What Powell's Fed renomination means for banks

November 22, 2021 11:45 AM

WASHINGTON — President Biden is renominating Federal Reserve Chair Jerome Powell for a second term atop the central bank, in a vote of confidence for the Trump appointee’s leadership at a pivotal moment for the economy.

With his decision to reappoint Powell, announced Monday, Biden passed over more progressive picks to chair the Fed. Powell has earned praise from both Democrats and Republicans for his crisis management responding to the pandemic. But some on the left had urged a change in leadership, criticizing Powell’s track record on bank regulation. They were pushing for Fed Gov. Lael Brainard to get the nod instead.

As Fed chair, Powell most notably shepherded the central bank through the market shocks resulting from the spread of COVID-19. He is now fielding criticism over rising prices while serving as the primary spokesperson for the Fed’s new inflation policy.

Although the Biden administration has been subject to mounting criticism over inflation, the president’s choice to renominate Powell underscores the White House’s faith in his leadership.

"When our country was hemorrhaging jobs last year and there was panic in our financial markets, Jay’s steady and decisive leadership helped to stabilize markets and put our economy on track to a robust recovery," Biden said at a press conference with both Powell and Brainard.

The Fed nomination had appeared to come down to a two-person race between Powell and Brainard. The administration is also trying to fill two key vice chair positions on the Fed board, including one to oversee bank supervision policy. The White House announced that Brainard was nominated for the vice chair slot soon to be vacated by Richard Clarida. A nominee for vice chair of supervision will be announced sometime in December.

“As I’ve said before, we can’t just return to where we were before the pandemic, we need to build our economy back better, and I’m confident that Chair Powell and Dr. Brainard’s focus on keeping inflation low, prices stable, and delivering full employment will make our economy stronger than ever before,” President Biden said in a statement Monday. “Together, they also share my deep belief that urgent action is needed to address the economic risks posed by climate change, and stay ahead of emerging risks in our financial system.”

Sen. Elizabeth Warren, D-Mass., has already said she won’t support Powell’s renomination, calling him “a dangerous man to head up the Fed” in light of his votes to approve regulations that rolled back certain provisions of Dodd-Frank during the Trump administration.

Still, Powell is expected to receive support from both sides of the aisle. He has received high marks from several Republican and Democratic members of Congress, and is known on Capitol Hill for his efforts to engage with lawmakers.

Here’s what a second term for Powell at the Fed means for key bank regulatory issues:

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Bank supervision

While the Fed chair might delegate bank supervision matters to the central bank’s vice chair of supervision, the chair’s support will be crucial in making any material changes to the Fed’s oversight of financial institutions.

As chair, Powell has generally deferred to Randal Quarles (above, left), the Fed’s former vice chair of supervision, but has acknowledged more recently that Quarles’ successor could make changes to the Fed’s supervisory and regulatory agenda.

“I respect that that's the person who will set the regulatory agenda going forward and I would accept that,” Powell

said in September

.

Still, it’s unlikely that Powell would support overturning some of the very rules he voted in favor of, including the implementation of a “stress capital buffer” meant to simplify the agency’s capital regime and a rule that reduced the frequency of large-bank resolution plans. But he could be open to tweaking some of the rules finalized under Quarles’ tenure.

A significant factor is whom the Biden administration will nominate for the coveted vice chair of supervision job, a position created in the wake of the financial crisis with extensive authority to set the central bank’s regulatory agenda. Some commentators had speculated that Brainard could get the position if she was not nominated for Fed chair, but the White House signaled it wanted to go in a new direction.

“President Biden still has three vacant seats on the Federal Reserve Board of Governors to fill, including the important position of Vice Chair for Supervision,” according to a White House statement. “The President intends to make those appointments beginning in early December, and is committed to improving the diversity in the Board’s composition.”

Powell also might be in favor of carrying on the torch of Quarles, who embarked on an effort last year to reform the Fed’s supervisory regime. In January 2020, Quarles unveiled a comprehensive set of proposals to update how the agency supervises the nation’s banks on an ongoing basis, with the overall goal of bringing more transparency to the existing regime.

However, much of the work on that effort was dashed by the COVID-19 pandemic. Quarles told American Banker in an interview that

he was hopeful

his successor might pick up where he left off.

“I do think that a consequence of our having drawn attention to it is that a lot more attention is being paid to it. On the left [and] on the right, I think everyone recognizes [that] thinking about due process and supervision is something that we ought to think about,” he said.

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Regulatory reform

In his second term as chair, Powell may opt to maintain the status quo in the bank regulatory sphere, having defended his regulatory record after criticism from some that he oversaw a rollback of Dodd-Frank-era rules at the helm of the central bank.

Warren has already announced

she will not support

Powell’s renomination in light of his regulatory record, calling him “a dangerous man to head up the Fed.”

But Powell has said that as chair, he “actively resisted any move” to weaken big-bank capital requirements.

“We raised capital standards on the largest banks,” Powell said during a July Senate Banking Committee hearing. “Full stop.”

Still, several regulatory decisions are pending at the Fed, including whether or not to make permanent adjustments to the supplementary leverage ratio in order to account for an influx of reserves in the system that banks say has become challenging for them to manage.

Powell said earlier this month that the central bank was looking at “if there are ways we can address liquidity issues through” the calculation of the SLR but declined to say whether or not the Fed was still pursuing permanent adjustments. Although the Fed had said in the spring that it planned to seek comment on ways to amend the SLR, it has yet to do so.

Since the temporary relief from the stringent capital ratio expired earlier this year, the SLR has become a binding constraint for several of the nation’s largest banks, including JPMorgan Chase, Bank of America, Goldman Sachs and Morgan Stanley.

