WASHINGTON — The Federal Reserve's role as a financial supervisor is just as important as its monetary policy duties, Vice Chair Janet Yellen said Thursday during her nomination hearing before the Senate Banking Committee.

"I absolutely believe that our supervisory responsibilities are critical, and they're just as important as monetary policy," Yellen said, responding to questioning from Senator Elizabeth Warren about regulations, "and we need to take them just as seriously and devote just as much time and attention to them as we do to monetary policy."

While Yellen stressed that "we have a much safer and sounder financial system than we had pre-crisis," she was quick to add that there is more to do. "We're not at the end of the road in terms of putting in place regulations and enhanced supervision that will make the system as safe and sound as it needs to be to contain systemic risk," Yellen said.

One area that needs more work is in crafting the regulations for large non-bank financial institutions, particularly those designated as systemically important such as GE Capital, the financing division of General Electric.

"I do believe a one-size-fits-all should not be the model for regulations," she said, "and that we need to develop appropriate models for regulation and supervision of different kinds of institutions."

Insurance companies, such as Prudential Financial and American International Group which have also been designated as systemically important financial institutions, "certainly have some very unique features that make them very different than banks," Yellen told the Senators.

She added that the Fed, through its own regulatory authority and its role on the Financial Stability Oversight Council, is "taking the time to try to study what the best way is to craft regulations that would be appropriate for those organizations." She added, "there are certainly critical differences in terms of their business models that we want to understand and respond to."

Sen. Mark Kirk asked Yellen about possible changes in the accounting practices of insurance companies in order to comply with proposed International Accounting Standards Board's recommendations.

Yellen responded she was aware of the issue, adding "I haven't had the chance to study that myself, but I would certainly agree this is something we need to look into and consider very carefully and pledge to do so."

As for the largest U.S. banks, Yellen said the objective of federal regulators, which includes other agencies such as the Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency, "should be to put in place tough enough regulations, and capital and liquidity standards that level the playing field and make it costly since those firms do pose systemic risks to the financial system."

She said the Fed is involved in reviewing activities at the bank holding company level, and while she didn't advocate for breaking up big banks, she did say "we should be making it tougher for them to compete, and encouraging them to be smaller, and less systemic."

Reiterating what she expressed in her prepared testimony, Yellen said the Fed should take into account the burdens and costs on smaller institutions when it devises regulations.

"With respect to the community banks, we need a model for supervision of them that is different," she said, "and much less onerous and has much less regulatory burden and is appropriate for their business model."

Market News International is a real-time global news service for fixed-income and foreign exchange market professionals. See www.marketnews.com.

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