Hopefully, it's not a promise too big to keep.
"I would agree that addressing too big to fail has to be among the most important goals of the post-crisis period," Yellen, who is currently vice chair at the Fed, said in response to a question from Ohio Democrat Sherrod Brown. "Too big to fail is damaging, it creates moral hazard, it corrodes market discipline, it creates a threat to financial stability, and it does — unfairly in my view — advantage large banking firms over small ones."
Addressing the problem, however, is easier said than done.
The Government Accountability Office issued a report last week suggesting that the Fed was dragging its feet on rules mandated by the Dodd-Frank financial reform to remedy too big to fail — notably by limiting the aid it can provide to banks in an emergency.
Dodd-Frank, GAO said in its report, "contains provisions that aim to modify the scope of federal safety nets, restrict future government support and strengthen regulatory oversight for the banking sector, but implementation is incomplete and the effectiveness of some provisions remains uncertain."
Specifically, the watchdog agency noted, "The Federal Reserve Board is required by the act to establish policies and procedures implementing changes to its emergency authority … but it has not completed its process for drafting the required procedures or set time frames for doing so."
The GAO recommended that the Fed set an internal time frame for completing the new rule on emergency lending and said it will report back when the central bank has followed up on that recommendation.
In general, implementation of Dodd-Frank has been slow as regulatory agencies, including the Fed, breeze past deadlines without any indication of progress i! n formulating and approving the rules.
Yellen didn't offer much comfort on that score, getting particularly vague whenever the subject of time frames came up.
Specifically on the question of emergency lending authority from Louisiana Republican David Vitter, Yellen came as close to stuttering over the answer as at any time in the hearing. She couldn't give a time frame, and Vitter asked her to come back with a written answer on that point.
Other Dodd-Frank regulations have yet to be implemented. The Volcker rule, for instance, which calls for separating speculative trading activities from banks benefiting from government-guaranteed deposit insurance, is languishing among the various agencies.
"The devil here is in the details," Yellen explained at her hearing. The agencies are having trouble with wording that would exclude speculative activity but permit what the banks claim is legitimate market making and hedging.
When Massachusetts Democrat Elizabeth Warren suggested the Fed's Board of Governors hold regular meetings on bank supervision as it does on monetary policy, Yellen pointed out that the Government in the Sunshine Act requires board members to discuss bank regulation with each other only in the context of a public meeting.
In short, Yellen, while professing concern for regulatory matters — nominees invariably share senators' concerns — gave little ground on how she might do anything different than what the Fed has always done.
It was Fed lapses in supervision on mortgages and other consumer finance matters that prompted Warren to propose a whole new regulatory agency, the Consumer Financial Protection Bureau, which became part of Dodd-Frank.
Congressional hearings, and particularly confirmation hearings, are as much about legislators laying down markers as anything else. It is part of the oversight exercise, which, next to legislation itself, is the most powerful tool lawmakers have.
Yellen, like most nominees, will get the benefit of th! e doubt t! his round, though Vitter said afterward he would oppose her confirmation primarily because of his concerns about too big to fail.
Nonetheless, she will almost certainly be approved by the committee and confirmed by the full Senate.
As vague as she succeeded in being in her comments on regulation, however, she is officially on notice that lawmakers are as concerned about reining in the banks as they are about monetary policy.
Darrell Delamaide has reported on business and economics from New York, Paris, Berlin and Washington for Dow Jones news service, Barron's, Institutional Investor and Bloomberg News service, among others. He is the author of four books, including the financial thriller Gold.
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