Powell as Fed chair? Five things bankers should know

WASHINGTON — President Trump's pick of Federal Reserve Board Gov. Jerome Powell as the next head of the central bank is likely to cause bankers to breathe a sigh of relief.

In many ways, Powell represents the best of all worlds among the five candidates that were the subject of considerable speculation in recent weeks. Powell, who previously served in George H.W. Bush’s Treasury, also has extensive experience in the private sector, and is seen as open to deregulatory efforts by the administration and Congress. But he also provides the continuity and capability with current Fed Chair Janet Yellen, who has been a stabilizing force in the financial markets.

Analysts say Powell is a shrewd choice. Though Trump had lately talked up the possibility of reappointing Yellen because he approves of the Fed's low interest rate policy, he has also criticized her in the past for attempting to help his presidential opponent, former Secretary of State Hillary Clinton. Powell is likely to continue Yellen's monetary policy while satisfying demands from Republicans that Trump appoint one of their own.
Moreover, Powell has a long history of working well with new Fed Vice Chair for Supervision Randal Quarles, which suggests the central bank would approach any changes to the Dodd-Frank Act in a united manner. Moreover, unlike some other candidates for the Fed job, Powell has spelled out his views on bank regulation, having served as head of the central bank's banking committee after former Fed Gov. Daniel Tarullo left in April.

Now that Powell has received the nod from Trump to head the Fed, here’s what banks can expect:

Federal Reserve Chairman Jerome Powell.
WASHINGTON — President Trump's pick of Federal Reserve Board Gov. Jerome Powell as the next head of the central bank is likely to cause bankers to breathe a sigh of relief.

In many ways, Powell represents the best of all worlds among the five candidates that were the subject of considerable speculation in recent weeks. Powell, who previously served in George H.W. Bush’s Treasury, also has extensive experience in the private sector, and is seen as open to deregulatory efforts by the administration and Congress. But he also provides the continuity and capability with current Fed Chair Janet Yellen, who has been a stabilizing force in the financial markets.

Analysts say Powell is a shrewd choice. Though Trump had lately talked up the possibility of reappointing Yellen because he approves of the Fed's low interest rate policy, he has also criticized her in the past for attempting to help his presidential opponent, former Secretary of State Hillary Clinton. Powell is likely to continue Yellen's monetary policy while satisfying demands from Republicans that Trump appoint one of their own.

Moreover, Powell has a long history of working well with new Fed Vice Chair for Supervision Randal Quarles, which suggests the central bank would approach any changes to the Dodd-Frank Act in a united manner. Moreover, unlike some other candidates for the Fed job, Powell has spelled out his views on bank regulation, having served as head of the central bank's banking committee after former Fed Gov. Daniel Tarullo left in April.

Now that Powell has received the nod from Trump to head the Fed, here’s what banks can expect:
John Taylor, professor at Stanford University
A (relatively) quick and painless nomination process
The fact that Powell has already served on the Fed for five years should minimize any questions in the Senate about whether he is fit to head the organization. And he has also retained substantial bipartisan support when he was first nominated to the Fed in 2012 (approved by a vote of 74-21) and again in 2014 (approved 67-24).

That doesn’t mean he won’t face tough questions during his confirmation hearing or likely have fewer “yea” votes this time around. Powell's primary opponents are likely to be the Republicans who voted against his reappointment in 2014, the vast majority of whom remain in the chamber. They have lobbied for Trump to instead pick Princeton economist John Taylor, who is seen as a hawk on monetary policy matters.

Meanwhile, Powell's background working for the Carlyle Group, a private equity firm, will also likely be a source of opposition from Wall Street hawks for whom anything short of a Yellen renomination would be unacceptable. But most pragmatic Democrats will see Powell’s nomination as the best pick they could hope for under the circumstances.
Federal Reserve Board Gov. Jerome Powell
Powell has outlined clear views on regulation
Powell’s confirmation would likely mean piecemeal, practical revisions to aspects of the post-crisis regulatory regime, rather than a wholesale reconstruction of banks' regulation.

Powell had maintained a relatively low public profile before April, when he took over as head of the Fed’s supervisory committee. But he raised his profile while in the role, making a series of speeches and media appearances to lay out what he saw as the Fed’s regulatory agenda.

In a speech in April, Powell said the fundamental changes put in place after the crisis – namely capital retention, stress testing and living wills – should not be rolled back, and that the Fed and other regulators should continue to make regulations on small and midsized banks appropriate for the systemic risks they pose. He also said the regulatory framework erected since the crisis is too complex and needs to be simplified.

