For Yellen, a stable financial system is key to American economic strength

Treasury Secretary Janet L. Yellen will tell lawmakers Tuesday that the United States has enjoyed a “historic” economic recovery from the pandemic, but that regulators must vigilantly protect the financial system from a range of looming risks to preserve the achievements of the last three years. .

Ms. Yellen will make the comments during her testimony before the House Financial Services Committee nearly a year after the Biden administration and federal regulators took aggressive steps to stabilize the nation’s banking system following the abrupt bankruptcies of Silicon Valley Bank and Signature Bank.

As turmoil in the banking system has largely subsided, the Financial Stability Oversight Council, led by Ms. Yellen, has reviewed how it tracks and responds to risks to financial stability. Like other government agencies, the board did not anticipate or warn regulators of the problems that have hit several regional banks.

“Our continued economic strength depends on a strong and resilient U.S. financial system,” Yellen said in her speech. prepared remarks.

Last year’s bank failures were the result of a confluence of events, including the failure of banks to properly prepare for rapidly rising interest rates. As interest rates rose, Silicon Valley Bank and others absorbed huge losses, creating a panic among depositors who rushed to withdraw their money. To prevent a broader 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 the government bailout – sparked debate over whether more should be done to ensure customer deposits were protected and whether banking regulators were capable of adequately controlling risks.

Ms. Yellen is expected to face questions about what was done last year to safeguard the financial system and to prepare for steps to deal with 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 decline of the value of office buildings.

The Treasury secretary is expected to tell lawmakers that the Financial Stability Oversight Council, which submitted its annual report report to Congress At the end of last year, the focus was on banks’ ability to absorb losses, as well as improving the liquidation process of failed banks in an increasingly interconnected financial system. She will note that other types of financial institutions also pose risks and plans to highlight the Securities and Exchange Commission’s scrutiny of hedge funds and money market funds.

The Biden administration has also focused on longer-term threats. Ms. Yellen will say regulators continue to focus on climate-related risks to financial stability and call on them to advance disclosure rules that would allow investors and lenders to take climate change into account when making decisions . Cybersecurity and the emergence of artificial intelligence are also risks on regulators’ radar.

“The board is closely monitoring the growing use of artificial intelligence in financial services,” Yellen will say, adding that the new technology’s potential cost-cutting benefits could come with new security threats. cybersecurity.

Despite these concerns, the Treasury secretary will present an optimistic assessment of the U.S. economy, saying economic growth is strong while inflation has fallen significantly. She will describe that the job market is healthy and note that American household wealth has increased significantly since 2019.

“Families are now reinvesting their additional income and accumulated savings into the economy,” Ms. Yellen will say.