Fed's Yellen questions whether Wall Street ethics up to par

(Reuters) - The head of the U.S. Federal Reserve took a swipe on Tuesday at unlawful and unethical behavior at banks, saying it raises questions over whether the values embedded on Wall Street have improved enough in recent years.

Fed Chair Janet Yellen cited the many improvements since the 2007-2009 crisis at both financial institutions and the U.S. central bank that monitors them. But large banks must continue to fix their internal governance and risk controls, she said, or the Fed will take "swift and meaningful" action.

While other Fed officials and bank regulators have complained about the ethics and culture on Wall Street, the stern comments from the country's top financial supervisor appeared to amplify concerns expressed by Washington lawmakers.

"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," Yellen said in prepared remarks to the Citizens Budget Commission, which hosted a New York dinner for her.

"Too often in recent years, bankers at large institutions have not done so, sometimes brazenly," she added.

"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."

The rapid unraveling of Wall Street's risky mortgage bets were at the core of the financial crisis, leading to new rules including higher capital requirements, stress tests, and so-called living wills at banks, all meant to halt a repetition of the brutal global recession that followed.

But a series of scandals have ensnared firms including the disclosure that some bankers have manipulated the key London interbank offered rate, or Libor, leading to billions of dollars in fines globally.

New York Fed President William Dudley, a key Yellen ally who introduced her at the dinner, has called on bankers to overhaul a culture that values profits at the expense of overall financial stability.

The Fed aims to introduce new guidelines around executive compensation later this year. On Thursday, it will release the results of this year's stress tests that measure how big banks would withstand a hypothetical coming crisis.

But Dudley himself has come under congressional fire for perceived "regulatory capture" at the New York Fed, or the accusation that his employees have grown too cozy with banks and unable to properly monitor them for risky activities.

Yellen said regulatory capture can happen in both intentional and inadvertent ways, and is something the Fed "takes very seriously and works very hard to prevent."

"We enforce strict ethics rules and promote strong values among our employees, among them a commitment to public service," she added. "It is important that anyone serving the Fed feel safe speaking up when they have concerns about bias toward industry, and that those concerns be addressed."

(Reporting by Jonathan Spicer; Editing by Lisa Shumaker)