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Yellen's Big Difference May Come in Banking Regulation

NEW YORK ( TheStreet -- Federal Reserve chair nominee Janet Yellen is appearing before the Senate Banking Committee today as they vet her for the job of chairman.

"What we will see is theater with the expected characters playing their expected roles saying the expected things," says White & Case Banking Partner Ernie Patrikis, who is a former general counsel and Chief Operating Officer of the New York Reserve Bank and alternate member of the Federal Open Market Committee (FOMC). "Most Democrats will love her and Republicans will criticize her and pose difficult questions."

Yellen's pre-written testimony was considered to be very bland, colorless and above all very dovish, meaning she will continue Ben Bernanke's easy money policies. However, there is one area where Yellen differs from Bernanke - her views on banking regulations. Yellen favors more regulations on 'too big to fail' banks.

"Her advocacy of a stringent regulatory environment, imposing more rules and putting more restriction into what she refers to as the Seattle banking system is where she will differ," says Robbert van Batenburg, Director of Market Strategy at Newedge.

"One interesting aspect is, if those rules are imposed, it will mean a contraction in some of these wholesale funding markets," says van Batenburg. "If those wholesale funding markets contract, it could also mean less liquidity in the treasury market." van Batenburg says if that happens, it could force Yellen to taper whether she likes it or not.

When Yellen was vice chairman at the Fed, she was very involved in the overhaul of financial regulations and in July the Fed announced it was working on four new rules that would affect risk taking for the big banks. These rules include a capital surcharge, reforms to short-term funding and tough leverage restrictions.

"People on the Hill will have to realize that, if Yellen doesn't make it through this process relatively unscathed, the view around the world of the United States could drop again significantly," says White & Case Banking Partner Ernie Patrikis, who is a former general counsel and Chief Operating Officer of the New York Reserve Bank and alternate member of the Federal Open Market Committee (FOMC). "It will raise questions about the stability of matters such as the US dollar and government securities."
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