WASHINGTON Nearly six months into her first term as chair of the Federal Reserve Board, Janet Yellen has attempted to place bank regulation on nearly equal footing as monetary policy.
How deep Yellen's involvement in regulatory issues would be was a central question mark as she became the first head of the central bank since former Chairman Paul Volcker to have had significant regulatory experience. That is underscored by her recent public statements and apparent agreement on several issues with Daniel Tarullo, who is seen as the Fed governor most active on financial regulation.
"She's gotten a clear signal from Congress they want to be convinced that she's paying more attention to those issues then any Fed chairman historically has," said Patrick Parkinson, former director of the Fed's Division on Banking and Supervision and now a managing director at Promontory Financial Group.
Others said it still remains to be seen just how active Yellen will be in developing the Fed's regulatory focus.
"There was hope that Yellen might be more involved, bringing an extra set of eyes into the process," said Wayne Abernathy, executive vice president of financial institutions policy and regulatory affairs for the American Bankers Association. "It's hard to tell, because it's early. It is happening to some degree, just how much is hard to say."
In public, Yellen has repeatedly voiced her support for ending "too big to fail," imposing higher capital requirements on the country's top banks, and backing yet-to-be-released financial stability plans floated by Tarullo, who overseas bank regulation at the central bank.
"I believe that capital and liquidity rules and strong supervision are important tools for addressing the problems of financial institutions that are regarded as 'too big to fail,'" said Yellen, at her confirmation hearing last year.
She more recently called for higher capital requirements on the largest U.S. banks to address risks tied to short-term wholesale funding, arguing that the current set of requirements are inadequate to remove potential liquidity shocks.
Such public endorsements have also put to rest some of the speculation before her term started that Yellen and Tarullo would have a strained working relationship. The two come from somewhat different backgrounds, with Yellen's career grounded in monetary policy including a stretch as head of the Federal Reserve Bank of San Francisco and Tarullo's longtime emphasis on regulation.
To date, no signs of tension between the pair have emerged. Still, some suggest it is too soon to tell how their relationship will unfold.
"It's a little difficult to infer working relationships from public behavior, and there have not been many decisions where a conflicting perspective between Chair Yellen and Gov. Dan Tarullo are evident," said one source close to the financial services industry, who requested anonymity given the sensitive nature of the subject. "These are early days."
Although the top priority for the Fed chair especially at a time when the central bank is executing its exit strategy from many of its crisis-era programs is monetary policy, Yellen has sought to convey the idea that regulation also receives top billing at the Fed.
"The Fed has a lot of responsibilities. Job number one is always going to be monetary policy," said Parkinson. "The chairman is always going to spend a lot of time on monetary policy, so it's not surprising that Fed chairmen have for many years relied on another governor to oversee the Fed's efforts with respect to banking supervision and regulation."
Yellen's greater engagement on regulatory issues, however, is also being driven in part by calls from members of Congress, who have made financial stability concerns a front-and-center issue.
At her confirmation hearing, Sen. Elizabeth Warren, D-Mass. called on Yellen to engage in supervisory and regulatory responsibilities as chair of the world's top central bank. It "cannot be something that is merely an afterthought, but has to be a primary effort on your part," said Warren.
The preponderance of questions Yellen received that day focused on the central bank's incomplete regulatory reform agenda and looming financial stability risks tied to low interest rate policies.
Yellen has tried to make it clear to Congress and the public that financial stability concerns are near the top of her agenda. Traditionally, the Fed's two mandates are to focus on price stability and unemployment, but she has essentially named financial stability as a third mandate.
"The recent crises have appropriately increased the focus on financial stability at central banks around the world," said Yellen in a speech earlier this month at the International Monetary Fund. "At the Federal Reserve, we have devoted substantially increased resources to monitoring financial stability and have refocused our regulatory and supervisory efforts to limit the buildup of systemic risk."
Yellen thus far has seemed to rely on Tarullo for his intellectual leadership on regulatory issues, often sending the message that she leans on him as well as all the governors of the board for their expertise.
That point was made evident most recently at a June press conference when Yellen was asked about the prospects of a plan to address ongoing risks tied to short-term wholesale funding.
"I've been supportive, Governor Tarullo and others have been supportive, of taking some action to diminish the incentives for heavy reliance on short-term funding," she said. "We still see that as one of the risks to the financial system that wasn't really addressed in the risk-based capital requirements that we put out or in the liquidity coverage ratio that's out for proposal."
Despite early predictions of a possibly tense relationship between Yellen and Tarullo, both have sent signals they are working as a team.
"I'm not sure if they have any significant differences with respect to regulatory policy," said Parkinson. "But I'm pretty sure that if they did they would recognize the Fed's interest in working out those differences privately rather than airing them in public."
Some noted that any public difference of opinion between members of the Fed board would be highly unusual.
"It is very rare, at least among the governors and that includes the chairman, to make any public statements that create daylight between one governor and another," said Abernathy.
Others said the transition between former Fed Chairman Ben Bernanke and Yellen has appeared to be seamless.
"I just don't see anything changing from the time she took office as chair until now," said Gil Schwartz, a partner at Schwartz & Ballen and a former attorney for the Fed. "If you close your eyes, and say, 'Who's the chair at the Fed in terms of people, in terms of issues, in terms of what they've proposed and what they've considered, has it really changed?"
Still, some observers note small glimmers of change in personalities. There has been evidence of growing elasticity by Tarullo. Known to be a driving force behind the Fed's more stringent requirements imposed on banks under the 2010 Dodd-Frank Act, Tarullo is seen by some now to be taking a more consultative approach.
"It seems there is an effort there to show a lot more flexibility in approach than we saw before," said Abernathy. "And sometimes expressions of flexibility like that can be a manifestation of the fact there is more consultation being involved rather than expressing your own views."
Donna Borak is the Federal Reserve reporter for American Banker