The Fed also still has to finalize the Basel IV rules — known by some as the “Basel III endgame” — before January 2023. That framework includes revisions to the international standards governing market risk, operational risk, credit risk and leverage ratios.

Fed officials

have previously said

that they would look to implement Basel IV in a way that wouldn’t force banks to raise more capital, and that it could tweak the stress capital buffer or the capital surcharge for global systemically important banks in order to make the Basel IV rules “capital neutral.”

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Digital assets

Powell has been skeptical about cryptocurrency. He

argued earlier this year

that while digital assets could have benefits, they have “not served as a convenient way to make payments, given, among other factors, their swings in value.”

As a member of the President’s Working Group on Financial Markets, Powell collaborated with other financial regulators on a report issued earlier this month that recommended that

Congress pass legislation

to limit stablecoin issuance to insured depository institutions.

The report also suggested that the Financial Stability Oversight Council — which counts the Fed chair among its members — consider designating certain activities conducted within stablecoin arrangements as systemically important payment, clearing and settlement activities.

Because Powell signed off on that report as a member of the PWG, he is likely to continue aligning himself with those stances in his second term as Fed chair, and could leverage the relationships he has established with lawmakers to push for legislation.

However, it remains less clear where Powell stands on the Fed developing a central bank digital currency. The Fed is expected to release a report at some point detailing its thinking around digital payments and CBDC, but it’s unclear when that report will be published and what it will conclude.

Powell said in May that following the release of the Fed’s discussion paper exploring CBDC, it plans to solicit public feedback on data privacy, financial inclusion and information security, in the hopes of “stimulat[ing] broad conversation.” He added that regardless of the Fed’s decision to develop a digital dollar, the Fed would “expect to play a leading role in developing international standards for CBDC.”

He has also been clear that if the Fed decided to move forward with developing a digital dollar, it would not replace cash, and would instead serve as a complement to existing payments. However, many decisions about how a CBDC might be designed, including whether it would serve retail or wholesale purposes, are still open questions.

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Bank mergers

Powell’s renomination could mean fewer changes to the Fed’s views on bank mergers, given that Brainard has split with the Fed chair on a few larger deals.

Warren, the Massachusetts Democrat, has

clashed

with Powell in the past on the issue, saying the Fed is too lax on signing off on mergers and never formally rejects any.

Brainard has voted for many mergers that have come across the Fed’s desk, the vast majority of them noncontroversial. But she did abstain from the Fed’s vote to approve PNC Financial Services Group’s purchase of the U.S. operations of BBVA in May, and she voted against Morgan Stanley’s acquisition of E*TRADE and a tie-up between TD Ameritrade and Charles Schwab last year.

More recently, the prepaid card issuer Green Dot

called off

its deal to buy Republic Bank & Trust’s tax-refund business, saying it “has been unable to obtain” Fed approval.

Some banks have faced a longer timeline than they expected to get Fed approval this year.

In September, First Citizens BancShares in Raleigh, North Carolina, and CIT Group in New York

said

they were extending the deadline for closing their $2.2 billion merger because they have yet to get Fed approval. Executives at Columbia Banking System and Umpqua Holdings told

analysts

they expected a longer approval process for their deal in light of a “backlog” at the Fed.

Other pending deals include a merger between Evansville, Indiana-based Old National Bancorp and First Midwest Bancorp in Chicago, and U.S. Bancorp’s proposed acquisition of MUFG Union Bank. The two deals have

gotten

the

attention

of community groups.

Assuming Powell gets approved for a second term, he will oversee the central bank as it considers any changes to its merger review process.

The Biden administration in July issued an executive order encouraging numerous agencies, including the Fed, to review current merger practices and adopt a plan for strengthening merger oversight under the Bank Merger Act and the Bank Holding Company Act of 1956. It remains unclear if the central bank is amending its bank merger approval process in light of the executive order.

Fed Governor Michelle Bowman, who focuses on community banks, has

supported

a revamp of the process to reflect changes in the industry and technology over the past two decades.

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Climate change

The Fed has slowly begun to factor climate change into its regulatory framework under Powell’s tenure, a process that is expected to continue if he gets another term.

Though it officially joined later than its peers, the Fed

became

a member of the Network of Central Banks and Supervisors for Greening the Financial System in December. It also created a Supervision Climate Committee within the Fed system.

More recently, Brainard said in October the Fed is

proceeding

with a “scenario analysis” exercise aimed at measuring the impact of climate change on financial institutions and markets.

All that work — along with other regulators’ climate-related

actions

— is expected to proceed if Powell stays atop the Fed.

At the press conference, Biden said Powell has "made clear to me a top priority will be to accelerate the Fed’s effort to address and mitigate the risk that climate change poses to our financial system and our economy."

"We have to make sure our financial system can withstand climate change and is prepared to transition to clean energy," Biden said. "The Fed must be a leader among central banks globally in addressing climate related financial risks."

But Powell has also

made clear

that he sees limits to the Fed’s role, saying the regulator’s job is to manage banks’ climate risks rather than aggressively shift them away from financing fossil fuels or set a “national strategy on climate change.”

“Our existing mandates are really prudential regulation of financial institutions,” he told reporters this month. “We expect them — and the public will expect us to expect them — to understand and be in a position to manage their risks.”

Several lawmakers, however, have felt that Powell has not gone far enough to address climate change at the central bank. Sens. Sheldon Whitehouse, D-R.I, and Jeff Merkley, D-Ore., came out Friday against renominating Powell to a second term, raising concerns about his record on combating climate risks.

“President Biden must appoint a Fed chair who will ensure the Fed is fulfilling its mandate to safeguard our financial system and shares the Administration’s view that fighting climate change is the responsibility of every policymaker,” Whitehouse and Merkley said in a joint statement. “That person is not Jerome Powell.”