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Yellen Fed Guarantees Change in Bank Culture

Stocks in this article: BAC JPM WFC

The Federal Reserve, in conducting annual stress tests, is now responsible for overseeing firms' financial planning and ensuring that lenders have the capital in place to weather a severe economic downturn similar to 2008 and 2009. In those stress tests, it is often Wall Street-oriented trading and proprietary investment activities that are treated as the riskiest and most burdensome to a firm's capital.

A continuation of strictly enforced stress testing could continue to propel banks to divest their riskiest assets as they look to free up their balance sheets to strengthen their lending to consumers and small businesses.

Such a scenario could, again, favor the business models of firms such as Wells Fargo over those with significant earnings streams from Wall Street. Recent stress testing, billions of dollars in asset divestitures and an emphasis by some firms on reducing their risk all indicate firms are moving in the direction of safety.

In that sense, Yellen's tenure could be a time when banks re-prioritize their Main Street lending capacities over their more glamorous Wall Street activities. Whether such a change results from Yellen's beliefs or, instead, the natural momentum of post-crisis regulatory policy may ultimately matter little.

For now, Yellen is likely to be seen as holding the Federal Reserve's more aggressive monetary policies in place and leaning toward an accommodating stance when it comes to setting interest rates.

"Yellen is unquestionably the best candidate. But there is a slightly bigger risk that under her stewardship, the Fed will fail to tighten monetary policy in time once the recovery gathers momentum, eventually triggering an unwanted surge in inflation," Paul Dales, Senior U.S. economist at Capital Economics said in a Wednesday note.

In September, the Fed was expected to begin paring down an $85 billion a month bond purchasing program designed to push down mortgage and long-term interest rates. Weak recent economic data, the shutdown of the U.S. government and looming uncertainty over the government's ability to service its debt, however, appear to have caused the Fed to hold steady on its bond buying.

Lawmakers will have to approve Yellen upon her formal nomination by Obama later this afternoon. While Yellen's previous confirmation as vice chair caused some rumbling among Republican senators who saw a dovish policy stance that could lead to inflation. Still, Yellen sailed through confirmation and it seems unclear what, if anything, has changed since.

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