The Deal: What Too-Big-to-Fail Banks Should Expect From Yellen Fed
However, if Yellen were to take over the reins at the central bank, as many Fed watchers expect, she would take further steps in an effort to end the perception that large financial institutions are "too big to fail," a situation that she acknowledges still exists.
Under her oversight that effort will likely come in the form of tough capital and leverage regulations on big banks, as her recent speeches demonstrate. She is expected to back the chock-full agenda recently laid out by the Fed's chief bank regulator, Fed Governor Daniel Tarullo.
"You've seen the Fed pursue strict counterparty credit limitations, higher capital requirements for big global banks and other major financial firms
Yellen has outlined a whole host of new requirements she'd like to see imposed on big financial institutions, including new restrictions on short-term wholesale funding big banks often rely upon to make loans.
In the run-up to the 2008 financial crisis, big banks became increasingly reliant on short-term funding to make loans. The quality of collateral that banks put up to obtain the funding became steadily worse, including subprime loans, all of which helped drive a liquidity crisis in 2008. Proponents argue that new capital requirements on the activity could help limit a run on the banks and help stem a future crisis should a significant amount of the loans begin to go bad.
In a June speech, Yellen indicated her backing for new restrictions on short-term funding, noting that the "trigger for the acute phase of the