WASHINGTON -- President Clinton's second nominee to the Federal Reserve Board told Congress Friday that she favors consolidating the bank regulatory agencies and requiring banks that trade in derivatives to hold more capital.

University of California business professor Janet L. Yellen also took a hard line on inflation in her confirmation hearing before the Senate Banking Committee.

The government must consolidate the "Byzantine and unduly complex" bank regulatory system, Ms. Yellen said. Because of its full schedule, the committee is unlikely to vote on her nomination for a 14-year. term on the board until August.

"There are efficiences to be gained," Ms. Yellen said of proposals to eliminate several of the regulators. She added that consolidation would "result in fairness with a lower regulatory burden."

Ms. Yellen declined to endorse Treasury Secretary Lloyd Bentsen's plan - which Federal Reserve Board Chairman Alan Greenspan opposes - to create a super bank regulator. But she pledged to committee chairman Donald W. Riegle Jr. of Michigan that she would support his consolidation efforts. Sen. Riegle said he would hold Yellen to her promise.

Ms. Yellen also said regulators must increase the attention they give to the financial sector's use of derivatives, which are financial contracts whose returns are derived from the performance of currencies, interest rates, or commodities.

"It is an area where regulators cannot be complacent," she said.

She said institutions that do speculate in derivatives should carry increased capital. "I think adequate capital requirements are very important because if there is gambling going on, it is gambling with their own money," Ms. Yellen said.

The nominee said she is not yet confident that regulators have control of the derivatives issue. But she said recent moves by examiners to convey the risks of derivatives to banks is a positive sign.

On Thursday, the Office of the Comptroller of the Currency warned banks to watch out for the hidden risks in a class of derivatives called structured notes.

She told Sen. Riegle that she would monitor the use of derivatives outside the banking industry to protect it from the systemic risk that could ripple through the banking system with the failure of one bank to close out its positions.

Ms. Yellen, the Bernard T. Rocca Jr. Professor of International Business and Trade at the University of California at Berkley, said repeatedly that she is committed to fighting inflation.

She said inflation alters the business game, as companies try to make their profits by outwitting the market rather than by efficiently producing products for consumers. It also erodes the net worth of small savers and precludes young families from buying homes.

"The Fed's responsibility is to choose policies that are designed to maintain a noninflationary environment," she said.

The nominee took a hard line on unemployment. She said that while she understands the high price of joblessness, she also knows that the Fed cannot use monetary policy to increase employment beyond its natural level without igniting inflation.

She said the Fed tried that in the 1970s and ended with a severe recession in the early 1980s. "I think we paid a great price in '82-'83, and I would not like to live through that again."

Sen. Riegle warned Ms. Yellen that, "We cannot expect the Fed to be able to avoid recession entirely, but the Fed's decision can have a powerful effect on how costly they are and how frequent."

Supports Early Rates Hikes

Ms. Yellen said she supported the Fed's decision to raise rates earlier this year. But she is unsure if the central bank needs to increase rates again, she said.

The committee and then the Senate must approve Ms. Yellen's nomination before she can be sworn in. If that happens, it will not be the first time she has worked for the Fed.

Ms. Yellen, who holds a doctorate from Yale University, served as an economist to the board of governors from 1977 to 1978. She also worked as a consultant to the Fed's Division of International Finance in the mid-1970s.

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