President Joe Biden’s choice of who will lead the Federal Reserve may come down to a debate about regulating Wall Street.
Jerome Powell is viewed as the favorite to get the nod for another term leading the central bank, but progressive Democrats like Massachusetts Sen. Elizabeth Warren and New York Rep. Alexandria Ocasio-Cortez have lambasted the Republican chair for easing regulations on big banks. And some have praised Fed Governor Lael Brainard — widely seen as the leading rival to Powell for the top spot — for opposing those efforts.
That means Powell and Brainard’s approach to regulation is poised to be at the center of debate about the bank’s future ahead of the expiration of the former’s term as chair in February. Biden’s advisers are considering recommending Powell for chair and Brainard as vice chair of supervision, the agency’s top regulatory role, people familiar with the matter told Bloomberg last week.
Biden himself was said to have not yet weighed in on Fed personnel matters, so the outcome remains far from certain ahead of an expected decision this fall. Any nomination will be subject to Senate confirmation, where Democrats have a slim majority.
These are some of the key differences between Powell and Brainard on financial regulation:
— Collaboration. While the chair has the last word in which rules get Fed consideration, Powell has often deferred to the top regulator — currently Vice Chairman Randal Quarles whose term ends later this year. When serving at the Fed from 2012 to 2018 before taking over as chair, Powell went along with the banking oversight efforts of fellow Governor Daniel Tarullo, who was appointed by President Barack Obama and who led the agency’s supervision of the industry before Quarles arrived.
But after being named chair by President Donald Trump, Powell backed the efforts of Quarles — a fellow veteran of private equity giant Carlyle Group — to sand down the edges of post-crisis banking rules, sometimes reversing aspects of Tarullo’s work.
Together, Powell and Quarles made changes that weren’t flashy but were significant, and they pushed Brainard into the role of a frequent foil.
Brainard often came out against rule changes she argued increased risks to the banking system, logging almost two dozen opposition votes during Powell’s chairmanship.
— Living wills, stress tests. The bulk of Powell’s regulatory moves benefited regional and community banks, which were released from the most stringent rules put in place after the 2008 financial collapse. But Wall Street also made out.
The Fed freed the big banks from a requirement that they hold as much as $40 billion in margin for swaps transactions between a bank’s own affiliates. The central bank also spearheaded an overhaul of the Dodd-Frank Act’s Volcker Rule, allowing lenders to boost investments in venture capital funds.
The Powell-Quarles team also lightened Wall Street’s burdens from two key post-crisis efforts:
— Living wills: The Fed simplified and reduced the frequency of these massive documents written by the banks as credible road maps for quickly and safely taking them apart if they fail.
— Stress tests: And it overhauled the annual checks for big banks, which may be the most important move during Powell’s tenure.
Brainard argued that changes to the stress tests represented “a green light for large banks to reduce their capital buffers,” and said the living-wills overhaul could weaken the plans from the biggest lenders and “leave the system less safe.”
Her misgivings have been echoed by key Democratic senators on the Banking Committee that will initially vet Biden’s picks — panel Chairman Sherrod Brown and Warren.
Powell argues that the changes on his watch were generally capital-neutral, roughly leaving the biggest banks with similar capital requirements than they had before — or even higher in some cases.
“We did not weaken capital requirements for the largest banks,” Powell said at a recent hearing with lawmakers. “I actively resisted any move in that direction. And in fact, the stress capital buffer, which we implemented quite recently after years of consideration, raises capital standards.”
For the next tier of large-but-not-gigantic banks, however, Powell oversaw the weakening of post-crisis rules on several key areas of Fed supervision, including the liquidity cushions lenders such as U.S. Bancorp and PNC Financial Services Group Inc. need to keep on hand if funding dries up in a crisis. Brainard opposed much of that work.
She also called for caution in letting those regional banks merge and swell in size, such as in PNC’s purchase this year of the U.S. operations of Banco Bilbao Vizcaya Argentaria, S.A., voicing concern about concentration among such banks “where common-sense safeguards have been weakened.”
— Digital currency. Brainard’s been outspoken about the need for the central bank to accelerate its decision on adopting a digital currency, countering Powell’s more patient stance.
In recent remarks to the Aspen Economic Strategy Group, she exhibited that greater willingness, calling it an urgent issue and saying that letting other jurisdictions such as China get ahead on digital currencies “doesn’t sound like a sustainable future to me.”
Powell has downplayed that risk, arguing that the U.S. isn’t about to lose its reserve-currency dominance to China’s digital move.
Brainard has also shepherded the Fed’s effort toward a real-time payments system against pushback from Wall Street banks that had already created a similar network. Quarles opposed the plan, though Powell split from him and backed it.
— Buybacks, buffer. In the heat of the COVID-19 crisis, Powell supported a partial limit on banks’ dividends and stock buybacks, which was highly unpopular on Wall Street. But Brainard favored more aggressive measures to halt capital give-backs, as did Senate Democrats who called for total bans on returning money to shareholders.
Another clear 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 — as in other jurisdictions around the world — can turn up the capital dial for banks when the economy is booming and loan portfolios swelling. When a new crisis rears up, the Fed can spring a trap door that dumps that excess capital back into the lenders’ operations to reduce outside strains on the industry.
For the years leading up to the pandemic’s economic damage, Brainard advocated the central bank consider flipping the switch to turn the buffer on. Hers was the lone vote for activating it in March of 2019.
As the U.S. economy digs out of the COVID-19 hole, the buffer — and its billions in increased capital requirements — will almost certainly return as a focus of debate at the board and strenuous opposition from Wall Street lobbyists.
— Climate change. Seven different climate-activist groups, including the Sierra Club, came out in May against a Powell renomination, arguing that the Fed under his leadership has failed to use its regulatory tools to discourage banks from lending money to fossil fuel companies. They did not endorse Brainard or anyone else for the job.
The Powell Fed has established new committees for addressing the threats that climate change poses to the financial system. Its growing focus on the environment has drawn criticism from Republicans in Congress, who’ve warned it against taking any action to stifle the flow of funds to carbon-producing companies.
Bloomberg’s Craig Torres contributed to this report.