How Yellen Will Shape Fed's Banking Regulation

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WASHINGTON — Janet Yellen is expected to take a more hands-on role in bank regulation than her predecessors if she is confirmed to be the next chairman of the Federal Reserve Board.

For the first time since former Chairman Paul Volcker, Yellen would come to the job with significant bank regulatory experience, having served as the head of the Federal Reserve Bank of San Francisco for six years. Although former Fed chairmen Alan Greenspan and Ben Bernanke often delegated regulatory matters to other Fed governors or staff, Yellen is expected to tackle issues directly, according to former colleagues and others that know her well.

"She'll want to be active in all of the responsibilities of that job, including in leading the system not just in monetary policy, but leading the board with its other important responsibilities, including banking supervision and regulation," said Steve Hoffman, who headed bank supervision under Yellen at the San Francisco Fed. "I think she'll want to be actively involved."

The San Francisco Fed directly supervises hundreds of institutions and holding companies, including Wells Fargo & Co. That experience gives Yellen, a noted economist, an in-depth understanding of the supervisory process, according to H. Rodgin Cohen, a partner at Sullivan & Cromwell and a leading banking lawyer.

"Economists tend not to be focused on regulation, but once you've actually run a Reserve bank, it gives you incredible management expertise," said Cohen. "You also have to be part of the regulatory aspects of the job so you understand it and its importance more."

Speaking from the White House on Wednesday, President Obama officially named Yellen, the current No. 2 at the Fed, as his nominee to succeed Bernanke. He also noted the regulatory challenges she will face if she gets the job, including ending the perception that some institutions are "too big to fail."

"She understands the necessity of a stable financial system where we move ahead with the reforms that we've begun, to protect consumers, to ensure that no institution is too big to fail, and to make sure that taxpayers are never again left holding the bag because of the mistakes of the reckless few," Obama said.

During her tenure as vice chairman, a role she has had since 2010, Yellen has largely remained focused on the central bank's monetary policy strategy, consistently supporting the Fed's unprecedented bond buying program.

But she has also been supportive of Bernanke's efforts to take a holistic view of the Fed's mandate, including better integrating bank regulation with monetary policy.

"She really gets the multifaceted responsibilities of the Fed and how all of those elements come together in enabling the Fed's role and its mission," said Hoffman, now a managing director at Promontory Financial Group.

Still, exactly what Yellen's views are on regulatory matters is unclear. During her tenure at the board, she has kept her remarks on bank supervision and regulation to a minimum. Many said that even if she takes a more active role in regulation, she is not likely to radically depart from Bernanke's actions.

"We almost know nothing of her views on bank regulation," said Douglas Elliott, a fellow at the Brookings Institution and a former investment banker at JPMorgan Chase. "I expect continuity of the Bernanke Fed on bank regulation."

Tim Pawlenty, president and CEO of the Financial Services Roundtable, echoed the view that Obama's decision to nominate Yellen signals the "president's desire for continuity at the Federal Reserve during this pivotal economic time."

Some observers said, too, that the difficulty of unwinding the Fed's monetary policies could keep her from diving too much into the regulatory sphere.

"I would expect her to think of monetary policy as her main task there," said Mark Flannery, a finance professor at the University of Florida.

Yet despite the urgency of the monetary policy situation, the Fed still faces enormous regulatory challenges, including implementing a slew of Dodd-Frank rules that have yet to be completed. She is likely to rely on Fed governors Daniel Tarullo and Jeremy Stein, who have spent a significant amount of time wrestling with those issues.

Observers said Yellen is likely to try to build consensus on the board.

"She's not going to want to change things for the sake of changing things," said Flannery. "She is a Fed veteran. Her attitude is more likely to be toward gradual changes and consensus building."

Sheila Bair, former chairman of the Federal Deposit Insurance Corp., who has been a strong advocate for Yellen's candidacy, said Yellen is someone who has "good judgment who will be open to differing views and whose decisions will be driven by what she believes is in the broad public interest."

Obama also spoke of Yellen's ability to work effectively with colleagues.

"Janet also knows how to build consensus, "he said. "She listens to competing views and brings people together around a common goal. And as one of her admirers says, she's the kind of person who makes everybody around her better."

Yellen has only given a handful of speeches on regulatory reform, but in them she has largely endorsed the views of Tarullo, who is the point person on bank supervision at the Fed.

"I see her views very aligned with what the Fed has been doing," said Hoffman. "I don't see her making any significant dramatic changes in that regard. She is a big believer of institutions having good solid capital, good solid liquidity, that they have the appropriate risk management frameworks in place."

She has already spoken of the need for setting higher capital requirements on the biggest banks, requiring systemically important financial institutions, or 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 Stein have noted in recent speeches, it may be appropriate to go beyond the capital surcharges put forward by the Basel Committee."

Supporters of Yellen credit her with identifying looming threats from the housing bubble and the shadow banking system as vice chair of the Fed and president of the San Francisco Fed.

Cam Fine, president of the Independent Community Bankers of America, said Yellen would bring "practical 'on the ground' regulatory and administration experience to the chairmanship" because of her former role as president of the San Francisco Fed.

"She understands community banks from the ground level and has an appreciation for the challenges community bankers," said Fine, who added that if Yellen is confirmed, the trade group would work with her to address challenges facing the community banking industry.

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