* At hearing, Fed chair nominee talks tough on regulation

* Telling exchange with Warren on bigger role for governors

By Jonathan Spicer

NEW YORK, Nov 15 (Reuters) - Move over inflation and job

growth.

The next Federal Reserve chief appears set to direct the

central bank's might at ensuring financial stability and stern

banking oversight with the same vigor it currently applies to

its traditional mandates of fostering price stability and

maximum employment.

The question of monitoring and stabilizing Wall Street was a

dominant issue during Fed chair-designate Janet Yellen's

confirmation hearing before a Senate committee on Thursday.

Yellen, widely expected to win Senate backing for the job, said

financial regulation should be on par with monetary policymaking

on the Fed's list of priorities.

The central bank's current vice chair, Yellen appeared

willing to draw fellow governors on the powerful Fed Board into

more decisions on stabilizing the still-vulnerable financial

system.

In a telling exchange with Sen. Elizabeth Warren, Yellen

said it was a "worthwhile idea" to consider reinstating regular

board meetings to tackle financial supervision, as was the case

at the central bank in the 1990s.

In strong language, she also said she was prepared to use

traditional monetary policy tools such as higher interest rates

to prick any emerging asset-price bubbles, and pledged that

addressing too-big-to-fail banks "has to be among the most

important goals of the post-crisis period."

While Yellen and current Fed Chairman Ben Bernanke often

speak of the need to do more to curb Wall Street risk-taking and

erase the notion the government will step in to bail out massive

banks that get into trouble, as it did in the midst of the

crisis, Yellen's testimony hints at a new approach.

"She was unambiguously clear on how the Fed has massively

revamped supervision of big banks, and left me with the sense

she will spend more time discussing macroprudential oversight

with colleagues than in the past," said William O'Donnell, head

of Treasury strategy at RBS Americas.

"It suggested they would shift to a better balance of

macroprudential and monetary policy."

The Dodd-Frank law in the wake of the 2007-2009 financial

crisis and Great Recession tasked the Fed with protecting the

overall financial system from risks that could spill into the

broader economy, something called macroprudential regulation.

The 2010 law effectively doubled down on the central bank's

regulation of Wall Street, even though Fed policymakers -

including Yellen, who ran the San Francisco Fed at the time -

failed to avert the crisis in the first place.

Absorbing this fresh supervision task into the Fed's

traditional dual mandate of stable prices and full employment

has proven tricky: requiring banks to hold more and

better-quality capital can for example clash with the Fed's

desire for those banks to ramp up lending to spur investment,

hiring and economic growth in the wake of the recession.

BUBBLES, BIG BANKS

There also appears to be internal disagreement on how best

to stamp out financial risks.

Dallas Fed President Richard Fisher is alone among U.S.

central bankers in calling on regulators to go beyond Dodd-Frank

and simply break up the too-big banks; and earlier this year Fed

Governor Jeremy Stein set off a debate over whether the Fed

should battle asset bubbles with tighter policies.

Yellen said on Thursday she does not yet see the broad

buildup of leverage that threatens financial stability. Nor does

she feel that U.S. stock prices - which are at record highs

thanks in large part to the Fed's ultra easy policies - are in

"bubble-like" territory.

Yet toward the end of the two-hour confirmation hearing,

Yellen told Warren the Fed's "supervisory capabilities are

critical and they are just as important as monetary policy." She

added that despite some logistical hurdles, it could be possible

to better involve policymakers in key regulatory decisions that

are usually handled by staff.

"I remember in the 1990s that the board did regularly meet

to discuss supervisory issues ... and I did consider those very

valuable," Yellen said. "So I think that's a very worthwhile

idea."

Those regular meetings faded as the Fed under Alan Greenspan

and in the early stages of Bernanke's chairmanship favored a

hands-off approach to bank regulation. Yellen, who was president

of the San Francisco Fed from 2004-2010, is still smarting that

she and other regulators failed to "connect the dots," as she

put it in 2010, between loose lending practices and a overpriced

housing market that helped spark the crisis.

Warren is an influential Democrat who made her name pushing

tougher rules for banks, and she played a big role in the

lobbying effort that knocked Yellen challenger Lawrence Summers

out of contention for Fed chair earlier this year.

At the hearing, the senator highlighted a $9-billion

settlement the Fed and the Office of the Comptroller of the

Currency reached with several banks accused of improper

foreclosures. Warren criticized the decision to simply let

staffers lead the effort, instead of having Fed governors vote

on the deal.

Such matters are typically handled by regulation experts at

the central bank and spearheaded by Governor Daniel Tarullo, the

Fed's point-person and chair of a three-governor committee on

bank supervision that includes Stein and Jerome Powell.

"Tarullo has been carrying this load virtually

single-handedly," said Ernest Patrikis, a partner at White &

Case and a former first vice president at the New York Fed. "The

question is, will that change with more Board involvement in

evolving issues and matters?"