WASHINGTON President Obama's nominee to become vice chair of the Federal Reserve Board defended his tenure at Citigroup Thursday, telling senators his time in the private sector helped ready him for public service.
Stanley Fischer, who testified before the Banking Committee along with two other nominees for the Fed board, agreed there are potential concerns about the revolving door between Wall Street and government. But he argued his time at the banking giant, where from 2002 to 2005 he served in a variety of positions including heading up Citigroup International, made him a better regulator when he left to become governor of Israel's central bank. (He stepped down from the Bank of Israel last year.)
"In my case, my three years at Citigroup were the most important element in my education that enabled me to be an effective supervisor of banks, which is one of my duties as the governor of the Bank of Israel," Fischer said. "Without that experience, I would have come to it largely with an academic background without ever having seen the inside of a bank, or furthermore without ever having worked in the private sector. I think that experience was extremely valuable."
The question was raised by Sen. Elizabeth Warren, D-Mass., who pointed to other high-ranking officials from both the Clinton and Obama administrations with ties to Citigroup. For example, Robert Rubin and Lawrence Summers, former Treasury secretaries under President Clinton, and Jack Lew, the current Treasury chief, all worked at the bank.
"Are you concerned about the revolving door between recent Democratic administrations and Citigroup either in terms of policy or in terms of just public perception?" said Warren.
While Fischer acknowledged the ties of other key officials to the bank, he said they were never his colleagues since their Citi tenures began after he left in 2005.
"I don't see that as a particular problem at least in my case," said Fischer.
Sen. Charles Schumer, D-N.Y., defended Fischer and his time at Citi, agreeing with the nominee that the experience made him "a better central banker" because it helped him anticipate how the private sector would react to regulatory policy.
"All too often we have regulators who don't understand how the private sector would act and the private sector runs rings around them," said Schumer. "Three years at Citibank should be an asset, not a liability, if you use that to understand how to regulate institutions that you are asked to regulate."
The hearing also featured testimony from Fed nominees Lael Brainard, a former Treasury undersecretary for international affairs, and Jerome Powell, who currently holds a seat on the board but whose term technically ended in January. Overall, there were few surprises as the three Fed nominees echoed principles previously aired by Fed Chair Janet Yellen, including favoring tailored capital rules for insurers and ensuring that community banks are not unduly burdened by regulations intended for the largest financial institutions.
Senators have been wrestling with a path ahead to prevent insurance companies from being swept up with capital regulations meant for bank holding companies. Fed officials have repeatedly said the Collins amendment a provision authored by Sen. Susan Collins, R-Maine, in the Dodd-Frank Act makes tailoring capital rules for insurers difficult. The amendment sets a floor for capital requirements for all systemically important financial institutions. As a result, the Fed has delayed issuing any capital regulation for insurers.
Powell, who has been nominated for a second term set to expire in 2028, said he has "looked in vain for flexibility" on the Collins amendment, but has yet to find it.
The Fed nominees also largely endorsed efforts to improve general capital requirements, including the addition of a surcharge to minimize risks tied to short-term wholesale funding, as well as a pending proposal to require big banks to hold enough long-term senior debt to aid the Federal Deposit Insurance Corp. in resolving a giant institution should it fail.
"We're not done yet with the capital process," said Powell.
As more rules come down the pike, Brainard said it is important to assess the full impact of new regulations including liquidity requirements, a leverage ratio and stress testing on curbing the perception of "too big to fail."
"I would be very attentive on whether that's sufficient and [would] be open-minded about taking additional measures, which could include a higher capital surcharge on the largest financial institutions," she said, adding the Fed "will have to be very attentive to that and be willing to do more if the 'too big to fail' perception remains."
Fischer agreed, noting it would also take some time before the "too big to fail" had been eradicated from the market.
"This is work that is going to take a bit of time to precisely figure out whether or not enough has been done," said Fischer. "You will certainly get some guidance on what happens to instruments of the premium that the larger banks benefit from. The markets haven't had time to understand how the new system is going to work. We're going to have to keep following that premium."