“The new rule book is excessively complex,” Powell said. “We need to look for ways to simplify the rules so that they support our goals but also improve the efficiency of regulation.”

He then expanded those broad strokes to set some concrete short-term goals, including changes to the way the Fed communicates its stress testing expectations to banks, recasting the requirements for bank boards to respond to supervisory issues, and developing a more effective means of implementing the Volcker Rule.

The Fed has already moved forward with a proposal to rescind a requirement that bank boards directly review certain supervisory reports, a move that has drawn some criticism from the left as being unduly lax on banks' ultimate governing bodies. But Powell has not shrunk from the fight, defending the proposal as pragmatic and the criticisms as unfounded.

The Fed and Federal Deposit Insurance Corp. have also extended the deadlines for the megabanks’ living will submissions, pre-empting a pileup of un-reviewed submissions and meaning the next living wills won’t be due until 2019.

Powell also favored the de-designation American International Group as a systemically important nonbank. After the Financial System Oversight Council voted to remove the label, Powell said it only made sense. “It was not the same company and is no longer active in the troubling businesses it was," he said.

But he’s also resisted calls to broadly roll back bank capital requirements, saying in comments earlier this month that he thought bank capital was “about right” — neither too high nor too low — but instead called for some changes to the supplemental leverage ratio to make it less restrictive in cases where it is the binding constraint. That view echoes calls that Yellen herself made earlier this year.

These actions make Powell’s nomination compatible with the general thrust of the Trump administration’s deregulatory agenda while setting some core postcrisis changes aside as off-limits.
Randal Quarles, Fed vice chair of banking supervision
A consistent message from the Fed
One side effect of Powell’s nomination is he would enjoy an unusually close working relationship with Quarles, his lieutenant on regulatory matters. That could mean that banks would benefit from a consistent and deliberate message coming from the Fed on both regulatory and monetary matters.

Powell and Quarles have known one another for decades, having worked together both at the George H.W. Bush Treasury and at Carlyle. The two are seen as being closely aligned in views and temperament, and a different Fed chair nominee could yield very different results.

The Fed, like the Supreme Court, is at its core a committee and can function differently depending on the personalities sitting in its chairs.

Quarles is the first person to hold the position of Vice Chair of Supervision, and how that position interacts with the Fed chair is unbounded by tradition and expectations, so if those personalities were at odds, it could lead to a far less functional central bank.

A functional and consistent Fed is a source of certainty and a basis for making strategic decisions for banks they supervise, and with Powell and Quarles, those positions will likely be working together rather than against one another.
Steven Mnuchin, U.S. Treasury secretary, takes a question during a White House press briefing.
A moderating force among regulators
The Trump administration has consistently pushed for deregulation, and in its series of policy papers the Treasury has laid out scores of ways that regulations could be rolled back.

Powell, whose nomination was reportedly favored by Treasury Secretary Steven Mnuchin, would be in a position to give the administration practical advice on how to prioritize those agenda items.

If nominated, he would be the only head of a banking agency that was present when the Dodd-Frank rules were being implemented, and would thereby be uniquely positioned to help the present administration understand why the current framework is designed the way it is. That means that reforms would be less likely to have vast or unexpected consequences.
Signage in front of the Fannie Mae and Freddie Mac headquarters.
A new push for GSE reform
Powell raised another priority of his own earlier this year when he called on Congress to begin the process of developing a bill to take Fannie Mae and Freddie Mac out of conservatorship and recalibrate the relationship between the government-sponsored enterprises and the taxpayer.

The administration’s position on GSE reform is something of an open question. Mnuchin has said that the administration will address GSE reform in 2018, but has not articulated how the mortgage giants would be reformed.

House Financial Services Committee Chair Jeb Hensarling, R-Texas, has championed an approach that would fully privatize the GSEs, replacing them with private firms and removing the government from any significant support of the market.

The Senate, meanwhile, is considering a bipartisan bill first introduced by Sens. Bob Corker, R-Tenn., and Mark Warner, D-Va., that would wind down the GSEs and replace them with a system of private mortgage insurers and a central federal agency empowered to step in in the event of catastrophic losses.

GSE reform is not an issue central to the Fed’s authorities, but the fact that Powell weighed in on it anyway suggests that if given the opportunity, he could help the administration formulate its thinking on how to navigate a challenging and unrewarding policy arena. And given the uphill battle that any mortgage plan faces in Congress, the administration may need all the help it can get.
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