WASHINGTON — Lawmakers peppered Janet Yellen with questions concerning just about every aspect of the regulatory system at her confirmation hearing on Thursday, demonstrating the degree Congress now focuses on the Federal Reserve Board's supervisory responsibilities.

Yellen, the No. 2 at the central bank who was nominated last month for the top spot by President Obama , touched on a variety of challenges, including the Volcker Rule, efforts by regulators to be more transparent, and how to supervise systemically important nonbank firms.

At times during the two-hour Senate Banking Committee hearing, questions about regulatory reform seemed to outweigh lawmakers' traditional focus on the Fed's monetary policy, including its $85 billion monthly bond buying program known as quantitative easing.

Yet Yellen, the former head of the San Francisco Fed and previously part of President Clinton's economic team, appeared at ease in handling both subjects, even earning praise from GOP senators on her forthright responses.

"Dr. Yellen, I do want to tell you I very much appreciate your candor and transparency," said Sen. Bob Corker, R-Tenn., who has been skeptical of the Fed's monetary policy.

Although some Republicans raised ongoing objections to the Fed's current monetary policy actions, the general lack of contentiousness during the panel discussion suggested Yellen would win confirmation relatively easily. The committee plans to vote on her nomination as early as next week, before it is advanced to the full Senate.

Yet the hearing also demonstrated just how focused lawmakers are on the Fed's bank regulatory role, which has expanded dramatically three years ago under the Dodd-Frank Act. The focus on regulatory issues even elicited a commitment by Yellen for the Fed to continue to pay equal attention to its supervisory role as on its monetary policy decision-making.

Following are some of the key issues addressed during Thursday's hearing:

Volcker Rule

Sen. Jeff Merkley, D-Ore., one of the drafters of a Dodd-Frank provision to stop banks from engaging in proprietary trading, raised concerns that regulators' final Volcker Rule would be riddled with loopholes.

Five agencies have issued a proposal, but have been stalled in releasing a final regulation because of concerns about exemptions concerning "market making" activities.

Yellen said regulators were "working very closely" and "constructively" on the Volcker Rule, but refrained from offering a time line on how soon U.S. regulators would sign off on the highly-anticipated rule.

"We are certainly trying to be faithful to the intent of this rule, which is to eliminate short-term financial speculation in institutions that enjoy the protection of the safety net," said Yellen. "The devil here is in the details."

The vice chairman said regulators were trying to craft a rule that would "permit appropriate hedging in market-making activities," while also adhering to the congressional intent of the provision in restricting proprietary trading.

Basel III

Sticking with the Fed's consensus view, Yellen strongly endorsed a batch of global rules to improve the quality and amount of capital and liquid assets held by U.S. financial institutions. She said the decision by U.S. regulators to take steps in July to implement Basel III was "extremely important" in strengthening the financial system.

She also telegraphed, as other Fed officials have previously, plans to make those standards even tougher for the most systemically important financial institutions.

Banks and other firms most likely to jeopardize the stability of the financial system — including JPMorgan Chase, Bank of America, Citigroup, and Goldman Sachs — would be asked "to hold more capital and meet higher standards of liquidity and prudential supervision to make sure that they're more resilient," Yellen said.

Fed officials have said they plan to release a proposal to instate an extra capital surcharge on those institutions by the end of this year. Regulators have also proposed an additional supplemental leverage ratio to beef up safeguards.

Leverage Ratio

Even so, some senators were still deeply concerned that the current set of reforms was insufficient, especially in terms of the proposed supplemental leverage ratio for the biggest U.S. banks.

"I do not agree that it's enough and I think even when you consider the SIFI surcharge and other things more needs to be done," said Sen. David Vitter, R-La, who is the co-author of a "too big to fail" bill with Sen. Sherrod Brown, D-Ohio. "Would you support going further in terms of leverage ratios for the largest banks or not?"

Yellen declined to endorse making further improvements on supervisors' tools for now, and instead opted to take a wait-and-see approach until reforms were enacted.

"I would want to see where we are when we've implemented all of the Dodd-Frank requirements that we need to put in place," said Yellen, endorsing a sentiment repeatedly suggested by Fed Chairman Ben Bernanke.

