Yellen: 2023 Bank Runs Highlight Need for ‘Thoughtful Regulation’

Treasury Secretary Janet Yellen said Thursday (Sept. 26) that it takes continuous work to build and maintain a resilient financial system.

In remarks prepared for delivery at the 2024 U.S. Treasury Market Conference, Yellen outlined financial regulators’ work related to banks, nonbanks and “cross-cutting risks” like cybersecurity and artificial intelligence.

“A resilient financial system is critical to a strong economy,” Yellen said. “And strengthening it requires insisting on thoughtful regulation, including in the face of challenges from those who advocate to roll back policies and regulations.”

Regarding banks, Yellen said there is a need for greater supervisory attention on banks with less stable deposits, regulations that account for unrealized losses on securities, and changes to ensure that banks are better prepared for liquidity stress.

Noting that regulators prevented contagion at the time of the runs on Silicon Valley Bank and Signature Bank, Yellen said: “We’re well aware, however, that we need to address the core weaknesses these banking stresses revealed, and we urge moving forward on key next steps.”

Noting the growing importance of nonbanks, Yellen said regulators have been working to identify risks from hedge funds that have more debt than equity and the growth in private credit, encourage state regulators and Congress to take steps to prepare for any stress among nonbank mortgage servicers, and advise Congress to legislate to close regulatory gaps around digital assets and stablecoins.

Banks and nonbanks face risks related to cybersecurity and artificial intelligence, Yellen said in her remarks.

“More broadly, we also see that AI technologies bring significant potential for efficiency and other benefits but also potential risks,” Yellen said. “We are working to monitor adoption, identify vulnerabilities and assess whether existing regulations are sufficient to mitigate them or new ones are needed.”

The Treasury Department has taken several steps to address issues around financial stability this year. They include seeking comments from the public about the “uses, opportunities and risks” of artificial intelligence in the financial services sectors; warning consumers that non-fungible tokens (NFTs) are “highly susceptible” to theft and use in fraud and scams; and using automation and innovation to find new ways to fight illicit finance.