SBC Holds Nomination Hearing for Janet Yellen

BANKING COMMITTEE HEARING, Members questioned Janet Yellen, Vice Chair of the
Federal Reserve Board (FRB) and President Obama’s nominee to be the next FRB
Chairman, on a range of issues, including the Fed’s Quantitative Easing (QE)
policy, its methods for communicating meeting minutes and monetary policy, and
its supervisory and regulatory responsibilities.

In his opening
remarks, Chairman Tim Johnson (D-S.D.) praised Yellen’s “impressive” academic
and professional record, and highlighted her ability to analyze trends in the
economy, calling her economic judgment a “tremendous quality for a Fed Chair.”
In closing, he said Yellen has proven through
her “extensive and impressive record in public service and academia” that she
is most qualified to be the next chair of the Federal Reserve, and announced
his intention to vote in support of her confirmation.

Ranking Member Mike
Crapo (R-Idaho) said the Fed is currently engaging in “unprecedented policies”
and questioned the size of the central bank’s $3.8 trillion balance sheet and
the efficacy of its QE policies, noting his concern that markets are “overly
reliant” on the Fed’s asset purchases. He also expressed concern with the Fed’s
intention to hold short-term interest rates low for an extended period of time,
highlighting the negative effects on fixed income investments and pension
funds. In his concluding remarks, Crapo said that as the Fed promulgates its
prudential regulations, it must balance financial stability with the “inherent
need” for markets to take on and accurately price risk, and must be careful not
to stifle economic growth or job creation.

In her brief opening
, Yellen praised the leadership of outgoing Chairman Ben Bernanke,
calling the economy “significantly
stronger” than it was six years ago and said the recovery “continues to
improve.” She highlighted the turnaround in housing and the auto industry’s
“comeback,” but noted that the nation’s high unemployment rate indicates “a
labor market and economy performing far short of their potential.” In light of
continuing weakness in the labor market, and the larger economy, Yellen
defended the Fed’s monetary policies.

“I believe that supporting the recovery today is the surest
path to returning to a more normal approach to monetary policy,” she said.

In closing, Yellen said regulators have made considerable
progress in addressing the weaknesses in financial institutions and markets
exposed by the crisis and relayed her commitment to maintaining the Fed’s
regulatory and transparency posture while reducing the regulatory burden on
community banks and other small financial institutions.

Question and Answer

Republican Senators expressed their concern with the Fed’s growing balance
sheet and the “limited impact” of QE, highlighting several scholarly articles
and studies questioning the effectiveness of the policy, and pressing Yellen on
when the Fed plans on tapering its asset purchases. Yellen said several studies
have analyzed the efficacy of QE, but her personal assessment is that QE has
had a meaningful impact on economic growth, employment levels and the housing

would not commit to a specific date or time period for ending QE, but said the
Federal Open Markets Committee (FOMC) is constantly reevaluating the efficacy
of the policy by closely examining the labor market, and agreed that the
program cannot go on indefinitely. “There are costs and systemic risks
associated with the program and we are monitoring them closely,” she added.
“The Fed recognizes that the longer the program continues the more it will have
to consider those risks.”

response to a question from Johnson, Yellen said she is committed to working
with the FOMC “to continue promoting a robust economic recovery.” She added
that the statistics regarding Americans unemployed for longer than six months
is “unprecedented” and that the Federal Reserve will continue its asset-buying
program as the benefits of the program still exceed the costs. “We expect to
maintain a highly accommodative monetary policy for some time to come,” Yellen

Bob Corker (R-Tenn.) specifically expressed concern that the Fed’s QE policy is
unfairly benefiting the wealthy, without “trickling down to the rest of the
economy.” Yellen acknowledged that the policy has boosted the stock market, but
said QE has had an important role in supporting the housing recovery.

up on Yellen’s support of QE, some Senators asked if QE and other monetary
policy decisions were creating asset bubbles. Yellen acknowledged that stock
prices have risen “robustly,” but said that according to traditional evaluation
measures, including the equity risk premium, stock prices today are not in
“bubble-like territory.” She said the Fed devotes “a good deal of time and attention”
to monitoring asset prices in different sectors and does not currently see
evidence of “asset price misalignments” in major sectors that would threaten
market stability. In response to a question from Corker, Yellen said she will
have the courage, as Chairman, to take action to counter the formation of asset
bubbles through monetary policy and enhanced supervision.

