Treasury Secretary Janet L. Yellen will tell lawmakers on Tuesday that the United States has experienced a “historic” economic recovery from the pandemic but that regulators must be vigilant in protecting the financial system from a range of looming risks to the gains of the past three years to preserve .
Ms. Yellen will make the comments as a witness 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 sudden 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 been reviewing how it tracks and responds to risks to financial stability. Like other government agencies, the council did not foresee or warn regulators about the problems that beset several regional banks.
“Our continued economic strength depends on a sound and resilient U.S. financial system,” Ms. Yellen said in her prepared remarks.
Last year’s bank failures were the result of a confluence of events, including the failure of banks to adequately prepare for the rapid rise in interest rates. As interest rates rose, Silicon Valley Bank and others suffered large losses, causing panic among depositors who rushed to withdraw their money. To prevent another run on the banking system, regulators took control of Silicon Valley Bank and Signature Bank and took emergency measures to reassure depositors that they would not lose their money.
The bank failures – and the government bailout – sparked debate about whether more needed to be done to ensure customer deposits were protected and whether bank regulators were able to properly monitor risks.
Ms. Yellen is expected to ask questions about what has been done to protect the financial system over the past year and what preparations she will make to deal with future threats. The International Monetary Fund said in a report last week that expectations of falling interest rates had led to greater demand for risky financial assets and that some sectors, such as commercial real estate, continued to face defaults due to falling office property values.
The Treasury secretary is expected to tell lawmakers that the Financial Stability Oversight Council, which submitted its annual report to Congress late last year, has focused on the ability of banks to absorb losses and that it has started the process of resolving defaulters Banks in a year has improved increasingly interconnected financial system. She will point out 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 remain focused on climate-related financial stability risks and urged them to advance disclosure rules that would allow investors and lenders to take climate change into account in their decisions. Cybersecurity and the emergence of artificial intelligence are also risks on regulators’ radar.
“The Council is closely monitoring the increasing use of artificial intelligence in financial services,” Ms. Yellen said, adding that the potential cost-cutting benefits of the new technology could come with new cybersecurity threats.
Despite those concerns, the Treasury secretary will offer an optimistic assessment of the U.S. economy, saying economic growth is strong while inflation has fallen significantly. She will describe the job market as healthy and point out that Americans’ household wealth has risen sharply since 2019.
“Families are now putting their extra income and accumulated savings back into the economy,” Ms. Yellen will say.