WFC Wells Fargo and Company

By Ryan Tracy 

WASHINGTON -- Federal Reserve Chairwoman Janet Yellen promised lawmakers the central bank will scrutinize all big banks in the wake of Wells Fargo & Co.'s phony account scandal, the latest sign that fallout from the firm's missteps could affect the entire industry.

During a contentious hearing on bank regulation before the House Financial Services Committee, Ms. Yellen faced questions from both parties about whether the Fed has adequately addressed the risks posed by the largest U.S. banks. Several Democrats said the Wells Fargo scandal was an indication that big banks are too big to manage and should be broken up. Rep. Sean Duffy (R., Wis.), without citing Wells Fargo, questioned whether the Fed has failed to end the problem of taxpayer bailouts for big banks.

The comments were a reminder of just how unpopular big banks are in Congress, and how much pressure Ms. Yellen and other regulators face to crack down on them.

"I would be amazed if this practice was just limited to Wells Fargo," said Rep. Stephen Lynch (D., Mass.). He told Ms. Yellen to hold bank executives accountable: "Make their life hell."

"Wells Fargo has identified two additional reasons to break these institutions up," said Rep. Brad Sherman (D., Calif.), by creating an incentive system that pushed employees to open fake accounts and failing to change the system when problems cropped up.

The hearing also touched on monetary policy, and Ms. Yellen underscored the Fed has "no fixed timetable" for raising interest rates as the economy continues its recovery. Fed officials earlier this month held interest rates steady but indicated they intended to raise rates about 0.25 percentage point before the end of the year. "We expect to see solid job growth continue, but we do need, if things continue on their current course, to gradually remove the accommodation that is there," she said.

On Thursday, the same committee will hold a hearing on the Wells Fargo matter with testimony from Chief Executive John Stumpf.

Wells Fargo didn't admit wrongdoing as part of a recent settlement with regulators. It announced clawbacks of executive pay on Tuesday and said it is ending the sales practices under scrutiny.

Ms. Yellen said the Fed wasn't directly responsible for regulating that aspect of Wells Fargo's business, because it oversees the firm's holding company. She said the Fed has launched a broad review of big bank compliance regimes.

"We are undertaking a look comprehensively not only in the consumer area but compliance generally because there have been a very disturbing pattern of violations" in businesses such as mortgage lending and foreign-exchange, she said.

Fed governor Daniel Tarullo has previously mentioned the Fed compliance review, but Ms. Yellen's commitment to it at the hearing is significant because it means she likely will have to show lawmakers results.

Mr. Duffy, chairman of the committee's investigative panel and a regular Fed critic, aggressively questioned Ms. Yellen about whether the Fed has ended the problem that big banks are "too big to fail" without a bailout. He didn't mention Wells Fargo but said "too big to fail still exists."

"I wholeheartedly disagree on many issues with Elizabeth Warren, but at least she is truthful on that one," he said, referring to the Democrat senator from Massachusetts who has called for big bank breakups.

Though lawmakers appear uneasy with the state of big bank oversight, they aren't unified on how to handle the issue. Mr. Duffy and other Republicans want to significantly alter or repeal the 2010 Dodd-Frank law that directed the Fed and other regulators to impose stricter rules on big banks. Ms. Warren and other Democrats favor reinstating the Depression-era Glass-Steagall law that separated investment banking from traditional lending.

Ms. Yellen didn't appear to favor either agenda, and defended what regulators have done to date. She said that under Dodd-Frank, the Fed has made "significant progress" in reducing the probability of future bailouts. Major regulatory changes include capital requirements that limit borrowing, "living wills" outlining how they could fail in an orderly way and annual "stress tests."

She also said she didn't believe reinstating Glass-Steagall would have prevented the 2008 financial crisis, and declined to say the Fed would use its regulatory power to break apart big banks.

Looking ahead, Ms. Yellen reiterated the Fed's commitment to raise capital requirements for big banks as part of the stress tests. She said the Fed stands ready to tighten capital rules further if the big banks don't prove, in their living wills, that they could go through bankruptcy without taxpayer help.

In her prepared testimony, Ms. Yellen said regulators need to do more to alleviate the regulatory burden on small lenders, a signal the central bank may soon propose easing rules for community banks. She said the Fed and other agencies "are actively considering proposals to simplify regulatory capital requirements for community banks."

David Harrison contributed to this article.

Write to Ryan Tracy at ryan.tracy@wsj.com

(END) Dow Jones Newswires

September 28, 2016 15:27 ET (19:27 GMT)

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