Back when Janet Yellen was just one of two candidates for the job of Federal Reserve chairman, we were assured by Noam Scheiber in the New Republic, among others, that "Yellen is more trustworthy on financial regulation" than Larry Summers, even though the commentators had precious little record to go on. But in yesterday's otherwise strong performance in her first congressional appearance, she stumbled over regulatory matters.
One example involving the Volcker Rule, which bans proprietary trading by U.S. banks, came early in her six-hour session before the House Financial Services Committee.
U.S. Representative Patrick McHenry, a North Carolina Republican, asked if Yellen agreed with the European Union's top bank regulator who recently said there is no such thing as a risk-free asset, even if it's sovereign debt. The EU, McHenry said, seems to be going in a different direction on sovereign debt than the U.S., where the Volcker Rule allows banks to continue to prop-trade U.S. Treasuries, as if they were risk-free.
Some economists say Congress erred by exempting U.S. debt from the Volcker Rule's prohibitions. After all, it was government debt that got many European banks into trouble -- debt that regulators allowed banks to hold without putting equity capital behind it.
Then came McHenry's question: "We could remedy that if you think that is a flaw. How would you react to that?"
Yellen seemed perplexed, not just by the look on her face but also by her answer:
Yellen: Well, we put into effect the allowance that Congress included in Dodd-Frank to exempt Treasury securities.
McHenry: That's Treasury securities. I'm asking about sovereign debt excluded from the Volcker rule. Written into the language of Dodd-Frank is exclusion of U.S. sovereign debt, not the exclusion of other sovereign debt.
Yellen looked blankly at him for about 30 seconds, at which point McHenry said, "I would call this a lack of enthusiasm from you."
The new Fed chairman showed a similar lack of enthusiasm -- or offered vague "we're addressing that" responses -- on issues such as too-big-to-fail banks, the effect of the Volcker Rule on certain types of bank lending, how and whether to regulate insurance companies, and whether the financial system is less risky overall.
Admittedly, Yellen may not have prepared as much on regulatory matters as she did on quantitative easing and the outlook for the economy in her maiden voyage as Fed chairman. But she gave no sign that she will be a tougher regulator than Summers would have been.
Toward the end of the hearing, Yellen at least showed enthusiasm for raising bank capital requirements. In response to a question from Representative Lynn Westmoreland, a Georgia Republican, she said: "In deciding to raise capital standards on financial institutions, [studies] tried to assess what would be the net effect on the economy. And while there may be some impact in terms of raising the cost of capital, the overall impact that these studies found is that reducing the odds of a financial crisis would be the most important benefit."
This shows she gets the most important cost-benefit trade-off when it comes to forcing large, systemically risky banks to have more capital. But Summers gets this, too. There appears to be little daylight between them on bank capital.
We'll have to wait and see if there are any real differences between them on other regulatory matters, or if their differences existed only in the imaginations of Summers' detractors.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter at @paulaEdwyer.)