WASHINGTON — Though they have little chance of thwarting President Trump’s nominees for the top bank regulator slots, Democrats are expected to grill them at a confirmation hearing Thursday in an effort to paint the administration as favoring the biggest banks.
Both former Wall Street lawyer Randal Quarles, nominated as the Federal Reserve Board vice chairman for banking supervision, and former banker Joseph Otting, nominated as Comptroller of the Currency, are likely to face sharp questions about their past dealings and current views.
Republicans, meanwhile, are expected to push for promises of deregulation, including following the lead set by a recent Treasury Department guide to simplifying and revising the existing slate of regulatory standards.
Following is a guide to the hearing, including what questions might be raised.
Will Quarles face heat over his pre-financial-crisis regulatory role?
Quarles was picked in part because he served as Treasury undersecretary for domestic finance in the George W. Bush administration in 2005 and 2006, when the financial crisis was bubbling up.
Democrats are likely to ask him why he didn’t see the housing bubble coming, and how his views have been shaped by the crisis that followed when it burst.
“There is no evidence he has learned anything since then. He spent most of his time profiting from the financial crisis,” said Marcus Stanley, policy director at Americans for Financial Reform. “People are going to be looking for some evidence that he has learned or absorbed the lessons of the financial crisis.”
Bart Naylor, a financial policy advocate at the watchdog group Public Citizen, said the question boils down to, “Why should you be trusted to watch the industry again?”
Isaac Boltansky, a policy analyst at Compass Point Research & Trading, said he expects Sen. Elizabeth Warren, D-Mass., to ask about the Fed’s role in the boardroom and Wells Fargo’s board in particular.
“More and more, Wells Fargo is a talking point in her commentary,” Boltansky said.
Warren sent a letter to Fed Chair Janet Yellen in June calling for the Fed to remove board members who ignored the bank's phony-accounts scandal that eventually led to the ouster of then-CEO and co-chairman John Stumpf.
Quarles “is going to have direct control over bonus regulation we see at a lot of these banks” and oversee the completion of an executive compensation rule, Stanley said.
Warren released a report last week detailing all the lobbyists and corporate executives who have joined the Trump administration since the president took office in January. Quarles and Otting fit that profile.
Is Quarles supportive of community bank viability?
While the banking trade groups uniformly support both Otting and Quarles, some Fed critics argue that Quarles’ past shows he favors consolidation of small institutions.
As a member of the Carlyle Group, Quarles lobbied the Fed and Federal Deposit Insurance Corp. to raise the 10% cap on private equity ownership of commercial banks — a change that the regulators ultimately adopted and that enabled Carlyle and other private equity firms to acquire BankUnited from the FDIC in 2009.
Soon after the acquisition, Carlyle and the other investors installed former New York-based North Fork Bank CEO John Kanas as CEO of Miami-based BankUnited, he said.
“When private equity firms restructure banks and go in on commercial banks like this, not only does it fuel the long-term trend of community bank consolidation, but it also tends to install people who are not based in the community,” said Jordan Haedtler, the campaign manager for Fed Up. “I do think that the BankUnited story is going to get told on Thursday.”
Haedtler added that it was puzzling that the administration would choose someone like Quarles to head the Fed’s supervisory activities when much of the justification for Republicans’ deregulatory push is based on the adverse impacts of regulation on smaller banks.
“Given all of the emphasis we’ve heard from Senate Republicans and chair Crapo on community banking and why that makes the case for Dodd-Frank regulatory relief, it’s sort of surprising that Quarles was chosen for the vice chair for supervision position,” Haedtler said. “They could have chosen a community banker for that slot, in addition to the community banking slot that they still have to fill.”
Will OneWest’s foreclosure practices haunt Otting?
Of the two nominees, Otting may be set up for the tougher hearing as Democrats have been highly critical of his former bank, OneWest. Otting was president of the bank, serving under Steven Mnuchin, who is now Trump's Treasury secretary, when the bank engaged in aggressive foreclosures.
“It’s likely that Quarles will pass with a more comfortable margin than Otting,” Ian Katz, a policy analyst at Capital Alpha Partners, wrote in a client note.
Brandon Barford, a partner at Beacon Policy Advisors, said it’s possible that Otting’s confirmation will be held up if panel member Sen. Dean Heller, R-Nev., expresses concern about the former OneWest executive. Nevada was hit especially hard by the foreclosure crisis and OneWest earned a reputation as a foreclosure factory.
Sen. Catherine Cortez Masto, D-Nev., another panel member, has been outspoken on mortgage issues. She helped secure large settlements with banks for improperly foreclosing on homeowners while she was the Nevada’s attorney general.
Will OCC’s Noreika complicate life for Otting?
Acting Comptroller of the Currency Keith Noreika has not been a seat warmer since taking office two months ago, and has already started inter-regulator fights with the Consumer Financial Protection Bureau and the FDIC. Noreika has also vowed to go his own way in revisiting the Volcker Rule if the other agencies aren’t willing to go along with his plan.
That gives Democrats several lines of questions to probe Otting to discover if he agrees with Noreika’s activities. That could include Noreika’s opposition to the CFPB’s rule banning mandatory arbitration clauses and his criticism of the FDIC for a lack of new bank charters.
Naylor said he hopes lawmakers force Otting to spell out his views.
Is the Treasury report the blueprint for deregulation?
Republicans will likely focus on ways regulators can reduce regulatory burden, including looking for commitments from Otting and Quarles to follow the path laid out by the Treasury report.
“That is what is interesting about having the road map come before the nominees,” Barford said. “The nominees have to answer for the road map.”
Barford said regulatory relief discussions will likely be centered on reducing regulations for community and regional banks, rather than larger institutions.
“Looking at the membership of the committee as it currently stands, I don’t think there are that many defenders of big banks,” Barford said.
John Heltman contributed to this article.