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From Banking and Finance Law Daily, November 21, 2013

Senate Banking Committee approves Yellen as Fed chair

By Anne Sherry, J.D., and Jim Hamilton, J.D., LL.M.

The Senate Banking Committee on Nov. 21, 2013, approved, 14 to 8, the nomination of Janet Yellen to chair the Board of Governors of the Federal Reserve System for the next four years. All but one of the committee’s Democrats, along with three of its 10 Republicans (Senators Bob Corker (R-Tenn.), Tom Coburn (R-Neb.), and Mark Kirk (R-Ill.)), voted to approve the nomination. If she is confirmed by the full Senate, Dr. Yellen, who has served as vice chair of the Fed since 2010, will take over as chair when Ben Bernanke’s term expires in January 2014.

Chairman Johnson’s introduction. Senator Tim Johnson (D-S.D.), the committee’s chairman, described Dr. Yellen as an extraordinary candidate for Fed chair with an impressive academic background. He noted in particular that she “devoted a large portion of her professional and academic career to studying the labor market, unemployment, monetary policy, and the economy,” making her nomination especially timely in the wake of the recession. Dr. Yellen’s accurate prediction of the housing bubble and early recognition that the economy was in a recession demonstrate economic judgment that “would be a tremendous quality of a Fed Chair,” Chairman Johnson said.

Corker reversal. Senator Corker, despite expressing some reservations about Dr. Yellen’s views on monetary policy, lack of experience in systemic financial regulation, and isolation from market dynamics, voted to approve the nomination. Senator Corker noted in a statement last month, “I voted against Vice Chairman Yellen’s original nomination to the Fed in 2010 because of her dovish views on monetary policy. We will closely examine her record since that time, but I am not aware of anything that demonstrates her views have changed.” But today the senator said that after meeting with Dr. Yellen and listening to her responses in her confirmation hearing last week, he is satisfied that she will bring a more transparent and rules-based approach to Fed decisions and will moderate stimulus purchases as soon as that action is warranted by the data. “In the end,” he said, “I do believe she has the qualifications necessary to be the Fed chairman.”

Volcker Rule. Responding to a written question from Banking Committee Ranking Member Mike Crapo (R-Idaho) about whether the Volcker Rule would be re-proposed, Yellen emphasized that the federal financial regulators are striving to consider the Volcker Rule by year’s end in order to provide clarity and certainty to the financial firms affected by the rule. In a written statement, Yellen noted that the Fed has been working for some time with the FDIC, SEC, OCC, and CFTC to develop a final Volcker Rule that effectively implements congressional intent by being faithful to the words and purpose of Dodd-Frank Act Sec. 619.

Responding to a query from Crapo on compliance with the Volcker Rule after its adoption, Yellen noted that Sec. 619 took effect on July 21, 2012, with an additional two-year period after that for financial firms to conform their activities and investments to the law and regulations. The Fed may extend the two-year conformance period for up to three one-year periods if the board determines that an extension is consistent with the purposes of the Volcker Rule and would not be detrimental to the public interest. Yellen pledged that, as the Fed considers the merits of adopting a final Volcker Rule, it would also consider the public interest in granting an extension of the conformance period.

Yellen also said that the regulators are working hard to ensure that the exception from proprietary trading for hedging activity is properly implemented. This was in response to a question from Crapo about how the Fed would distinguish hedging from proprietary trading. Risk-mitigating hedging focuses on reducing the risk associated with individual or aggregated positions as distinguished from proprietary trading, noted Yellen, which focuses on trying to achieve short-term profits.

Republican opposition. Crapo voted against confirmation, stating that the Fed’s pursuit of quantitative easing and policy of holding interest rates at or near 0 percent have “led to a $4 trillion dollar balance sheet, now totaling almost one-quarter of the U.S. economic output.” Dr. Yellen, he said, “continues to promote the policies that led me to vote against her initially. At her nomination hearing, she gave no indication that a prompt return to normalized policy was on the horizon.”

Outside the committee, several Republican senators have announced their intention to vote against Dr. Yellen’s confirmation when it is taken up by the full Senate. Senator Marco Rubio (R-Fla.) today acknowledged the vice chair’s accomplishments but said, “I will be voting [no] because of her role as a lead architect in authoring monetary policies that threaten the short and long-term prospects of strong economic growth and job creation. Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behavior, and put the U.S. economy at increased risk of higher inflation and another future boom-bust.”

Industry reaction. The Independent Community Bankers of America released a statement congratulating Dr. Yellen on securing the Banking Committee’s approval. ICBA leadership said, “From her time as president of the Federal Reserve Bank of San Francisco, Dr. Yellen has demonstrated an understanding of community banks and their unique, relationship-based business model. As one of the nation’s most accomplished economists, Dr. Yellen also surely appreciates the role community banks play in the economic growth and stability of communities across the nation.”

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