The Federal Reserve is shifting its focus from writing and revising rules aimed at limiting risk in the banking system to a concentration on how lenders interpret the restrictions, the agency’s supervision chief said.
Having finished the bulk of its work on major rules, the Fed can now devote more attention to behind-the-scenes interactions between bankers and their government overseers, vice chairman Randal Quarles said at a meeting of industry lawyers in Washington. He said the central bank will be more transparent about its supervisory work, sharing guidance documents with Congress and seeking public comment on them as it does with new rules.
“Supervisors promote good risk management and thus help banks preemptively avert excessive risk-taking that would be costly and inefficient to correct after the fact,” Quarles said. “Where banks fall materially out of compliance with a regulatory framework or act in a manner that poses a threat to their safety and soundness, supervisors can act rapidly to address the failures.”
Financial-industry regulators appointed by President Donald Trump have overhauled restrictions put in place after the 2008 credit crisis, and they’ve blunted the sting of some strictures that Wall Street hated most. The Fed last year completed some of those items and finished a major project to tailor regulations to banks based on their size, complexity and business models.
Quarles said the new emphasis on supervision and the proposed incremental changes are meant to “increase transparency, accountability and fairness” without jeopardising the strength of the financial system.
In another potential change, he said the Fed could also clarify how banks are added to list of complex institutions overseen by the Large Institution Supervision Coordinating Committee. That’s meaningful because those dozen lenders including JPMorgan Chase & Co, Bank of America Corp, Deutsche Bank AG and Credit Suisse Group AG are compared with their peers when evaluated by supervisors. Quarles said he wants to move the four foreign banks — Deutsche Bank, Credit Suisse, UBS Group AG and Barclays Bank Plc — to a lower category.
“This change in supervisory portfolio would have no effect on the regulatory capital or liquidity requirements that currently apply,” Quarles said at a meeting of the American Bar Association’s banking law group. The firms have shrunk their US footprints, he said, and this move would align with other recent changes in their regulatory requirements.
He also said he favors codifying the Fed’s assurances that it won’t treat guidance — such as the 2013 directives on leveraged lending — as enforceable rules.
The vice chairman said the Fed intends to be clearer with the banks about what it wants and why, opening more two-way communication with the industry. His agency has earned a reputation for opacity, rarely revealing its evaluation methods or sharing specifics about its expectations, but Quarles’ tenure has been marked by a relaxation of the secrecy around the stress tests introduced after the 2008 meltdown to ensure the banks can weather another crisis.
Quarles didn’t address the status of some pending rules. The Fed is still working with other agencies on a new proposal to govern Volcker Rule limits on banks’ investments, and it’s also completing work on significant measures dealing with bank liquidity and leverage.
Trump to nominate Shelton, Waller to serve on Fed board
President Donald Trump plans to nominate Judy Shelton and Christopher Waller to join the Federal Reserve, the White House said.
The president, who has publicly criticised Fed Chairman Jerome Powell and his colleagues for not cutting interest rates as aggressively as he would like, tapped the pair in July for the two remaining vacancies on the central bank’s seven-seat board in Washington. But the formal announcement of his intention to nominate them didn’t come and will now move to the Senate for consideration.
If confirmed by the Senate, they will join an institution that’s been under constant attack from the president who has sought to make Powell a potential scapegoat if the economy falters as he seeks re-election this year. Trump returned to this theme at the White House, appearing to lament that he had passed over Kevin Warsh in picking Powell as Fed chief.
Fed officials cut interest rates three times in 2019 but signalled they expect to keep rates on hold through 2020, based on their forecast of moderate economic growth with unemployment staying near a 50-year low.
The two economists have widely different backgrounds, but their policy comments suggest they’d be inclined to be open to Trump’s calls for easier monetary policy.
Shelton, who has been an informal adviser to president Donald Trump, has publicly said the central bank should reduce rates. She’s spent decades outside mainstream economics.
and recently appears to have completed a metamorphosis from proponent of returning to the gold standard — a concept broadly espoused by those who feel monetary policy is too lax — to an advocate of the need for more stimulus.
“There is a little more at stake here than just filling up the governor spots,” said Sarah Binder, a senior fellow at the Brookings Institution and co-author of a book on the Fed’s relations with Congress. “She could get confirmed, but it does seem that the deck is stacked against the easy road here.”
Binder noted that senators may find it difficult to square Shelton’s stand on stable money and the gold standard with her newfound desire to advance the policies of Donald Trump. She could also be in line for the chairmanship if Trump wins a second term. Shelton has a doctorate in business administration from the University of Utah with an emphasis on finance and international economics.
Larry Kudlow, the White House chief economic adviser, told reporters Friday that Shelton is “not going to have any trouble” with Senate confirmation “because she has a long, distinguished track record in monetary affairs, and a Ph.D., and she’s very well known.”
Waller is largely a conventional choice because he’s drawn from within the Fed’s own ranks.
He is a Ph.D. economist who previously served as a professor of economics at the University of Notre Dame before joining the St. Louis Fed in 2009, where he is director of research. Waller has been consistent in his calls for a more dovish approach over the years. His key research focus has been on monetary and macroeconomic theory and the political economy.
Kudlow said Friday that the two nominees’ views can be summed up as “growth, jobs, low unemployment does not cause high inflation and interest rates.”
The lengthy Senate confirmation process means neither candidate is likely to join the board for months. Current Vice Chairman Richard Clarida’s nomination was announced April 18, 2018, and he wasn’t sworn in until Sept. 17. Governor Michelle Bowman, nominated the same day as Clarida, didn’t take office until Nov. 26.
As a high-ranking Fed staffer, Waller may have a better chance of passing muster with lawmakers than some of Trump’s previous contenders. As for Shelton, the Senate has already confirmed her in her current role as the U.S. executive director for the European Bank for Reconstruction and Development.
In an interview with Bloomberg in May, she said she was “highly skeptical” that the goals for the Fed set by Congress — the pursuit of maximum employment, stable prices and moderate long-term interest rates — were relevant.