* At hearing, Fed chair nominee talks tough on regulation
* Telling exchange with Warren on bigger role for governors
By Jonathan Spicer
NEW YORK, Nov 15 Move over inflation and job
The next Federal Reserve chief appears set to direct the
central bank's might at ensuring financial stability and stern
banking oversight with the same vigor it currently applies to
its traditional mandates of fostering price stability and
The question of monitoring and stabilizing Wall Street was a
dominant issue during Fed chair-designate Janet Yellen's
confirmation hearing before a Senate committee on Thursday.
Yellen, widely expected to win Senate backing for the job, said
financial regulation should be on par with monetary policymaking
on the Fed's list of priorities.
The central bank's current vice chair, Yellen appeared
willing to draw fellow governors on the powerful Fed Board into
more decisions on stabilizing the still-vulnerable financial
In a telling exchange with Sen. Elizabeth Warren, Yellen
said it was a "worthwhile idea" to consider reinstating regular
board meetings to tackle financial supervision, as was the case
at the central bank in the 1990s.
In strong language, she also said she was prepared to use
traditional monetary policy tools such as higher interest rates
to prick any emerging asset-price bubbles, and pledged that
addressing too-big-to-fail banks "has to be among the most
important goals of the post-crisis period."
While Yellen and current Fed Chairman Ben Bernanke often
speak of the need to do more to curb Wall Street risk-taking and
erase the notion the government will step in to bail out massive
banks that get into trouble, as it did in the midst of the
crisis, Yellen's testimony hints at a new approach.
"She was unambiguously clear on how the Fed has massively
revamped supervision of big banks, and left me with the sense
she will spend more time discussing macroprudential oversight
with colleagues than in the past," said William O'Donnell, head
of Treasury strategy at RBS Americas.
"It suggested they would shift to a better balance of
macroprudential and monetary policy."
The Dodd-Frank law in the wake of the 2007-2009 financial
crisis and Great Recession tasked the Fed with protecting the
overall financial system from risks that could spill into the
broader economy, something called macroprudential regulation.
The 2010 law effectively doubled down on the central bank's
regulation of Wall Street, even though Fed policymakers -
including Yellen, who ran the San Francisco Fed at the time -
failed to avert the crisis in the first place.
Absorbing this fresh supervision task into the Fed's
traditional dual mandate of stable prices and full employment
has proven tricky: requiring banks to hold more and
better-quality capital can for example clash with the Fed's
desire for those banks to ramp up lending to spur investment,
hiring and economic growth in the wake of the recession.
BUBBLES, BIG BANKS
There also appears to be internal disagreement on how best
to stamp out financial risks.
Dallas Fed President Richard Fisher is alone among U.S.
central bankers in calling on regulators to go beyond Dodd-Frank
and simply break up the too-big banks; and earlier this year Fed
Governor Jeremy Stein set off a debate over whether the Fed
should battle asset bubbles with tighter policies.
Yellen said on Thursday she does not yet see the broad
buildup of leverage that threatens financial stability. Nor does
she feel that U.S. stock prices - which are at record highs
thanks in large part to the Fed's ultra easy policies - are in
Yet toward the end of the two-hour confirmation hearing,
Yellen told Warren the Fed's "supervisory capabilities are
critical and they are just as important as monetary policy." She
added that despite some logistical hurdles, it could be possible
to better involve policymakers in key regulatory decisions that
are usually handled by staff.
"I remember in the 1990s that the board did regularly meet
to discuss supervisory issues ... and I did consider those very
valuable," Yellen said. "So I think that's a very worthwhile
Those regular meetings faded as the Fed under Alan Greenspan
and in the early stages of Bernanke's chairmanship favored a
hands-off approach to bank regulation. Yellen, who was president
of the San Francisco Fed from 2004-2010, is still smarting that
she and other regulators failed to "connect the dots," as she
put it in 2010, between loose lending practices and a overpriced
housing market that helped spark the crisis.
Warren is an influential Democrat who made her name pushing
tougher rules for banks, and she played a big role in the
lobbying effort that knocked Yellen challenger Lawrence Summers
out of contention for Fed chair earlier this year.
At the hearing, the senator highlighted a $9-billion
settlement the Fed and the Office of the Comptroller of the
Currency reached with several banks accused of improper
foreclosures. Warren criticized the decision to simply let
staffers lead the effort, instead of having Fed governors vote
on the deal.
Such matters are typically handled by regulation experts at
the central bank and spearheaded by Governor Daniel Tarullo, the
Fed's point-person and chair of a three-governor committee on
bank supervision that includes Stein and Jerome Powell.
"Tarullo has been carrying this load virtually
single-handedly," said Ernest Patrikis, a partner at White &
Case and a former first vice president at the New York Fed. "The
question is, will that change with more Board involvement in
evolving issues and matters?"