Robert Menendez (D-NJ) asked Yellen whether “weak demand” was a greater
immediate concern than an asset bubble created by QE. Yellen said weak demand
is a “major drag” holding back economic growth.

Richard Shelby (R-Ala.) asked Yellen to detail her views on Basel III. Yellen
said it is “extremely important” for the nation’s banks to hold higher levels
of quality capital, and implementing Basel III requirements are an important
step toward achieving that goal. However, Yellen noted that more rulemakings
will be forthcoming to address the capital and liquidity levels of systemically
important financial institutions (SIFIs).

Sherrod Brown (D-Ohio) asked whether Yellen agreed with recent comments from
Ben Bernanke and William Dudley, President and CEO of the Federal Reserve Bank
of New York, that the Too-Big-To-Fail (TBTF) problem has not been solved and
how this issue can be better addressed.

agreed that addressing the TBTF issue “has to be among the most important
goals” of the post-crisis period and that it “must be a goal we try to
achieve.” Yellen stated that Dodd-Frank and other prudential regulations should
make a “meaningful difference” in terms of TBTF, specifically highlighting
increased capital standards, the SIFI surcharge, and the possibility of
requiring the largest banking organizations to hold additional unsecured debt
at the holding company level “to make sure they’re capable of resolution.” She
also said that the architecture behind resolution authority is “very promising”
and the Fed and other regulatory agencies are working with foreign regulators
to “improve the odds” of a successful cross-border resolution.

also mentioned how the Fed hopes to complete its proposal regarding
supplemental leverage requirement for the largest banks “in the months ahead.”

on whether she believes there is still a subsidy for the nation’s largest
banks, Yellen referenced the different methodologies used in various studies
and noted that most of those subsidies point to “some subsidy,” but added that
there are additional factors that may account for reasons why larger financial
institutions face lowering borrowing costs.

David Vitter (R-La.) followed up on Brown’s TBTF line of questioning,
highlighting the findings of a recently released GAO study on market subsidies
for large financial institutions, including the “huge discount” the Fed offered
to large banks during the crisis. Yellen said the Fed is formulating guidance
on winding down its emergency lending authority, but said she could not offer a


Noting Yellen’s
commitment to continuing the Fed’s current supervisory and regulatory role espoused
in her testimony, Vitter asked if she would commit to “going further” on
leverage ratio requirements. Yellen said there has been a “very meaningful
improvement” in capital standards by implementing the approaches that
Dodd-Frank has recommended, adding that the Fed is contemplating a
countercyclical capital surcharge in addition to a SIFI surcharge.

She said the Fed is
also considering additional ways to address the risks posed by short-term
wholesale funding, including additional capital charges or margin
requirements.  In response to Vitter’s specific question, she said the Fed
believes the leverage requirement should serve as backup to risk-based capital
requirements, and would not commit to increasing the currently proposed
leverage ratio without first assessing the cumulative impact of Dodd-Frank

also asked if Yellen would support “true openness and transparency” at the Fed
by endorsing S. 209, which would subject the Fed to a Government Accountability
Office (GAO) review.

noted that Congress has recognized that there should be an exception to GAO’s
ability to audit the Fed for 50 years, and said she would not support a
requirement that would diminish the independence of the Federal Reserve, noting
the risk of “short-term political pressures” interfering with monetary policy.

