WASHINGTON, Sept.23 (Reuters) – With the next top regulator at the U.S. Federal Reserve still hanging in the balance, one thing is certain: whoever gets the job will have a busy agenda to tackle the full gamut , capital rules and fair lending to digital assets and climate change.
Appointed to the Fed board by former Republican President Donald Trump, Randal Quarles will end his tenure as vice president of oversight – a powerful role overseeing the nation’s largest lenders – in October. President Joe Biden has yet to say who will replace him. Read more
Analysts and Washington insiders say the main candidate for the post is Lael Brainard, a Fed governor who was a senior treasury official under President Barack Obama. Other names suggested include: Sarah Bloom Raskin, a former Fed governor; Atlanta Fed Chairman Raphael Bostic; Acting Currency Controller Michael Hsu; and US Under Secretary of the Treasury Nellie Liang.
Each would have their own interpretation of the role and, in turn, would have to gain the support of the Fed chairman and board, both also at stake, to push through major changes. Read more
But any Democratic choice for the supervisory post, whether centrist or progressive, will need to chart a new course and tackle a number of looming and in some cases thorny issues, analysts say. These include:
RISKS OF CLIMATE CHANGE
Climate change, a top political priority for Democrats, should quickly be on the Fed’s agenda under new leadership.
“The climate is a key priority here,” said Gregg Gelzinis, senior policy analyst at the Center for American Progress think tank. “There are a few first steps the Fed can take quickly.”
So far, the Fed has asked lenders to explain how they mitigate climate change risks to their balance sheets, and Powell has said he’s open to some form of climate-focused stress testing. Read more
These projects should gain momentum. The big question will be whether Quarles’ successor advocates restrictions or stricter capital requirements for banks heavily exposed to polluting industries or other climate-specific risks.
The Fed could also approve climate risk lending guidelines for major lenders, which Acting Supervisor Hsu said this month bank regulators were working on. Read more
Quarles’ successor will also have to tackle a regulatory plan for “fintech” companies which are rapidly eroding the traditional financial sector.
The Fed is studying how banks intersect with fintechs, especially with smaller lenders who can outsource more services and infrastructure. Fintechs are also pressuring the Fed to gain access to its payment system.
While other banking regulators have worked 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 swell, the Fed should act.
“You hear a lot about fintech promises, but they should also take a very close look at the risks,” said Tim Clark, a former Fed official who now works with the markets advocacy group Better Markets.
On a related front, the Fed is currently studying the implications of a central bank digital currency. With studies from the Fed Board and the Federal Reserve Bank of Boston expected in the coming weeks, the central bank is trying to weigh the risks and benefits of such a product, which could expand the Fed’s reach and help speed up the pace. money transfers.
Democrats criticized Quarles for overhauling rules introduced in the wake of the 2007-2009 financial crisis, and his successor is also expected to review his job. The annual health checks of banks’ stress tests should be at the top of the list.
Quarles tried to make the tests more transparent and predictable for banks, including removing a “qualitative” objection that allowed the Fed to dismiss lenders on subjective grounds. Democrats say that under Quarles, testing has become too easy.
Cowen Washington Research Group analyst Jaret Seiberg wrote this month that stress testing changes would likely come in 2023 and could include requiring banks to reserve eight quarters of expected dividends, instead of the current four. , and potentially revive the qualitative objection.
ADDITIONAL LEVER RATIO
Another issue on the table is the additional leverage ratio, a rule created after the crisis of ten years ago that required banks to hold capital against assets regardless of their risk.
The Fed had to temporarily relax this rule amid the pandemic, as an overabundance of bank deposits and Treasuries raised capital requirements on what are considered safe assets.
Despite intense bank lobbying, the Fed allowed this relief to expire in March, but promised to review the comprehensive rule. The Fed has yet to release a proposal, leaving the job to Quarles’ successor.
COMMUNITY REINVESTMENT ACT
The central bank will also play a key role in the long-awaited overhaul of the Community Reinvestment Act rules that encourage lending in low-income communities. The Fed, which shares responsibility for drafting the rules with other banking regulators, hopes the rules can be updated to reflect the growth of online banking, while ensuring that lenders make meaningful contributions to the areas most. poorer than they serve.
Efforts to update the rules under the Trump administration failed after regulators could not agree on the way forward.
Finally, the Fed has yet to finalize the capital rules dictated by the international Basel III accord. Many bank executives expect the new board to tackle this problem quickly. While the Fed under Quarles has said the main goal is to keep overall capital requirements stable, a Democratic replacement could try to strengthen the capital buffers.
Reporting by Pete Schroeder; Editing by Michelle Price and Andrea Ricci
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