Yellen vs. Summers: Who Would Be the Tougher Regulator?

WASHINGTON — While the regulatory reform effort is likely to continue on its current path if Janet Yellen, the Federal Reserve Board's vice chairman, is tapped to lead the central bank, the future is decidedly murkier if Larry Summers wins the post.

There are a number of open questions on how the former Treasury secretary might drive the Fed when it comes to bank supervision and regulation, including how well he would work with colleagues like Fed Gov. Daniel Tarullo and how deep his interest in the subject would be.

While the chairman selection has always been important to bankers, it has become even more so in the wake of the Dodd-Frank Act, which gave the Fed substantially more power over regulatory policy.

"If there was ever a time for a Fed chair to take more of a role in regulatory issues, it would be now given how much more responsibility the Fed has and how central to what the Fed's overall task is of an institution now all tied up in regulatory policy," said Wayne Abernathy, executive vice president for financial institutions policy for the American Bankers Association.

Some outsiders warn that if Summers is nominated and confirmed, it could lead to "a clash of titanic egos" between the new chairman and Tarullo, who has been the Fed's point-man on bank regulatory policy since 2009.

"They may well have an intellectual clash either in terms of the nature of the supervision — or the extent," said an industry source, who requested anonymity. "It's very hard for me to envision circumstances which Larry or somebody like him would allow Tarullo to be the Tarullo that we've come to know in terms of the leading role that he has really stepped into with regard to the supervision of systemically important financial institutions, and the extent to which [Fed Chairman Ben] Bernanke has allowed him to take on a role of such prominence both here domestically and internationally in the context of Basel negotiations. I think that would be exceptionally difficult for a Chairman Summers to allow."

In contrast, Yellen has already endorsed many of Tarullo's views, including the need to set higher capital surcharges on the biggest banks, requiring SIFIs to hold long-term unsecured debt to facilitate resolution planning, reforming the shadow banking system, and requiring capital requirements to mitigate risks related to short-term wholesale funding.

"I'm not convinced that the existing SIFI regulatory work plan, which moves in the right direction, goes far enough," said Yellen, in a speech on June 2. "As my colleagues Governors Tarullo and [Jeremy] Stein have noted in recent speeches, it may be appropriate to go beyond the capital surcharges put forward by the Basel Committee."

While Yellen has long been seen as the top candidate to succeed Bernanke, speculation began building three weeks ago after the Wall Street Journal said Summers was a front-runner for the job. The news sparked a progressive backlash, prompting the administration to lower expectations that an announcement is imminent, saying a decision would not come until the fall.

Other candidates that have been rumored to be on the White House's short-list include two previous vice chairs at the Board, Donald Kohn and Roger Ferguson, as well as former Treasury Secretary Timothy Geithner, and Cristina Romer, former chair of the Council of Economic Advisors for President Obama.

If past history is any indication, any Fed chair would likely to continue to place their primary focus on driving the central bank's monetary policy, especially as the Federal Open Market Committee will likely take unprecedented steps in the coming year to wind down its easy money policies.

"The Fed chairman's primary mandate is always going to be the economy, so I think that it's also important not to overstate the importance of how much influence the chairman will have on bank regulatory policy," said Jaret Seiberg, a policy analyst at Guggenheim Partners. "I think you're going to see a lot of consistency no matter who becomes chairman."

Yet bank regulatory policy has gained newfound importance in the wake of the financial crisis, and the Fed's to-do list from Dodd-Frank remains long. The central bank must finalize capital and liquidity requirements and a ban on proprietary trading, among other items.

So far, Yellen and Summers, who headed Treasury under President Clinton and Obama's first National Economic Council director, have provided few clues on how they would implement regulatory policy.

Despite Yellen's prior role as president of the San Francisco Fed, where she oversaw a range of large and small banks, including Wells Fargo & Co., Yellen has only given a handful of speeches on regulatory reform, focusing most of her comments on monetary policy.

"In her time as vice chairman, Janet Yellen has not spoken a lot on regulatory policy," said Brian Gardner, an analyst at Keefe, Bruyette & Woods, who adds many of her speeches have not "given a lot of hard clues on what her approach would be." Summers, on the other hand, has focused his comments on fiscal policy, and has even refrained from discussing the Fed's current monetary policy strategy.

Gardner said both candidates have a "weak paper trail" hinting at their views on the subject, but both are perceived as having the same "general pro-regulator bent."

"I don't think there's going to be a lot of difference between the two of them in terms of the regulatory approach," said Gil Schwartz, a partner at Schwartz & Ballen and a former attorney for the Fed.

But others said Summers would face additional challenges because of his perception as a "deregulator." He's been unapologetic about blocking tougher regulation on derivatives. He was also a lead collaborator in dismantling the Glass-Steagall Act, a Depression-era law that separated commercial and investment banking.

That may make it difficult for a Summers-led Fed to champion changes to Dodd-Frank, among other things.

"Our concern is that Summers is so identified with Glass-Steagall repeal and the Clinton deregulatory agenda that he will have a harder time pushing for needed changes to Dodd-Frank and the regulatory landscape because he will have to prove that he's tough, before he can start to compromise," said Seiberg.

Yellen, on the other hand, he says, "doesn't have to prove that she's tough," because she hasn't been "tagged as being soft on banks."

"She sounded the alarm early about the financial crisis," said Seiberg. "She worked with Bernanke to craft the Fed's response to the crisis, so no one doubts where she stands on being tough and that's why we think she would have a freer hand to push changes to make Dodd-Frank more workable."

Others suspect that similar to Gary Gensler, chairman of the Commodity Futures Trading Commission, who was also a supporter of the Gramm-Leach-Bliley Act, Summers may face the same constraint "in that you kind of [are] making up for past sins or what people perceived to be past sins, and so that boxes you in," said Gardner.

"At the end of the day, whoever the administration picks, they're going to feel confident that the person is going to continue a strong, muscular regulatory policy," says Gardner. "I would be surprised if they would agree to anybody who would change direction, certainly not in the direction of lightening the regulatory impact over the last couple of years."

That's why many suspect, if Summers is at the helm, he will likely do little to change the scope of regulatory policy measures already in the works at the Fed, especially with a process so far along.

"I can't see how he can impose a dramatic turnaround in some of these rules and convince all the other players that everything should be scrapped and re-thought at this point," said Schwartz. "In fact, I think that's one of the concerns that he'll meet on the Hill as to how much rethinking are you planning on doing on some of these proposed rules that are out there. I think the more dramatic he wants to change things, the more resistance he's going to get."

Summer's past has already helped spur Senate Democrats, led by Sen. Sherrod Brown of Ohio, to start a letter campaign in support of Yellen's nomination, a development that suggests Summers will face an uphill battle during his confirmation process, if nominated.

For Democrats, it will be about "getting him on the record as promising to be a forceful regulator of the banking industry and not weakening what has been done under Dodd-Frank," said Gardner.