Published October 10, 2013
WASHINGTON – Big banks hoping for a break from the U.S. Federal Reserve's tough line on regulation will be disappointed by Janet Yellen, President Barack Obama's choice to lead the central bank.
Yellen's primary focus will likely be monetary policy and getting Americans back to work, banking experts said, but she is not expected to divert the Fed from its current course of insisting on robust bank capital levels and risk reduction.
Yellen's nomination was "a dark cloud for the largest U.S. banks hoping for a reprieve from tough new rules," Karen Shaw Petrou of Federal Financial Analytics, a consulting firm, said in a note to clients on Wednesday.
"Yellen supports much of what the Fed has been doing with regard to the very tough rules," Petrou said in an interview.
Yellen has been portrayed as a tougher steward of big banks than former Treasury Secretary Larry Summers, who was said to be Obama's first choice to lead the Fed. He withdrew from the running in September after Senate Democrats raised concerns that Summers would be soft on Wall Street, and they instead publicly backed Yellen.
If confirmed by the U.S. Senate, Yellen would be the first woman to serve as head of the Fed. She would take over from Chairman Ben Bernanke at a time when the agency faces a number of tricky issues that go well beyond monetary policy.
The Fed is tackling a laundry list of new rules for banks after the financial crisis, many of which were called for by the 2010 Dodd-Frank Wall Street reform law and some that go beyond those prescribed rules.
Regulators are finalizing capital requirements for the biggest banks that are tougher than a globally agreed-upon framework, a ban on proprietary trading known as the Volcker rule, and plans for how to handle giant failing banks in a crisis.
The Fed in July announced it was working on four new rules that would further curtail risk-taking by the largest banks, including tough leverage restrictions, reforms to short-term funding, and a capital surcharge.
Yellen, who previously led President Bill Clinton's Council of Economic Advisers and the Federal Reserve Bank of San Francisco, has won praise from reform advocates for spotting problems in the subprime mortgage market early on.
Publicly, she has supported efforts to force banks to rely less on debt for funding and called for other actions to prevent them from becoming too big to fail.
Beyond that, her views on how regulators should crack down on banks are less well known. In a speech in June, she showed herself to be inside the Fed mainstream on regulation issues, largely approving of its current course of action.
During brief remarks on Wednesday, after Obama formally announced her nomination, Yellen did not explicitly bring up bank regulation, saying only that "we can and must safeguard the financial system.
She will likely be asked to elaborate on that during confirmation hearings before the U.S. Senate.
"My biggest question to Ms. Yellen will be, will she actively push for higher capital requirements for mega-banks than regulators have announced," Senator David Vitter, a Louisiana Republican, said in a statement.
Bernanke has delegated much of the agency's work on regulation to Fed Governor Daniel Tarullo, who has taken a particularly hard line on big-bank risk-taking.
Oliver Ireland, who was associate general counsel at the Fed when Yellen was a member of its board, said that dynamic was unlikely to change.
"Is she going to step in and aggressively insert herself in that process along the way if Dan stays there and keeps doing what he's been doing? Absent some fundamental disagreement by them, I tend to doubt that," said Ireland, who is now a partner with the law firm Morrison Foerster.
(The story has been filed again to correct month of Yellen speech to June from July in paragraph 12.)
(Reporting by Emily Stephenson, Douwe Miedema, and Peter Rudegeair, additional reporting by David Lawder; Editing by Karey Van Hall and Tim Dobbyn)