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Biden adds bank critics to transition team; will Biden get any Fed picks?

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Open seating

There could be “anywhere from zero to three open seats” on the Federal Reserve Board when President-elect Biden takes office in January, the Wall Street Journal reports. President Trump has nominated Judy Shelton and Christopher Waller for two of those seats, “but neither has been confirmed by the Senate. Republicans could potentially confirm one or both while they still are assured a majority in the body, rather than risking it on Georgia’s still-undecided Senate races or having to consider whomever Mr. Biden would nominate.”

“Further complicating the dynamic is the fact that one current Fed board member—the sole Democratic member, Lael Brainard—is touted by some as a potential Treasury secretary. Should that happen, it would create another Fed opening.”

Depending on what happens, “it could complicate any efforts to steer financial regulation in a considerably tighter direction in the near term.” It might also “complicate regulatory matters for Mr. Biden.”

“As the sole Democrat left at the Fed board in Washington, Ms. Brainard has used her position to draw attention to efforts to chisel away at bank rules, creating a rare public disagreement at the consensus-driven central bank. She has opposed the Fed’s regulatory changes 20 times since 2018.”

“Yet Ms. Brainard’s position has not relegated her to the role of Fed gadfly,” the New York Times reports. “Ms. Brainard’s data-driven approach and quiet persistence have allowed her to maneuver effectively even while staking out a minority position at the Fed. That skill could make her an attractive pick for the Treasury’s top job. So could her experience as a former Treasury official who played a leading role in European debt crisis and Chinese currency deliberations.”

American Banker looks at some of the possible Treasury candidates.

Healing

“Loans in forbearance at the largest U.S. banks more than halved in the third quarter but remained elevated, underlining how the outlook for defaults remains murky eight months after the pandemic took hold" the Financial Times reports. "Customers were still taking payment holidays on loans totaling $90 billion at the end of September, regulatory filings from the top four lenders reveal, down from $190 billion at the end of June.” About 5% of all loans to individuals and small businesses are in forbearance.

In Europe, however, “the European Central Bank said bad loans in the eurozone could soar as high as €1.4 trillion, equivalent to $1.7 trillion, if the economies fall even more than expected, a scenario the central bank said is severe but plausible,” the Journal reports. “That amount would be more than during the aftermath of the financial crisis.”

“The concern is that banks could run out of capital if they are suddenly overwhelmed by defaults, needing state support or even failing. What isn’t clear right now is how quickly those defaults could pile up, or if state programs might cushion banks’ losses for years to come.”

European banks need to prepare their balance sheets for the risk of pandemic-induced non-performing loans hitting them in the new year,” Elke König, the head of the Single Resolution Board, the EU agency tasked with winding down failing lenders, told the FT.

Banks beware

“President-elect Joe Biden on Tuesday tapped a number of fierce advocates for Wall Street regulation to his agency review teams, a sign that he could be quickly preparing to take stock of the deregulatory push President Trump has led for almost four years. Many of these new advisers, who are expected to serve in their roles during the transition in November, December and January, are veterans of the Obama administration or have played vocal roles in the past pushing for much tougher oversight of Wall Street as well as stricter consumer protection rules.”

“They include Michael Barr, who was a senior Treasury Department official during the Obama administration during the passage of the Dodd-Frank regulation law in 2010, and Leandra English, whom Trump ousted from the Consumer Financial Protection Bureau during a messy power struggle several years ago.”

Ted Kaufman, “a longtime friend of Mr. Biden” and his former chief of staff, is leading Biden’s transition team, “giving him a voice in choosing appointees to fill positions across the government, including the Consumer Financial Protection Bureau and the Securities and Exchange Commission,” the Wall Street Journal reports.

“In 2010, during a brief stint in the Senate, Mr. Kaufman led a push to limit the size of U.S. lenders—a move that would have led to the breakup of the biggest banks had it been successful. Mr. Kaufman is seen as a bridge between moderate Democrats and more liberal members of the party, who applaud his long history of seeking tough new rules on the financial-services industry.”

Wall Street Journal

To renew, or not to renew

The success of the Federal Reserve’s emergency lending programs in stabilizing financial markets is fueling a political battle over whether the programs should be extended. Democrats, looking ahead to President-elect Joe Biden’s inauguration in January, see the programs as a potential tool to deliver more aid if Congress doesn’t act, while some Republicans are worried about relying on central bank lending powers as a substitute for congressional spending decisions.”

“The tussle could open a divide between the Fed and the Treasury Department, which have mostly collaborated smoothly this year over providing emergency support after the coronavirus pandemic convulsed Wall Street. A decision not to renew the programs risks unsettling markets by weakening a key source of insurance that fueled investors’ optimism. They could also deprive some businesses and governments of access to low-cost credit if market conditions worsen.”

Quotable

“It is positive in that it is coming down as quickly as it is. The real issue is how far does it come down from here.” — Marty Mosby, analyst at Vining Sparks, about the sharp drop in loans in forbearance at large U.S. banks in the third quarter.

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