By Pete Schroeder
WASHINGTON (Reuters) - The Federal Reserve's new regulatory chief faces a dilemma: how much time and political capital to expend revisiting breaks the central bank gave Wall Street in recent years, versus focusing on novel issues like climate change and fintech.
President Joe Biden is expected soon to nominate the Fed's new vice chair for Supervision. Names in the mix include former Fed Governor Sarah Bloom Raskin, Atlanta Fed President Raphael Bostic, U.S. Treasury Under-Secretary Nellie Liang and former consumer watchdog chief Richard Cordray, among others.
Influential Democratic lawmakers and progressive groups are eager for the new pick to get tough on Wall Street and start tightening up rules eased by Fed Board member Randal Quarles, a Republican appointee who stepped down from the supervisory role in October.
But they also want the Fed to ramp up climate change financial risk management, overhaul community lending rules and create a regulatory roadmap for financial technology companies, changes in large part opposed by Republicans.
A major effort to overhaul Quarles' work will suck up the resources and political oxygen needed to address these other priorities. It also may be opposed by fellow regulators and even some centrist Democratic lawmakers, said Washington insiders.
"It's important for whoever the next vice chair for supervision is to really take a holistic look at the entire regulatory landscape," said Todd Phillips, a director with the Center for American Progress, a liberal think tank.
"They're going to have to make some tough decisions."
Progressives opposed Quarles every step of the way, accusing him and former President Donald Trump's administration more broadly of eroding safeguards created after the 2007-2009 crisis.
Among the most contentious changes he spearheaded were revisions to the “Volcker Rule” curbing speculative bank investments; scrapping a requirement for big banks to hold capital against certain swap trades; stripping the Fed of its power to fail banks on their annual “stress tests” based on subjective concerns; and easing capital, leverage and liquidity rules for all but the biggest lenders.
Quarles said he tailored the rules to banks' risks and that the industry's stellar performance amid the pandemic's economic crisis shows he did not weaken the system. In fact, he took a moderate approach specifically to improve the odds that his changes will survive a new administration, he told Reuters.
"I came in with the intention of trying to make changes that would be durable,” he told Reuters in an interview last month.
"If you come in with a measured, analytically sound consequential but not revolutionary approach, that will last and I think that’s likely to be the case."
Unraveling his work will be challenging, regulatory experts said. Many of the rules are highly complex and revisions would be time-consuming, especially given major changes are subject to public feedback and, in many cases, must be agreed by other regulators.
It took 3.5 years, for example, for the Fed, along with four other agencies, to craft the original Volcker Rule and another 2.5 years to tweak aspects of it.
That inter-agency process is even trickier given one of those regulators, the Federal Deposit Insurance Corporation, is still run by a Republican appointee, Jelena McWilliams, who has said she plans to stay on until her term ends in June 2023.
Democrats themselves are not united when it comes to prudential banking rules, analysts say. While they generally agree on the need for more consumer protections, some centrists have backed the notion that post-crisis rules overshot.
Several of Quarles' most significant changes, for example, were ordered by a 2018 bank de-regulation law that prescribed simpler capital and liquidity requirements for all but the nation's largest banks, for which several Democrats voted.
That could make a big overhaul politically risky.
"Some progressives have called for wholesale changes to Trump-era policy shifts, but we are skeptical given that many of those changes were congressionally mandated and relatively modest," wrote Isaac Boltansky, director of policy research for brokerage BTIG.
QUICK WINS
Still, Quarles' successor may be able to score some quick wins to keep progressives at bay, analysts said.
Quarles used discretionary powers Congress granted the Fed in the 2018 law to extend relief to some larger banks. Those breaks could be reversed without crossing lawmakers, they said.
Regulatory experts also expect the next Fed regulation chief to toughen up stress tests, which are not regulations and can be changed by the central bank on an ad hoc basis.
Similarly, lawyers expect the Fed to take a tougher line when scrutinizing big bank mergers, which progressives say hurt consumers, as well as in conducting big banks' everyday supervision.
“There’s only so many staff, there’s only so many hours in the day," said Phillip Basil, director of banking policy with the Wall Street reform group Better Markets.
"But there are very basic safety and soundness items that do have to be addressed."