Too Big to Fail

As expected, Yellen was also challenged by senators to weigh in on how she would address concerns that the largest banks are still "too big to fail."

The vice chair, 67, said "'too big to fail' has to be among the most important goals of the post-crisis period. That must be the goal we try to achieve. 'Too big to fail' is damaging. It creates moral hazard. It corrodes market discipline. It creates a threat to financial stability, and it does unfairly, in my view, advantage large banking firms over small ones."

Like Bernanke, who acknowledged in March that the issues tied to "too big to fail" have not been resolved, Yellen said U.S. regulators were "making progress" in that regard.

"Dodd-Frank put into place an agenda that as we complete should make a very meaningful difference in terms of 'too big to fail,'" said Yellen.

She echoed the number of steps already being undertaken by regulators under Dodd-Frank to raise capital standards and impose extra capital surcharges. She also reminded lawmakers that regulators are contemplating using additional tools, including asking the largest banks to hold unsecured long-term debt to facilitate the resolution of a troubled firm.

"I think that this agenda will make a meaningful difference and we're hoping to complete this in the months ahead," said Yellen.

Big Bank Subsidy

While Yellen acknowledged at the hearing that the largest institutions do receive a funding advantage, she said that estimating the amount is difficult.

"There are different methodologies that are used in different studies," said Yellen. "And it's hard to be definitive. But, yes… I would say most studies point to on some subsidy that may reflect 'too big to fail,' although other factors also may account for part of the reason that larger firms tend to face lower borrowing costs."

Yellen made the case that regulators must help to level the playing field between community banks and the largest firms through tougher regulations and by making it more expensive for firms which pose a risk to the financial system to operate.

"We should be making it tougher for them to compete and encouraging them to be smaller and less systemic," said Yellen.

Bernanke has repeatedly argued that the benefits of being large would be minimized over time as new regulations became finalized.

The Government Accountability Office on Thursday released a study requested by Brown and Vitter on the discount big banks received during the crisis from the Fed. The report recommends that the Fed finalize policies and procedures related to its emergency lending authority and establish internal timelines for developing a process to ensure timely compliance with Dodd-Frank requirements. (A second GAO report estimating the exact size of the subsidy is expected to be released next year.)

Yellen said the Fed is currently in the process of working on the guidance and would "try to get it out soon."

Financial Stability Oversight Council

Senators were equally concerned about levels of transparency by the Financial Stability Oversight Council, headed by Treasury Secretary Jacob Lew, given its ongoing efforts to designate insurance companies and asset management firms as systemically important non-bank companies.

Sen. Jon Tester, D-Mont. expressed disappointment that a recent study by the Office of Financial Research, the data and research arm of the FSOC, did not elicit comment from the asset management industry. (The Securities and Exchange Commission requested comment from the industry the same day the report was released.) The report has sparked fierce opposition by the asset management industry.

Yellen noted that she does not currently participate in the FSOC, but would, if confirmed, study the council's process more closely.

On a related matter, Tester and others also raised worries that policymakers would regulate insurance companies just like banks. The FSOC has the power to ascertain whether a non-bank firm is risky to the system and then subject them to a tougher set of rules.

Yellen acknowledged there were "critical differences" between the business models of banks and insurance companies.

"I do believe that one-size-fits all should not be a model for regulation and that we need to develop appropriate models for regulation and supervision of different kinds of institutions," said Yellen. "Insurance certainly has some very unique features that make them very different from banks."

She also said the Fed is taking time to study the best way to craft regulations for those organizations, which will fall under its supervisory purview once being designated as systemically important by the FSOC. Already, the council has designated three firms: AIG, GE Capital, and Prudential.

Swaps Push Out

Sen. Kay Hagan, D-N.C. also raised an ongoing issue related to the difficulty of implementing a swaps push out rule, which regulators have previously aired their own concerns over.

Yellen said she shares worries held by Bernanke on the proposal and that regulators are working hard to make fixes.

"We're working very hard to address the concerns around this rule," said Yellen. "And we think that we're likely to be able to do so."

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