As Federal Reserve vice chairman, Janet Yellen played a supportive role in the biggest overhaul of financial regulation since the 1930s. As chairman, she will lead the drive for those policies while monitoring their costs for borrowers and banks.
Since Congress passed the Dodd-Frank Act in July 2010, the Fed has pursued a mission of boosting capital and liquidity standards for the largest, riskiest banks to make them more resilient against economic shocks and less reliant on taxpayer bailouts if they do collapse. Yellen, 67, became vice chairman in October that year and has supported the central bank’s initiatives.
“The Fed has got a course in play; she’s participated in those discussions, she’s voted for them, so I can’t see any major changes,” said Ernie Patrikis, a former general counsel at the Federal Reserve Bank of New York and now a partner at White & Case LLP in New York. “To stand up and say we should back off -- I just can’t see that happening.”
President Barack Obama nominated Yellen yesterday to succeed Ben S. Bernanke, 59, when his term expires Jan. 31. She mentioned a “strong and stable financial system” as another goal Congress entrusted to the Fed during her acceptance speech at the nomination ceremony.
While estimating economic and social cost is a routine part of the central bank’s analysis in financial rule-making, Yellen’s policy approach probably will give it greater emphasis, said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington regulatory research firm whose clients include the world’s largest banks.
“Where you will see a difference is not in toughness on systemic risk, capital surcharges or the deep concern” over markets in which financial institutions pledge securities in exchange for short-term cash, Petrou said. “She will look to see what the financial consequences of a rule are or will it have adverse effects from an economic-development perspective.”
As delinquencies rose to more than 18 percent of total subprime-mortgage loans in the first quarter of 2008, for example, Yellen said in a speech that she worried about the impact on low-income communities.
That’s consistent with a focus in her macroeconomics work on the ability of government policy to help restore economic equity. During the six years she served as president of the San Francisco Fed, Yellen asked questions underscoring the “human element” of a problem, according to Mary C. Daly, a senior vice president at the district bank who has worked there as an economist since 1996.
Yellen routinely went beyond abstract issues such as the prospect of a jobless recovery, encouraging members of the staff to dig into the individual consequences of unemployment, including how people without work would support themselves and what difficulties they would face in returning to the labor market, Daly said.
Such emphasis won’t disrupt the Fed’s current approach of forcing the largest institutions to adopt tougher standards. If Yellen wins Senate confirmation, she will take over with much of the central bank’s regulatory efforts in mid-course.
“Janet Yellen understands the importance of supervision and regulation over the financial system,” said Deborah Bailey, managing director of Deloitte LLP’s banking and securities regulatory practice in New York and until 2009 the deputy director of the Fed Board of Governors’ supervision and regulation division. “When done effectively, it is critical to achieving and maintaining a strong economy.”
Yellen supported the Fed’s decision in July to adopt a leverage ratio, which measures capital as a flat percentage of assets, eschewing formulas that let banks hold less capital for assets deemed less risky.
She also agreed with a December decision to require large foreign banks with significant U.S. operations to establish holding companies the Fed would supervise.
Indeed, Yellen has supported all of the Fed board’s major regulatory initiatives in 2012 and 2013, according to the central bank’s website, including a proposed rule to adopt the codification of the Fed’s commitment to the global capital accord known as Basel III.
“This means all engines forward as Dodd-Frank continues to get implemented, just as if Bernanke was still chairman,” said Jaret Seiberg, a senior policy analyst with Guggenheim Securities LLC’s Washington Research Group. “There shouldn’t be any radical departure from what we’ve been seeing.”
Like Daniel Tarullo, the Fed governor in charge of supervision and regulation, Yellen has deep concerns about lightly regulated markets for short-term securities financing. These include transactions in the repo market, which she called “a major source of unaddressed risk” in a June speech.
Congress has bipartisan interest in assuring that the largest banks can fail without taxpayer support, and senators probably will press Yellen for details on her views during her confirmation hearing before the Senate Banking Committee.
“My biggest question to Ms. Yellen will be, will she actively push for higher capital requirements for mega-banks than regulators have announced,” said David Vitter, a Republican from Louisiana, who has proposed legislation that would break up the largest financial institutions. “My biggest concerns are that she won’t, continuing to support too-big-to-fail and bailouts as needed.”
Senator Mike Crapo of Idaho, the ranking Republican on the committee, said the next Fed chairman faces a “unique set of challenges” that includes “implementing a long list of unfinished rules under Dodd-Frank without over-regulating the community banking sector.”
Regulation has been a top concern for the committee’s 12 Democrats as well. Five of them signaled they would not support former Obama adviser Lawrence Summers for Fed chairman because of his push in the 1990s to loosen financial rules as a Treasury Department official under President Bill Clinton. Yellen hasn’t drawn any opposition from the Democrats on the committee.
“The Federal Reserve has much work left to do to accelerate our economic recovery, finish the important work of financial reform that began with the historic passage of the Dodd-Frank Act and dial down the risk of future financial crises,” said Senator Elizabeth Warren, a Massachusetts Democrat who has had a combative relationship with the banks since calling for creation of a consumer-protection bureau. “I have great confidence in Janet, and I am delighted by her historic nomination.”