Yellen Defends Post-Crisis Fin'l Regulation; Mum on Mon Pol

--Financial Reforms Have Not Limited Credit Availability, Growth

--May Be Benefits From Simplifying Volcker Rule

By Jean Yung

     WASHINGTON (MNI) - Marking a decade since the start of the financial crisis

that rocked the world, Federal Reserve Chairwoman Janet Yellen on Friday

celebrated the Fed's legacy in building regulation to safeguard system stability

and warned policymakers to remain vigilant to old risks emerging in new ways. 

     In a highly anticipated speech at the Fed's annual economic symposium in

Jackson Hole, Wyo., Yellen focused nearly exclusively on financial regulation

and avoided any discussion over whether easier financial conditions might

warrant higher interest rates. 

     Extensive studies show that financial regulatory reform has not limited

economic growth, credit availability or market liquidity, Yellen said. 

     Instead, "Our more resilient financial system is better prepared to absorb,

rather than amplify, adverse shocks, as has been illustrated during periods of

market turbulence in recent years," she said. 

     Yellen went on to warn that regulators need to keep the lesson of the

crisis fresh in their memories and be ready to act if new crises emerge.  

     "I expect that the evolution of the financial system in response to global

economic forces, technology, and, yes, regulation will result sooner or later in

the all-too-familiar risks of excessive optimism, leverage, and maturity

transformation reemerging in new ways that require policy responses," the chair

said. 

     Policymakers and researchers should stay alert to areas for improvement and

"unexpected side effects," she said. 

     For example, "there may be benefits to simplifying aspects of the Volcker

rule, which limits proprietary trading by banking firms, and to reviewing the

interaction of the enhanced supplementary leverage ratio with risk-based capital

requirements." 

     And while market liquidity for corporate bonds remains robust overall,

Yellen said, citing low bid-ask spreads and the large volume of corporate bond

issuance in recent years, regulations may be affecting markets in other ways. 

     Large dealers "appear to devote less of their balance sheets to holding

inventories of securities to facilitate trades and instead increasingly

facilitate trades by directly matching buyers and sellers," she said. 

     Also, algorithmic traders and institutional investors are a larger presence

in various markets than previously, and "the willingness of these institutions

to support liquidity in stressful conditions is uncertain." 

     "Liquidity conditions are clearly evolving," and that is something

regulators should pay attention to, the chair said. 

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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