The Federal Reserve speaks very cautiously, so the brief critical remarks that Chair Janet Yellen directed at America's largest banks in a speech delivered on the evening of March 3 is the Fed equivalent of going nuclear. She talked mostly about regulatory steps already taken to try to improve the stability of the American financial system, but she also took a huge shot at the culture of lawlessness in the industry:
Beyond focusing on capital and liquidity, the Fed also promotes safety and soundness by seeking to ensure that banks are well managed and subject to strong governance by a board of directors responsible to shareholders. It is unfortunate that I need to underscore this, but we expect the firms we oversee to follow the law and to operate in an ethical manner. Too often in recent years, bankers at large institutions have not done so, sometimes brazenly. These incidents, both individually and in their totality, raise legitimate questions of whether there may be pervasive shortcomings in the values of large financial firms that might undermine their safety and soundness.
She returned to this theme at the end of the speech, promising tougher oversight going forward:
Beyond these very tangible gains, we see some evidence of improved risk management, internal controls, and governance at large firms. But large firms still have room for improvement in this area, and supervisors will be watching closely. The compliance breakdowns in recent years that I mentioned earlier in my remarks undermine confidence in large firms' risk management and controls, which has implications for financial stability.
This could all end up being empty words, but it probably won't. The Fed has slowly but surely tightened the screws on America's banking giants over the past few years. And Sen. Elizabeth Warren is pushing them hard on this in Congress, even as the Fed seeks progressive allies to help it fend off calls for more congressional "auditing" to reduce its autonomy over monetary policy.