This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Yellen Fed Guarantees Change in Bank Culture

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.

2 of 4

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,234.72 +77.87 0.45%
S&P 500 2,010.44 +8.87 0.44%
NASDAQ 4,588.0670 +25.8780 0.57%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs