Fed Chair Race Spotlights Powell-Brainard Wall Street Rule Split

Jerome Powell is seen as the favorite for another term leading the central bank, but progressive Democrats such as Massachusetts Senator Elizabeth Warren and New York Representative Alexandria Ocasio-Cortez pushed for the Republican chair to ease rules on big banks. is reprimanded. And some have praised Fed Governor Lyle Brainard for resisting those efforts – widely seen as Powell’s prime rival for the top spot.

That means Powell and Brainard’s approach to regulation is poised to be at the center of debate about the bank’s future before the end of the former’s term as chairman in February. Biden’s advisers are considering recommending Powell for the chair and Brainard as vice president of oversight, the agency’s top regulatory role, people familiar with the matter told Bloomberg last week.

Biden himself is said to have yet to weigh in on Fed personnel matters, so the outcome is certainly far ahead of the expected decision this fall. Any nomination would be subject to Senate confirmation, where Democrats have a smaller majority.

These are some of the key differences between Powell and Brainard on financial regulation:

Cooperation

While the chair has the final word on which rules get Fed consideration, Powell has often deferred to the top regulator — currently Vice Chairman Randall Quarles whose term expires later this year. While serving at the Fed from 2012 to 2018 before taking over as chairman, Powell accompanied fellow governor Daniel Tarullo’s banking oversight efforts, who was appointed by President Barack Obama and who led the industry before Quarles’ arrival. Oversight of the agency was headed.

But after being named chairman by President Donald Trump, Powell backed the efforts of veteran Quarles—a fellow at private equity giant Carlyle Group Inc.—to sand the edges of post-crisis banking regulations, sometimes called Tarulo’s. Reverse aspects of work.

Together, Powell and Quarles made changes that weren’t flashy but significant, and they pushed Brainard into the role of constant foil.

Brainard frequently came out against the change in rules, arguing that while logging nearly two dozen opposition votes during Powell’s presidency, he increased the risk to the banking system.

will to live, stress test

Regional and community banks benefited from most of Powell’s regulatory moves, which were freed from the most stringent regulations created since the 2008 financial collapse. But Wall Street also got out.

The Fed exempted large banks from requiring that they keep margins of as much as $40 billion for swap transactions between their bank partners. The central bank also changed the Volcker Rule of the Dodd-Frank Act, allowing lenders to promote investment in venture capital funds.

The Powell-Quarles team also eased Wall Street’s burden with two major post-crisis efforts:

• Living Will: The Fed simplified and reduced the frequency of these large documents written by banks as a credible roadmap so they could quickly and safely disassemble them when they fail.
• The stress test: And it replaced annual checks for the big banks, which may have been the most important move during Powell’s tenure.

Brainard argued that the changes to the stress tests represent “a green light for large banks to reduce their capital buffers” and that the living-will overhaul could undermine the plans of the largest lenders and “system may leave it less secure.”

His misgivings have been echoed by prominent Democratic senators on the banking committee that will initially look at the likes of Biden – panel chair Sherrod Brown and Warren.

Powell argues that the changes in his clock were generally capital-neutral, largely leaving the largest banks with similar capital requirements – or in some cases even higher.

“We didn’t dilute the capital requirements for the largest banks,” Powell said in a recent hearing with lawmakers. I actively opposed any move in that direction. And in fact, strain the capital buffer, which We had implemented recently, after years of consideration, raises capital standards.”

As for the next tier of big-but-giant banks, however, Powell observed the weakening of post-crisis rules on several key areas of Fed supervision, including the need for liquidity cushion lenders such as US Bancorp and PNC Financial Services Group Inc. is included. To keep on hand in case funding runs out in a crisis. Brainard strongly opposed that work.

He also called for caution in allowing those regional banks to merge and grow in size, such as PNC’s purchase this year of Banco Bilbao Vizcaya Argentaria, SA’s US operations, expressing concerns about concentration among such banks. “Where common sense security measures have been undermined.”

digital currency

Countering Powell’s more patient stance, Brainard has been clear about the need for central banks to expedite their decision to adopt the digital currency.

In recent remarks to the Aspen Economic Strategy Group, it demonstrated that greater desire, calling it an urgent issue and saying that letting other jurisdictions like China move forward on digital currencies “doesn’t sound like a sustainable future to me.”

Powell has underestimated that risk, arguing that the US is not going to lose its reserve-currency dominance to China’s digital move.

Brainard also pushed the Fed’s effort toward a real-time payment system against pushback from Wall Street banks, which had already built a similar network. Quarles opposed the plan, although Powell broke away from it and supported it.

buyback, buffer

In the heat of the COVID-19 crisis, Powell favored partial limits on banks’ dividends and stock buybacks, which were highly unpopular on Wall Street. But Brainard favored more aggressive measures to halt capital delivery, as did Senate Democrats, who called for a total ban on returning money to shareholders.

Another apparent rift between Brainard and Powell developed over the use of a special capital cushion for megabanks, known as the countercyclical capital buffer.

The idea of ​​this post-crisis tool is that the Fed – like other jurisdictions around the world – can turn the capital dial for banks when the economy is booming and loan portfolios are swelling. When a new crisis strikes, the Fed can open a trap door that diverts that extra capital back into lenders’ operations to ease external stress on the industry.

For the years leading up to the economic damage of the pandemic, Brainard advocated for central banks to consider flipping the switch to turn on the buffer. Hers was the only vote to activate it in March of 2019.

As the US economy digs through the Covid-19 hole, the buffer – and its increased capital requirements – will almost certainly return as the focus of debate across the board and stiff opposition from Wall Street lobbyists.

Climate change

Seven different climate-activist groups, including the Sierra Club, came out against Powell’s re-nomination in May, arguing that the Fed under his leadership had failed to use its regulatory tools to force banks to lend money to fossil fuel companies. discouraged from giving. He didn’t endorse Brainard or anyone else for the job.

Powell The Fed has established new committees to tackle climate change threats to the financial system. Its growing focus on the environment has drawn criticism from Republicans in Congress, who have warned against taking any action to stop the flow of money to carbon-producing companies.