Despite isolationist mood, U.S. isn't going it alone on banking rules
WASHINGTON — The Trump administration's apprehension about global trade and international agreements poses a dilemma for advocates of cross-border regulatory standards. Should standards setters shift their focus away from Washington, or take more strident steps to keep the U.S. in the fold?
It is hard to say whether the Financial Stability Board was aiming for the latter last month when it named the Federal Reserve Board's top regulator, Randal Quarles, as chairman. Yet observers say the appointment of Quarles, who took the reins of the FSB over the weekend, has the side benefit of bolstering the standards setter's relevance.
“It’s probably a good idea to have the key guy in the United States … to have a permanent seat at the table. It’s much less likely we’re going to pull out,” said Richard Herring, a finance professor at the University of Pennsylvania's Wharton School of Business.
Quarles, the Fed's vice chairman of supervision, assumed the position atop the body organized by the G20 nations despite concerns about recent flirtations with isolationism in the U.S., which has caused some to question Uncle Sam's role in crafting international rules.
The process by which the FSB chooses its leadership decisions is opaque; leaders of member states have been mum about why Quarles was picked. The recent cooling of tensions between the U.S. and its trading partners doesn't hurt. But Herring and others speculated that Quarles' appointment helps the FSB by cementing U.S. commitment to the body and whatever regulatory policies it releases.
“If I were to conjecture, I would think that they’ve taken the view that not much is going to happen if they can’t get the U.S. on board with the next round of reforms,” Herring said.
Gregory Lyons, a partner at Debevoise & Plimpton, said that for the FSB — or any other international forum such as the Basel Committee on Banking Supervision — to remain relevant and vital, it needs buy-in from all the biggest players. For example, a final version of Basel Committee accords was on shaky ground last year when European countries threatened to pull out, only to have an agreement reached at the last moment.
“The credibility of these bodies to impose tougher regulations thus relies to a large extent on consensus, and a breakdown of that consensus, particularly by a material jurisdiction would be disastrous,” Lyons said. “If France or Germany didn’t support the accord, the Basel Committee would see its weight diminish significantly, with it just becoming effectively a best practices suggestion box for various jurisdictions.”
Leadership positions in international organizations tend to be designated according to shorthand political rules and arrangements, said Karen Shaw Petrou, managing partner at Federal Financial Analytics.
For example, the World Bank has historically been headed by an American, while the International Monetary Fund has historically been headed by a European. Given the importance that the U.S. plays in global finance, an American was probably the odds-on favorite to head the FSB from the outset, Petrou said.
“These FSB votes, like all of these global regulatory agencies, are not done by logic but by politics and agreements,” Petrou said. “It had been assumed that, since [former FSB Chair and Bank of England Gov. Mark] Carney had been at the FSB for so long, and Americans don’t run any of the other key global regulatory bodies, that the FSB was going to be America’s turn this time. It's just I think took a great deal more work than it otherwise would have.”
Quarles put forth effort this year to publicly demonstrate his faith in international cooperation. His candidacy to head the FSB had been rumored as early as March. Since then, he made a point both in his appearances before Congress and in a speech in June to defend the value of international bodies against criticism — often Republicans — that they undermine U.S. rulemaking powers.
George Madison, a former general counsel at the Treasury Department and partner with Sidley Austin, said that whatever opposition there may have been to Quarles’ appointment as FSB chief likely had little to do with Quarles’ own views.
That likely made it easier for Carney — who as outgoing chair takes the lead on identifying a successor — to make the case for Quarles’ selection to fellow FSB members.
“Randy Quarles is not a bomb thrower,” Madison said. “He’s a smart, careful, measured central banker with a lot of experience from his prior time at the Treasury.
And the committee is still a committee, Madison said — Quarles' chairmanship doesn’t allow him to dictate policy or priorities. "He’s not operating in a vacuum. Whatever he would like to do, he has to persuade a lot of other people that it makes sense.”
Petrou added that many of the items that the FSB will consider in 2019 are outside of the Fed’s jurisdiction or might otherwise be a challenge for the U.S. to implement without broader structural changes. Among those outstanding issues are asset management standards, resolution planning for central clearing counterparties and international standards for insurance firms.
“There are things that the FSB does that would require new law to do [in the U.S.] just because of the global regulatory construct does not always fit well with the U.S. one,” Petrou said.
And those inconsistencies move in both directions. The U.S. emphasis on resolution of large, systemically significant firms without taxpayer assistance, for example, is one that other countries don’t necessarily share. And the U.S. has many thousands of small banks that chafe under the constraints of internationally mandated standards, particularly related to capital and liquidity.
Madison said Quarles will likely take the approach toward international standards that he has toward domestic sources of systemic risk — namely tailoring enhanced prudential standards in such a way as to ensure that most of the burden falls on the largest and most complex firms and less on smaller institutions.
“What will be interesting is, obviously Quarles knows what the U.S.’s gripe has been about the international standards that have been set on capital and so forth, and it will be interesting to see what he is able to do there,” Madison said. “My gut is that it will be around tailoring to type of institution.”
Lyons noted that when former Federal Reserve Gov. Daniel Tarullo sat on the Basel Committee and FSB, he tended to push other countries to adopt more and more stringent rules than they might otherwise be inclined to adopt. Quarles may take a more casual approach to international consistency in favor of matching regulatory burden with systemic risk.
“It will be interesting to see what impact his leadership has on the FSB, and by extension other international standard setters,” Lyons said. “Former Gov. Tarullo generally pushed these bodies toward a ‘more is better’ approach; Quarles may seek to foster a greater tailoring and re-evaluation on the international level as he has done in the U.S.”