintain capital well above the global minimum levels against all assets on their books, not just those judged to be the riskiest.