While the biggest question surrounding the Federal Reserve in recent months has surrounded quantitative easing, the topic of bank regulation shared center stage with the central bank's asset purchase program at Janet Yellen's confirmation hearing on Thursday.
Senators of both parties pressed the vice chairwoman of the Federal Reserve about her views on "too big to fail" financial institutions, as well as how the central bank would go about staving off another financial crisis. Democrats focused on transparency in regulation and the Fed's willingness to delegate regulatory responsibilities. Republicans, meanwhile, voiced concerns that increased regulations like the still-unimplemented Volcker Rule might be too restrictive.
For her part, Yellen said ensuring no institution is too large to bring down the nation's financial system is a top priority.
"I would agree that addressing too big to fail has to be among the most important goals of the post-crisis period," she said. "That must be the goal that we try to achieve -- 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."
The chairperson of the Federal Reserve holds considerable power in financial regulation. The Federal Reserve is one of the chief bank regulators in the U.S., and the chairperson also sits on the Financial Stability Oversight Council, a body established by the 2010 Dodd-Frank financial reform law to monitor for risks in the financial system.
The Fed came under fire on the topic of "too big to fail" after the financial crisis, when it came to light that the central bank committed trillions of dollars to the nation's banks, whose troubles threatened the stability of the U.S. financial system.
Yellen said the central bank would continue to raise capital standards for the largest banks as the Fed continues to set regulatory standards. That process has been long in coming. A Government Accountability Office report released Thursday noted that Dodd-Frank "implementation is incomplete and the effectiveness of some provisions remains uncertain. " In the report, the agency also "recommends that the Federal Reserve Board establish timeframes" for its emergency lending procedures.
When pressed by Sen. Elizabeth Warren, D-Mass., on whether the Fed should have kept a closer eye on banks in the past, Yellen acknowledged that more regulation could have staved off the financial crisis.
"I would say one of our top priorities now is ramping up our monitoring of the financial system as a whole to detect financial stability risks," she said. "I think that's something that we weren't doing in an adequate basis before the crisis so we missed some of the important linkages whereby problems in mortgages would be found through the financial system."
As expected, quantitative easing also played a key role in Yellen's confirmation hearing. Currently, the Fed is purchasing $85 billion each month in treasuries and mortgage-backed securities as part of what is commonly called "QE3."
The vice chairwoman maintained a balanced stance on the topic in her answers -- though she credited the program with boosting the economy, she also acknowledged that there could come a point when quantitative easing goes too far. Critics of the policy often express concerns that excessive easing could lead to high inflation.
"I think that there are dangers, frankly, on both sides of ending the program or ending accommodation too early. There are also dangers that we have to keep in mind with continuing the program too long or, more generally, keeping monetary policy accommodation in place too long," she told Committee Chairman Tim Johnson, D-S.D.
However, Yellen remained mum on when tapering might happen, maintaining that the Fed will continue to watch economic data for sufficient signs of recovery -- a view often expressed by current Chair Ben Bernanke.