Warren (D-Mass.) said the Fed needs to make “reigning in banks” a top priority
and that regular Board meetings should be held on supervisory and regulatory
issues, making it clear to the public that both issues are important to the

said she believed the Fed’s supervisory responsibilities are “critical” and
“just as important as monetary policy.” However, Yellen noted that the FRB
operates under a variety of restrictions and the Board’s ability to discuss
regulatory matters outside of open meetings “is very limited.” She also said the
Fed has a committee system in place that focuses on particular areas and makes
recommendations to the Board.

on when is it appropriate to delegate certain issues to staff or retain them at
the Board-level, Yellen said there are certain matters under law that the Board
must vote on, but the Board typically delegates enforcement matters to staff.

by Sen. Kay Hagan (D-N.C.) whether markets are “too driven” by central bank
speeches and whether future talk of taper will lead to increased volatility,
Yellen said the Federal Reserve is trying to communicate clearly about its
monetary policy and its goals and intentions. “This is challenging,” she said,
due to “unprecedented circumstances” and the use of policies that “haven’t been
tried before.”

also addressed Section 716 of the Dodd-Frank Act and her concern that the rule
could raise costs on end-users without reducing risk to the financial system.
Hagan mentioned how Ben Bernanke had previously raised concerns about this rule
and asked Yellen if her views were consistent with his.

said the Fed is also concerned with the rule, but she believes the Fed will be
able to address the concerns without the need for a full repeal. As to whether
her views align with Bernanke’s views, Yellen said “I believe so.” Pressed on
when the final rule would be released, Yellen said she believed the Fed would
release a final rule “later this year.”

Dean Heller (R-Nev.) asked if Yellen believes the U.S. financial system is
“safe and sound.” Yellen said the U.S. has a “much safer and sounder” financial
system today than it did pre-crisis, but more must be done to bolster the
system’s resiliency, including additional regulations and enhanced supervision.
Following up, Heller asked how the Fed will prevent further consolidation among
larger financial institutions, which are “enjoying a TBTF subsidy.” Yellen said
the Fed hopes its capital and liquidity standards for large institutions will
level the playing field for smaller financial institutions, adding that due to
the systemic riskiness of larger firms, regulations should make it tougher for
them to compete and “encourage them to get smaller and less systemic.” 

John Tester (D-Mont.) and Mark Warner (D-Va.) expressed concern about the
Financial Stability Oversight Council (FSOC) applying a bank-centric regulatory
model to non-bank institutions. Tester also asked why the Fed had applied for
membership to the International Association of Insurance Supervisors (IAIS)

responded by noting that the Fed is now charged with supervising insurance
companies designated by the FSOC as systemically important. She said the Fed
applied for membership to IAIS because they wanted to be in a position to work
with regulators from other countries to promote and ensure internationally
compatible standards.

for a one-size-fits-all bank-centric model, Yellen said she believes different
regulatory models are needed for different kinds of institutions. She added,
“that the Fed is taking the time to study the best way to craft regulations
appropriate for [non-bank] organizations.”


Jeff Merkley (D-Ore.) expressed concern about the potential loopholes in the
final Volcker Rule that could compromise the “firewalls” between proprietary
trading, portfolio hedging and market-making. He asked Yellen whether Congress
can count on the Fed and other regulators to produce a “strong” Volcker Rule
and “implement it in a fashion that keeps faith with this goal of reducing systemic
risk by keeping the commercial banking world in the commercial banking sphere.”

said the Fed is working “closely and constructively” on the Volcker Rule with
the other regulatory agencies. “We are certainly trying to be faithful to the
intent of this rule,” she said, “but the devil here is in the details.”

also asked Yellen to share her perspective on the participation of large
financial institutions in commodity markets. Yellen said the Fed is engaged in
a “very comprehensive review of commodities activities” within financial
holding companies. She said the Fed is determining whether grandfathered
activities are being conducted in a “safe and sound” manner, and indicated that
the review may result in a future rulemaking.

testimony and a webcast of the hearing, please click here.