Speaking at a joint economic committee hearing on the U.S. economic outlook, Federal Reserve Chair Janet Yellen suggested that repealing Dodd-Frank would increase the odds of another financial crisis.
“We lived through a devastating financial crisis, and a high priority, I think, for all Americans should be that we want to see put in place safeguards through supervision and regulation that result in a safer and sounder financial system,” she said in response to a question from New York Rep. Carolyn Maloney. “I think that we have been doing that and our financial system as a consequence is safer and sounder—and many of the appropriate reforms are embodied in Dodd-Frank.”
Enacted after the financial crisis of 2008, the Dodd-Frank act reduced the levels of risks financial institutions could take by requiring them to hold more cash to cover their bets and prohibiting speculation with client money for its own benefit. The legislation also established the popular Consumer Financial Protection Bureau as an agency to field consumer complaints and respond against predatory financial practices. President-elect Donald Trump has repeatedly stated he would dispatch the legislation. That may not be likely, but the CFPB appears to be in trouble.
Yellen cited banks’ higher capital requirements in the post-crisis landscape, as well as a closer monitoring of derivatives, subjecting them to margin requirements to keep them from becoming potentially explosive. The Federal Reserve Chair dismissed ideas about her leaving before her term expires in 2018. She also discussed the progress to end “Too Big to Fail” through the living wills process, which she said was changing the mindset of financial firms and pointing them towards financial stability.
“I think Dodd Frank was very important in fostering those changes and we should feel glad our financial system is now operating on a safer and sounder footing,” she concluded.
As Maloney’s time expired with Yellen, she quickly snuck in a final question, referencing President-elect Donald Trump’s promises to repeal the Dodd-Frank act. “Do you have concerns that the repeal would make another financial crisis more likely?”
Without a pause, Yellen replied: “I certainly would not want to see all the improvements we have put in place—I wouldn’t want to see the clock turned back on those because I do think they’re important in diminishing the odds of another financial crisis.”