Why Yellen Will Keep Mum on Bank Regulation

WASHINGTON — While much of the banking world will be watching closely Thursday to divine hints of Janet Yellen's views on the progress of regulatory reform and the need for further action, the nominee for chairman of the Federal Reserve Board is likely to offer few clues.

Yellen, currently the Fed's No. 2 and likely to become the first woman to lead the central bank, has had a front-row seat since taking office three years ago as she and other policymakers have wrestled with completing a slew of regulatory rules, including many that are still pending.

Yet that position as a sitting member of the Fed board is expected to provide extra incentive to be careful in revealing her specific views when pressed by the Senate Banking Committee at her confirmation hearing.

"She's going to be extremely cautious and give very little detail on matters of substance before the board," said Brian Gardner, a policy analyst at Keefe, Bruyette & Woods, in order to demonstrate her impartiality regardless of whether she is confirmed or not.

President Obama nominated Yellen on Oct. 9 to succeed Ben Bernanke, whose term as chairman expires on Jan. 31.

Yellen, 67, who previously served as president of the San Francisco Fed and on the Council of Economic Advisors in the Clinton administration, has been credited with identifying looming threats prior to the financial crisis. Yet she has given bankers few details about her views on bank regulation and supervision, and has largely kept mum in recent months, forgoing public speaking events in anticipation of her confirmation hearing.

Her last speech in June offered some clues, but largely stuck to the consensus view of the Fed that breaking up the biggest banks is not the right solution to ending "too big to fail," while also endorsing many held views by her counterpart, Fed Gov. Daniel Tarullo.

Thursday's hearing could be an opportunity to learn more about Yellen as senators are likely to focus on capital standards and efforts by regulators to end "too big to fail."

Sen. David Vitter, R-La., a co-author of a "too big to fail" bill with Sen. Sherrod Brown, D-Ohio, said in an interview with Bloomberg TV after his meeting with Yellen that he urged "her to be concrete in terms of further action she would be open or supportive of" in strengthening capital rules. Their proposed legislation would scrap Basel III and impose a 15% leverage ratio on U.S. banks.

Jonathan Graffeo, a spokesman for Sen. Richard Shelby, R-Ala., said the senator would focus his questions on international coordination of capital standards along with ongoing concerns about the Fed's monetary policy and unwinding of its balance sheet.

The preponderance of questions on Thursday will almost certainly concern the Fed's unconventional monetary policy strategy and potential inflation risks. Yellen has played a pivotal role both in drafting the policy and developing a strategy for communicating the central bank's policy decisions to the markets and the public.

But as the Fed's supervisory powers have grown since the passage of the Dodd-Frank Act three years ago, observers anticipate that she will also get more questions about regulatory policy than past nominees.

"I doubt that Bernanke had a handful of questions" about banks, said Wayne Abernathy, executive vice president for financial institutions policy and regulatory affairs for the American Bankers Association. Regulation is "such a bigger role of the Fed. It may be that the tradition has outlived itself of the chairman of the Fed spending primary effort on monetary policy and not focusing on regulatory issues. I think we're at the point now that the chairman has to be involved in regulatory issues."

Senators are likely to probe Yellen to clarify just how much more capital could be necessary to end "too big to fail" or determine whether she would be tougher in enforcing bank regulation as the next Fed chair, if confirmed.

Sen. Elizabeth Warren, D-Mass., who has publicly endorsed Yellen to serve as Fed chair, has consistency criticized policymakers in failing to meet deadlines in implementing critical aspects of the regulatory reform law.

Speaking at a Wall Street reform event hosted by Americans for Financial Reform and the Roosevelt Institute on Tuesday, Warren told supporters, "It's time to act. Since when does Congress set deadlines, watch regulators miss most of them, and then take that failure as a reason not to act? I thought that if the regulators failed, it was time for Congress to step in."

A senior financial services executive based in Washington said Warren would throw her support behind Yellen, but point to the fact that the Fed has not done enough in addressing these issues.

"She will not attack Yellen. She will attack — what's been in her view — the Fed has not done sufficient work to end 'too big to fail,'" said the executive.

Marcus Stanley, policy director for the Americans for Financial Reform, said lawmakers would likely press Yellen to go on the record on her views on "too big to fail."

"I would hope she confirms her belief we have to go further in financial reform than we have and we have to go further than the rules that are already on the table," said Stanley.

Most expect, however, that she will remain consistent with remarks made previously by Bernanke.

"I think Yellen will have to answer that question the way Bernanke has," said a former Fed official, in regards to breaking up the banks.

But if recent confirmation hearings serve as precedent, many are skeptical Yellen will provide few, if any, concrete specifics.

"Since it's conventional wisdom that she'll be confirmed, most of the senators will use the question and answer period to push their own political agendas rather than grill the vice chair," said Isaac Boltansky, a policy analyst at Compass Point Research and Trading.

In public remarks, Yellen has already backed the need to set higher capital surcharges on the biggest banks and require systemically important financial institutions, or SIFIs, to hold long-term unsecured debt to facilitate resolution planning. She's also been supportive of reforming the shadow banking system and requiring banks to hold more capital to reduce risks related to short-term wholesale funding.

Most bankers continue to believe that Yellen will largely defer to Tarullo, who currently oversees the Fed's bank supervision, on regulatory matters. But that thinking could shift based on two unresolved questions: Will the White House nominate a vice chair of supervision required under the Dodd-Frank Act and how much longer will Tarullo stay on at the Fed?

At this point, Yellen's likely term as chairman is not expected to have much impact on regional and community banks that already know much of the new regulatory landscape. It's the biggest banks and non-bank financial institutions that are designated as systemically risky by the Financial Stability Oversight Council, like GE Capital, AIG, and Prudential that face much more uncertainty.

"They're not only facing an unknown of Janet Yellen's regulatory priorities, but regulatory unknowns of how they will be regulated," said Boltansky.