UPDATE 1-Yellen says tailoring bank rules helpful, but strong capital requirements needed

Adds quotes, details on regulatory burdens, banking system stresses, paragraphs 4-8

By David Lawder

Oct 29 (Reuters) - U.S. Treasury Secretary Janet Yellen said on Tuesday that it was important to continue tailoring the complexity and severity of banking regulations to the activities of institutions to avoid undue compliance burdens, but said she is predisposed to robust capital requirements.

Yellen, asked about a proliferation of regulatory burdens from multiple agencies at an American Bankers Association annual meeting in New York, said strong capital requirements put in place after the 2007-2009 financial crisis helped the U.S. economy weather the COVID-19 pandemic.

"Knowing how important it is to have a healthy banking system in order to have a healthy and resilient economy, I guess my predilection is very much toward robust capital liquidity, to make sure that we do have a banking system that can support the economy that's safe and sound," Yellen said.

She said the industry's concerns that the 2010 Dodd-Frank banking regulation law would make U.S. banks uncompetitive were proved unfounded, but has heard industry complaints about increasing regulatory burdens "loud and clear" and added that regulators should coordinate their approaches.

"I recognize that there is a substantial burden," she said. "It continues to evolve as we deal with the cloud, with non-banks, with third-party service providers, with cyber attacks and a growing, growing list of matters that all banking institutions need to be attentive to, but I hope that tailoring can help to reduce the burden for the smaller banks."

Yellen said in prepared remarks that the Treasury and regulators would work with the banking sector to address vulnerabilities revealed by turmoil in 2023 after the failure of Silicon Valley Bank and Signature Bank.

These include increased shares of uninsured and concentrated deposits and unrealized losses on loan and securities portfolios, she said.

"This means ensuring that banks are prepared for liquidity stress, including making sure banks have diverse sources of contingency funding, and the capacity to borrow at the discount window and periodically test this capacity," Yellen said.

(Reporting by David Lawder; Editing by Leslie Adler and Daniel Wallis)

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