WASHINGTON — Federal Reserve Chair Janet Yellen on Wednesday defended the central bank’s tighter oversight of the financial system as essential for a stronger banking system during a contentious hearing on Capitol Hill.
Yellen’s appearance was itself a source of controversy. The sweeping reform of the financial system passed in 2010, known as the Dodd-Frank Act, mandated that the White House appoint a vice chairman of supervision at the Fed to oversee its expanded regulatory responsibilities.
However, the Obama administration has yet to name someone for the job, so Yellen was filling in to testify before the House Financial Services committee.
Rep. Jeb Hensarling of Texas, who heads the committee, struck a combative tone, criticizing Yellen for the lack of transparency in developing the new regulations, many of which were required under Dodd-Frank.
“Simply put, the Fed must not be allowed to shield its vast regulatory activities from the American people and congressional oversight by improperly cloaking them behind its traditional monetary policy independence,” Hensarling said.
The reforms implemented by the central bank include raising capital requirements for the nation’s biggest banks, conducting annual stress tests on banks and identifying other large, systemically important financial institutions that should be monitored.
On Wednesday, Yellen said many of the largest institutions are healthier and have more stable funding sources than they did before the 2008 financial crisis. However, she said many still have “substantial compliance and risk-management issues.”
Lawmakers on both sides of the aisle asked pointed questions.
“Has the Fed crossed the line from being regulator to manager?” Hersaling asked, suggesting Fed officials had inappropriately attended board meetings of the banks they oversee.
One lawmaker even invoked higher powers in urging Yellen not to raise the Fed’s target interest rate, its chief instrument for steering the American economy.
“God’s plan is not for things to rise in the autumn. That’s why we call it fall,” said Rep. Brad Sherman, a Democrat from California. “God’s plan is that things rise in the spring. So if you want to be good with the Almighty, you might want to delay until May.”
