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By Pete Schroeder
WASHINGTON (Reuters) – As the Federal Reserve’s next regulatory officer race heats up, one thing is certain: Whoever gets the job will have a busy schedule to move from capital rules to digital assets and climate change loans. .
The latest development in the search for the Vice President of Faith oversight took place on Tuesday when the Wall Street Journal reported that the White House was considering former Fed Chair Sarah Bloom Raskin and a former Treasury official.
Other names include Atlanta Fed Chairman Raphael Bostic; Michael Hsu, Acting Currency Accountant; Nellie Liang, U.S. Undersecretary of the Treasury; Mehrsa Baradaran, a law professor who previously floated for the position of Accountant; and Richard Cordray, who headed the Office of Consumer Financial Protection.
Fed chief Randal Quarles resigned in October and will leave the central bank by the end of the year. Although the White House said it was appointing Fed Chairman Jerome Powell last month, it has decided who will take on the role of overseeing the largest lenders on Wall Street.
Analysts and Washington insiders have long said the main candidate for the role was Fed Chairman Lael Brainard, but he will play another role as Fed vice president focused on economic and monetary policy.
Each candidate would have his or her own role, and at the same time he or she would need to get the support of the Fed chair and management, both on the balance sheet, to make big changes.
But analysts say that any election to oversight will be democratic, centrist or progressive, drawing a new path and tackling a number of thorny issues in some cases, analysts say. Among others:
DEREGULATION REDUCED?
For the past four years, Quarles has led a review of the rules introduced after the 2007-2009 global financial crisis, arguing that they were too strict and harsh. Democrats have accused Charles of saving billions of dollars on Wall Street, exacerbating systemic risks.
Among the most controversial changes were reviews of the “Volcker Rule”, which reduces speculative bank investment; the rejection of the requirement for large banks to hold capital against certain exchange deals; and removing the Fed’s ability to fail banks in its annual “stress tests” based on subjective concerns.
The new head of oversight will have to decide who wants to review these changes, which can be a long and hard exercise.
CLIMATE CHANGE RISKS
Climate change, a top priority for Democrat policy, is expected to rise quickly on the Fed’s agenda with new leadership.
So far, the Fed has asked lenders to explain how they are working on balances that mitigate the risks associated with climate change, as the industry expects to move forward with a formal review of the climate change scenario in 2023, Reuters reported.
These projects are expected to accelerate. The big question will be whether banks in the wake of Quarles are pushing for cuts or tougher capital requirements for banks with significant exposure to polluting industries or other specific climate risks.
The Fed could also sign a climate risk lending policy for large lenders, Hsu said, acting as an Accountant working with bank regulators.
FINTECH FRAMEWORK
Quarles ’successor will also have to deal with a regulatory plan for“ fintech ”companies that are rapidly breaking the traditional financial sector.
The Fed is looking at how banks intersect with fintech, especially with small lenders who may outsource more services and infrastructure. Fintech is also lobbying the Fed for access to its payment system.
While other bank regulators have been working for years to get fintechs under their umbrella regulators, the Fed has faced fears that doing so could pose systemic risks. But as the sector continues to grow, the Fed is expected to act.
“You hear a lot about the promise of fintech, but the risks should be studied very carefully,” said Tim Clark, a former Fed official who now works with the Better Markets team.
In a related aspect, the Fed is studying the effects of the digital currency of the central bank. Studies by the Fed and the Federal Reserve Bank of Boston are expected soon, with the central bank trying to gauge the risks and benefits of the product, which could help expand its reach and speed up money transfers.
STRESS TESTS
It is likely that the banks’ annual “stress test” of health checks will be at the top of the list of changes that Democrats want to revise.
Quarles tried to make the tests for banks more transparent and predictable, including rejecting a “qualitative” objection that the Fed would fail lenders for subjective reasons. Democrats say the tests were too easy, according to Charles.
Jaret Seiberg, an analyst at Cowen Washington Research Group, wrote in September that changes to the stress test are likely to come in 2023, and focus on reserving eight-quarters of the planned dividend to banks instead of the current four, and potentially reviving the qualitative objection.
ADDITIONAL SHELF RELATIONSHIP
Another issue on the table is the additional leverage ratio, the rule created after the crisis of the decade, that banks have capital against assets regardless of their risk.
The Fed had to ease this temporary rule in the midst of the pandemic, as bank deposits and excess Treasury bonds increased capital requirements in what are considered safe assets.
Despite a large banking lobby, the Fed allowed that subsidy to expire in March, but promised to review the general rule. The Fed has not yet released a proposal, leaving the job in the hands of Quarles’ successor.
COMMUNITY REINVESTMENT LAW
The central bank will also play a key role in the long-awaited revision of the rules of the Community Reinvestment Act, which promotes loans to lower-income communities. The Fed, which shares responsibility for writing the rules with other bank regulators, hopes the rules can be updated to reflect the growth of online banking, ensuring that lenders make significant contributions to the poorest areas they serve.
Efforts to update the rules in the Trump administration were thwarted after regulators were unable to agree on a way forward.
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