Explanation – A difficult to-do list awaits the next head of the Fed regulator, writes Reuters

Explanation – A difficult to-do list awaits the next head of the Fed regulator, writes Reuters

© Reuters. FILE PHOTO: Federal Reserve Building Pictured in Washington, DC, USA, August 22, 2018. REUTERS / Chris Wattie / File Photo

By Pete Schroeder

WASHINGTON (Reuters) – As the race for the next top Federal Reserve official heats up, one thing is certain: whoever gets the job will have a packed agenda that ranges from capital rules and fair lending to digital assets and climate change.

The latest development in the search for the Fed’s vice president of oversight came on Tuesday when the Wall Street Journal reported that the White House was considering Sarah Bloom Raskin, a former Fed governor and former Treasury official, for the role.

Other names include: Atlanta Fed President Raphael Bostic; Acting Currency Controller Michael Hsu; U.S. Treasury Undersecretary Nellie Liang; Mehrsa Baradaran, a law professor previously appointed to the role of controller; and Richard Cordray, who headed the Consumer Financial Protection Bureau.

Fed chief Randal Quarles stepped down in October and will leave the central bank later this year. As the White House said last month that it was renaming Jerome Powell to chair the Fed, she wondered who would take on the powerful role of overseeing the biggest lenders on Wall Street.

Analysts and insiders from Washington have long said that the main candidate for the role is fellow Fed Governor Lael Brainard, but she will move on to another Fed vice president focused on economic and monetary policy.

Each of the candidates would have a role to play and, in turn, would have to get the support of the Fed president and board, who are also in balance, to push through big changes.

But any democratic election to a place of oversight, whether centrist or progressive, is expected to chart a new course and address a number of upcoming and in some cases thorny issues, analysts say. This includes:

DEREGULATION REDUX?

For the past four years, Quarles has led a review of regulations introduced after the 2007-2009 global financial crisis, arguing that they are too harsh and difficult. Democrats have accused Quarles of saving billions of dollars on Wall Street while increasing systemic risks.

Among the most controversial changes were the revisions of the “Volcker’s rule” that limit speculative banking investments; abolishing the requirement for large banks to hold capital for certain swap trades; and depriving the Fed of its power to let banks down on their annual “stress tests” based on subjective concerns.

The new head of supervision will have to decide whether he wants to reconsider these changes, which is a potentially long and arduous exercise.

CLIMATE CHANGE RISKS

Climate change, a top political priority for Democrats, is expected to rise rapidly on the Fed’s new leadership agenda.

The Fed has so far asked lenders to explain how they mitigate climate change risks for their balance sheets, and the industry expects to make progress toward a formal analysis of the 2023 climate change scenario, Reuters reported.

These projects are expected to accelerate. The big question will be whether Quarles ’successor will insist on restrictions or stricter capital requirements for banks with significant exposure to polluting industries or other climate-specific risks.

The Fed could also sign guidelines for lending to climate risks for large lenders that acting Hsu controller said banking regulators are working.

FINTECH FRAMEWORK

Quarles ’successor will also have to deal with a regulatory plan for“ fintech ”companies that are rapidly separating the traditional financial sector.

The Fed is investigating how banks intersect with fintech companies, especially with smaller lenders that can outsource more services and infrastructure. Fintechs is also lobbying the Fed for access to its payment system.

While other banking regulators have been working for years to bring fintechs under their regulatory umbrella, the Fed has resisted, fearing it could create systemic risks. But as the sector continues to grow, the Fed is expected to act.

“You’ve heard a lot about the promises of fintech, but they should also consider the risks carefully,” said Tim Clark, a former Fed official who now works with the Better Markets advocacy group.

On the connected front, the Fed is currently studying the implications of the central bank’s digital currency. With studies from the Fed Board and the Federal Reserve Bank of Boston expected soon, the central bank is trying to weigh the risks and benefits of such a product, which could expand its reach and speed up money transfers.

STRESS TESTS

The Bank’s annual health checks on a “stress test” are likely to top the list of Quarles changes that Democrats will want reviewed.

Quarles has tried to make tests more transparent and predictable for banks, including lifting a “qualitative” complaint that allowed the Fed to reject lenders on a subjective basis. Democrats say tests under Quarles have become too easy.

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 could include directing banks to reserve eight-quarters of expected dividends instead of the current four, and potentially reviving qualitative objections. .

ADDITIONAL LEVER

Another issue on the table is the supplementary leverage ratio, a rule created after the crisis of a decade ago that requires banks to hold capital in relation to assets regardless of their risk.

The Fed had to temporarily ease that rule amid the pandemic as oversaturation with bank deposits and treasury bonds increased capital requirements for what is considered safe assets.

Despite intense lobbying by banks, the Fed allowed the relief to expire in March, but promised to reconsider the entire rule. The Fed has yet to announce the proposal, leaving the job to 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 that promote lending in lower-income communities. The Fed, which shares responsibility for writing rules with other banking regulators, hopes the rules can be updated to reflect the growth of online banking, while continuing to ensure lenders make a significant contribution to the poorer areas they serve.

Efforts to update the rules under the Trump administration have stalled after regulators were unable to agree on a way forward.



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