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Yellen Fed Guarantees Change in Bank Culture

NEW YORK ( TheStreet) -- President Obama will nominate Janet L. Yellen as chairwoman of the Federal Reserve on Wednesday afternoon, in a move that could signal continued change across the U.S. banking sector five years after the financial crisis and a rescue of the industry orchestrated by current chair Ben Bernanke.

What role Yellen will have in imparting change to the financial sector or what her overall policies will be is a matter of speculation, however, there are clear areas for investors and Fed watchers to consider.

The Federal Reserve is now the most forceful regulator of the banking sector and a crucial player in deciding how unfinished post-crisis reforms to the industry eventually take hold. While no single player at the Fed decides overall policy, it is generally understood that the chair sets the tone on what the central bank will treat as a priority.

In some respects, Yellen may push a more moderate set of policies than some may expect. While she may not favor a break-up of the nation's largest lenders, Yellen may push forward regulations that make size and complexity prohibitively expensive.

For instance, Yellen has been quoted as not favoring a re-implementation of the Glass Steagall Act, which would split apart commercial banking from investment banking. However, she does appear supportive of higher regulatory constraints on the leverage ratios of the large lenders that fall under the Fed's regulatory jurisdiction. In July, the Fed proposed a tier 1 capital leverage buffer of at least 2% above the a minimum leverage ratio requirement of 3% for the nation's largest and most interconnected lenders.

The matter of leverage ratios is of great importance for the biggest banks in the U.S. Rising constraints on leverage and increasing capital burdens on risk taking businesses, for instance, could force some banks to exit some businesses under their own accord. Under some strict constraints on leverage, analysts say only a few large lenders in the industry, notably Wells Fargo (WFC - Get Report), would be adequately capitalized in their current state.

Wells Fargo is a good starting point to think about Yellen's prospective tenure as Fed chair because the San Francisco-based lender has fallen under her purview for years in her role as president of the San Francisco Federal Reserve Bank. In that sense, Yellen's familiarity with the relatively staid business model of Wells Fargo vs. those of its larger investment banking peers such as JPMorgan (JPM - Get Report), Bank of America (BAC - Get Report) and Citigroup (C) may be indicative of the change taking hold across the industry.
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