WASHINGTON Federal Reserve Chair Janet Yellen on Tuesday strongly discouraged lawmakers to proceed with a plan to earmark one seat on the Board of Governors for a community banker.
Testifying before the Senate Banking Committee, Yellen expressed her disapproval of a pending bill written by Sen. David Vitter, R-La. along with a group of bipartisan senators. She warned it would be ill-advised to lock in seats indefinitely.
"I am very positive on the idea of having a community banker appointed to the Board," said Yellen, who appeared before the committee to deliver the Fed's semiannual monetary policy report to Congress. "That said I don't support requiring it via legislation."
The bipartisan bill would mandate that the president nominate at least one person with community bank experience to be a member of the Fed Board. Lawmakers on both sides of the aisle have been urging the White House to pick a community banker as the president seeks to fill two remaining vacancies.
Sen. Tim Johnson, D-S.D., chairman of the committee, called for a "swift nomination" of a "well-qualified candidate" with experience in community banking, as well as one who could provide tough and effective oversight.
That sentiment was echoed by ranking member Sen. Mike Crapo, R-Idaho.
"Community banks play an important role in their local economies and face a disproportionate burden from regulation," said Crapo. "We should ensure that the perspective of those banks is represented in regulatory policy making."
Yellen argued that the Board has a variety of ever-changing needs, and that the seven seats on the board could not accommodate enough people with the expertise required to fill all of them
Instead, she called for greater flexibility for the president to make appointments based on the most important needs of the day, rather than locking in and earmarking particular seats for particular purposes.
"I feel that's a road that could go further in a direction that would worry me, if we are earmarking," said Yellen. "We could end up earmarking each seat for a particular kind of expertise."
The hearing demonstrated once again just how focused lawmakers are on the Fed's bank regulatory role, which was expanded dramatically since the Dodd-Frank Act was passed four years ago. Yellen has committed to paying as much attention to the Fed's supervisory role as on its monetary policy decision-making.
The Fed chair addressed a number of persistent regulatory concerns voiced by senators, ranging from" too big to fail" to regulation of insurance companies. She will appear before the House Financial Services Committee Wednesday.
Following are some of the key issues addressed during Tuesday's hearing:
Yellen signaled her openness to a legislative fix by Congress in another area: the Collins Amendment to the Dodd-Frank Act.
Top Fed officials, including Yellen, have repeatedly shown a willingness to tailor a set of prudential rules to nonbank financial firms, including insurance companies. But they have repeatedly stated they are constrained in doing so by the Collins Amendment
The provision was intended to apply bank-like capital requirements to larger firms under the Fed's purview, including bank holding companies. But lawmakers, even some who supported Dodd-Frank, are now claiming the capital floors were not meant for other types of firms.
The Fed chair once again sought to assure lawmakers of regulators' willingness to refrain from applying bank-like rules to insurance companies that are deemed systemically risky.
"Our objective in designating regulations for insurance companies that come under our supervision, or other non-bank SIFIs, will be tailored to suit the needs and special characteristics of the entities that we supervise," said Yellen. "We're certainly trying to achieve that in the case of insurance entities that we supervise."
Sens. Sherrod Brown, D-Ohio, Susan Collins, R-Maine, and Mike Johanns, R-Neb., introduced legislation in April that would attempt to address the issue. The bill would clarify the Fed's authority to distinguish between banks and insurance companies in the application of stringent capital rules.
"I think it would be useful to increase flexibility to allow us a greater latitude in tailoring appropriate regulations," said Yellen.
Too Big to Fail
On "too big to fail," Yellen endorsed the views of Fed Vice Chair Stanley Fischer, who has only recently joined the Board, and Fed Gov. Daniel Tarullo, who heads bank supervision at the agency.
The Fed chair said she agreed with the idea, aired by Fischer in his first policy speech last week, that monitoring pockets of systemic risks should go well beyond "too big to fail" institutions.
"We shouldn't lull ourselves into thinking that if we deal with ways to resolve or diminish the role of those institutions, that systemic risk is not still a real phenomenon that we have to worry about," said Yellen.
She reiterated her commitment to ending "too big to fail" a sentiment shared by Tarullo and all the members of the Board by forcing banks to hold more robust capital to reduce the odds of failure.
Senators Jeff Merkley, D-Ore. and Kay Hagen, D-N.C. also expressed concerns over how international discussions might influence how the U.S. will proceed with regulating global insurance companies.
Yellen tried to assure the Democratic lawmakers that the Fed would not be directed by any international body on how it wrote rules in the U.S. But she said it is useful to draw from different perspectives abroad, especially in helping to create a level playing field.
"Nothing that is decided in that international group has any force in the United States, unless we propose rules, put them out for comment and finalize them," said Yellen. "I think it's helpful to get the perspectives of others and to the extent possible and appropriate, to have an internationally level playing field."
'Glass Half Full'
As the 2010 regulatory reform law approaches its fourth anniversary next week, Yellen offered her own optimistic view of the progress achieved by regulators thus far in implementing rules.
"The glass is more half full than half empty and I actually believe we have made substantial progress and will continue to push forward," said Yellen.
Looking ahead to the rest of the year, the Fed chair indicated there are "a bunch of rules in pipeline that will be finalized in the near future." She singled out a first-time liquidity requirement and the Qualified Residential Mortgage rule mandating risk retention in securitizations.
Additionally, she said the Fed would make "a great deal of progress this year" on future agenda items. Top Fed officials have aired a number of plans they hope to accomplish this year, including a proposal to address risks tied to short-term wholesale funding and a long-term debt requirement that would help to buffer against losses of a failing firm.
Still, she acknowledged what has often been described as a sluggish process by regulators in reaching final agreement on rules.
"It's been frustratingly slow," said Yellen. "We want to take the time to get it right."
One of the burdens that have been placed on regulators, she noted, is a mandate by Congress to often work with multiple agencies, which have different perspectives and priorities, to coordinate in drafting and finalizing rules.