Fed should be tougher on large banks, Yellen says

WASHINGTON Thu Nov 14, 2013 4:18pm EST

U.S. Federal Reserve Vice Chair Janet Yellen stands after testifying during a confirmation hearing on her nomination to be the next chairman of the U.S. Federal Reserve before the Senate Banking Committee in Washington November 14, 2013. REUTERS/Joshua Roberts

U.S. Federal Reserve Vice Chair Janet Yellen stands after testifying during a confirmation hearing on her nomination to be the next chairman of the U.S. Federal Reserve before the Senate Banking Committee in Washington November 14, 2013.

Credit: Reuters/Joshua Roberts

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WASHINGTON (Reuters) - Big banks can still borrow more cheaply than competitors and should face tougher rules, the prospective new head of the U.S. Federal Reserve told lawmakers on Thursday.

Large banks may have an edge because markets think they have government backing in times of crisis, said Janet Yellen, President Barack Obama's choice to be the Fed's new head, unveiling some new steps the central bank could take to encourage those firms to downsize.

"Most studies point to some subsidy that may reflect too big to fail," she said during a hearing into her nomination before the Senate Banking Committee.

"Since those firms do pose (a) systemic risk to the financial system, we should be making it tougher for them to compete, and encouraging them to be smaller and less systemic."

Yellen, currently the Fed's vice chair, largely echoed the Fed's existing policy on bank regulation, but did reveal some new details of her thinking about Wall Street's role in commodity markets and on short-term funding.

Wall Street critics argue that banks such as JPMorgan Chase and Citigroup are too big to fail, and politicians such as Sen. Sherrod Brown - an Ohio Democrat - have introduced bills that could force them to cut their size.

A government report found on Thursday that bigger banks received more support than smaller firms from government backstops, such as deposit guarantees and the Fed's discount window, during the 2007-09 financial crisis.

The six biggest banks participated in crisis-era emergency programs, although they later stopped relying on much of that federal support, the U.S. Government Accountability Office report said.

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