Trump’s Fed pick in unique spot to forge new regulatory path on banks

On July 10, the White House announced that it will nominate Randal Quarles, a former Treasury official and private equity investor, to the seven-member Board of Governors of the Federal Reserve System and, separately, to serve as the board’s vice chairman for supervision.

Although that vice chairmanship was created by the Dodd-Frank Act in 2010, Quarles will be the first Fed governor officially confirmed for that position. Its creation reflected Congress’s recognition of the key role the Fed plays in supervising individual financial institutions while ensuring overall financial stability.

{mosads}Previously a member of the Fed board would oversee the Federal Reserve’s supervisory activities, but without explicit statutory authority to do so. Most recently, that role was exercised by Daniel Tarullo until his resignation from the Fed board in April of this year.

Not only is the Fed the federal regulator and supervisor of state-chartered banks, which elect to join the Federal Reserve System, but, more importantly, it is the sole federal regulator of financial holding companies, such as JPMorgan Chase, Citigroup, Goldman Sachs, and Wells Fargo.

The Fed’s supervision activities are carried out by personnel working at the board’s offices in Washington as well as at the twelve regional Federal Reserve banks.

Dodd-Frank provided that the vice chairman for supervision “shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms.” 

The vice chairman also must testify semi-annually to the Senate Banking Committee and the House Financial Services Committee about the Fed’s supervisory activities “regarding the efforts, activities, objectives, and plans of the Board with respect to the conduct of supervision and regulation of depository institution holding companies and other financial firms supervised by the Board.” 

As the first Fed governor to hold this position, Quarles will have the unique opportunity to flesh out the role this new position will play at the Fed. His prior service at the Treasury Department where he served as deputy assistant secretary for financial institutions policy and later as undersecretary for domestic finance plus his private-sector experience gives him ample background to establish this new vice-chairmanship within the Fed.

Doing so, though, will not be a slam dunk, for Quarles will need the support and cooperation of his fellow board members, as well as Fed staff as he assumes direct responsibility for leading the Fed’s regulatory and supervisory activities. 

Quarles also will lead the Fed’s interactions with other regulators, notably the Comptroller of the Currency and the Federal Deposit Insurance Corporation, in formulating and revising banking regulations to reflect the deregulatory tilt of the Trump administration. It will take strong leadership from Quarles to bring this about.

One such regulation begging for substantial modification is the excessively complex Volcker rule, which governs the securities trading activities of banks and their holding companies. Bank capital requirements – the rules that determine how much stockholder capital a bank must have – also cry out for extensive simplification.

Separately, as a member of the Board of Governors, Quarles will automatically serve on the Fed’s Federal Open Market Committee (FOMC), which establishes the Fed’s interest-rate policy.

In the past Quarles has advocated for a rules-based monetary policy for establishing the Fed’s interest-rate targets. Traditionally, the FOMC’s rate-setting decisions have reflected the FOMC’s collective judgment about the economic outlook and the interest rates it believes will produce the desired level of economic activity.

Strong advocacy of a more mechanistic, rules-based monetary policy could put Quarles at odds with his fellow FOMC members, whose support he will need as he takes charge of the Fed’s supervisory activities. It will be interesting to see how aggressively Quarles expresses his perspective on monetary policy.

A greater challenge for Quarles as an FOMC member will be helping to guide the shrinkage of the Fed massive $4.5 trillion balance sheet. But first, he must be confirmed by the Senate as both a member of the Board of Governors as well as vice chairman for supervision. That could take many months. Until then, Quarles will have to sit on the sidelines, planning what he will do if and when he is confirmed.

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system and the growing federalization of credit risk.

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