Federal Reserve Chair Janet Yellen said that she believes the largest banks in the country can legally exist, days before a handful of them are due to submit reports to the Fed that could lead to their breaking-up.
“We believe it is possible, even though it is extremely challenging for [these] organizations to comply with the law,” she said, in testimony before the House Financial Services Committee.
Yellen made the remarks in response to questions about Wells Fargo that had been asked by Rep. Brad Sherman (D-Calif.). The bank has recently been at the center of a scandal, after it admitted that its employees opened 2 million accounts in customers names without authorization.
Wells Fargo and four other banks had separately been ordered months ago to resubmit reports by Saturday on how they would handle bankruptcy — the so-called “living will” requirement under Dodd-Frank. The other four are Bank of America, JP Morgan, Bank of New York Mellon, and State Street.
In April, the Fed and Federal Deposit Insurance Corporation had co-determined that plans the quintet had previously submitted lacked credibility. If the outlines submitted next week aren’t up to snuff, the Fed and FDIC could eventually impose penalties on the banks, including more stringent caps on risk or orders forcing them to sell assets.
The plans were included in Dodd-Frank in a bid to avoid the possibility of taxpayer-financed bailouts, like the trillion dollar emergency lifelines extended to Wall Street in 2008.
After news broke this month of its widespread account falsification, Wells Fargo has been singled out as the textbook example of why the largest banks on Wall Street should be broken up. Both Republicans and Democrats on the Senate Banking Committee last week said that the managerial failure evidenced a need for downsizing — particularly after CEO John Stumpf testified before the committee, claiming that only one percent of the bank’s workforce was involved in account falsification.
On Wednesday, Sherman repeated that case, in colorful terms.
“Study microbiology,” he said. “The protozoa reaches a certain size and then it divides. That’s healthy, that’s normal. If a protozoa can divide in a healthy manner, you’d think the smartest minds on Wall Street could as well. Too big to fail is too big to exist.”
In their exchange, Yellen told Sherman that the Fed “will hold the largest organizations to exceptionally high standards of risk management, internal controls, [and] consumer protection.”
Sherman replied that the regulatory body has proven itself incapable.
“Two million phony accounts not detected by regulators,” he said. “Break ’em up.”
“From a Democratic side, I’ve heard too big to fail is too big to manage. From a Republican side, I’ve heard that too big to fail is too big to regulate,” he added. “But whether the fault is the regulators who can’t regulate it, or the managers who can’t manage it, too big to fail is too big to exist.”
The line of questioning was repeated later in the hearing by Rep. Mike Capuano (D-Mass.), who pointed out that the Fed had punished Wells Fargo in 2011, for policies similar to those that fostered account falsifications.
Two million unauthorized accounts were opened at Wells Fargo between May 2011 and May 2015, according to a consent order between the bank and the Consumer Financial Protection Bureau signed earlier this month. The order came with fines from the CFPB and two other regulators totaling $185 million. The Fed was not involved.
“We are very concerned with all of the compliance problems and violations of laws that have occurred,” Yellen told Capuano, at the end of his round of questioning.”
“You know they’re laughing at you,” he replied.
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