Is Fed vote on real-time payments a sign of a wider split?
WASHINGTON — As the Federal Reserve Board has moved to tweak post-crisis rules, Chairman Jerome Powell and Vice Chairman of Supervision Randal Quarles have voted in lockstep on regulatory relief measures from supervision of large banks to reforms of the living will process.
But the Fed's announcement earlier this week that it will create its own real-time payments system, known as FedNow, revealed a split between the two men on a key policy issue. Powell sided with Govs. Lael Brainard and Michelle Bowman, a former community banker, to support the effort and Quarles cast the lone dissenting vote.
Quarles' dissent in the 4-1 vote has raised questions of whether the payments vote was an aberration, or a sign of a wider policy disagreement. (The board's other vice chairman, Richard Clarida, also voted in support of FedNow.)
“It shows there are some differences between Powell and Quarles, with Quarles appearing to be a bit more sympathetic to some of the things big banks want,” said Ian Katz, an analyst at Capital Alpha Partners.
Such a visible split among the board's more senior governors is rare. Brainard, the last Obama-appointed governor on the board, has more consistently dissented from decisions to ease the post-crisis bank regulatory framework. But in this case, Quarles, who has spearheaded the central bank's regulatory reforms, was in the minority.
“This is certainly the largest example of a space between" Powell and Quarles "on a policy issue we’ve seen, but it’s not the only one,” said Gregg Gelzinis, a research associate for the economic policy team at the Center for American Progress. He noted, for example, that Quarles has signaled support for doing more to ease big-bank capital requirements, which Powell has not done.
"Quarles’ public statements have tended to go farther than Powell’s and Quarles has shown more of a willingness to sort of rewrite the post-crisis rule book," he said.
The Fed did not comment for this story.
Observers have speculated that Quarles, a former private equity investor and Treasury Department official in the George W. Bush administration, sympathized with large banks' view that the Fed's involvement will slow adoption of real-time payments in the U.S. The Clearing House, a payments company that is owned by the nation’s largest banks, has been operating its own real-time system since 2017.
Quarles "has been working with the largest banks both in the private sector and when he was at Treasury, and I think that did have an impact on his thinking,” said Cam Fine, the president and CEO of Calvert Advisors.
In a statement accompanying the Fed's vote, Quarles suggested the central bank should stand back to let the private sector take the lead on real-time payments.
“The U.S. private sector has a long history of providing efficient payment solutions to consumers and businesses. The public sector should provide its own capacity only when the evidence of market failure is clear and alternative means to achieve public goals are not feasible," Quarles said in a statement. "In this case, I do not see a strong justification for the Federal Reserve to move into this area and crowd out innovation when viable private-sector alternatives are available.”
On the other side, many small banks and credit unions urged the Fed to get involved. Smaller financial institutions have declined to sign up for the big-bank-operated system, worried that their interests will not be taken into account.
Analysts say the influence of Brainard, who chairs the Fed's payments committee, and Bowman, a fifth-generation banker from Kansas, likely played a significant role in the direction the board took.
"Her support for keeping the Fed involved in the payments system was crucial," Fine said of Brainard, a governor since 2014 who assumed the role heading the payments committee formerly held by Powell. "I think it was the deciding factor, quite frankly. Had she felt the other way I’m very doubtful whether the board would have moved forward with the real time system.”
Of Bowman, Gelzinis said the fear among small banks that an industry-run system could "potentially choke off access to the smaller, more rural community banks ... probably drove her views on this specific issue."
Meanwhile, Fine noted that Powell, a governor since 2012, has long focused on ensuring that the Fed could provide payments support in the event of a catastrophic event like a terrorist attack.
“I think that 9/11 made a strong impression on Gov. Powell,” Fine said. “One of his beliefs is that if we had another catastrophic event like that, the central bank would be there and would be involved and could keep the money flow going when private systems or whoever is operating private systems may not be in a position do that.”
In a press conference last week before the Fed's announcement, Powell said having a central bank-run real-time system competing alongside the private sector is consistent with past precedent.
"In our payments system, in many places the Fed operates alongside private-sector operators — for example, in wholesale payments, [automated clearing house] and checking," he said. "So it wouldn't be unusual or out of keeping with how we've done things in the past.”
Others downplayed the significance of Quarles' dissent, saying that a single vote in opposition to the rest of the board should only be read as such.
“What I concluded was what I know about being in the government, and that is I don’t think you can draw anything from a single vote except where the person stands on that issue,” said Thomas Vartanian, founder and executive director of the Financial Regulation & Technology Institute of George Mason University’s Scalia Law School and a former senior regulatory official. “I think it’s a pattern of votes that begins to tell you something, whether about the politics, about the issues or the relationships between people."
But there has been daylight between Powell and Quarles on some other issues.
During his tenure as vice chairman for supervision, Quarles has appeared open to providing further relief on capital requirements for global systemically important banks, including adjusting the so-called G-SIB capital surcharge. But Powell has emphasized that capital requirements are “just right.”
Both Powell and Quarles’ backgrounds likely have influenced their current decisions on policy, said Gelzinis.
“Just from 50,000 feet on many of these issues, Quarles seems to be more closely aligned with the view of the financial industry,” he said. “These people have had different experiences throughout their careers and have been in government at different points in time, and I think that all certainly plays into how your own viewpoint on a certain specific policy issue formulates, shapes and evolves over time.”
While disagreements between Fed governors are hardly uncommon, it is rare that they aren’t resolved behind the scenes, Fine said.
“It’s unusual when a policy disagreement is known publicly between the vice chair and the chair, because as I say, 99% of the time it’s worked out behind the scenes, and by the time it becomes public, everybody’s on the same page,” he said. “There’s not a time that I can recall where the chair and the vice chair had a public disagreement on a policy issue.”
But dissents are becoming more common, Gelzinis said. In the last year, Brainard has voted against several deregulatory policy proposals that the Fed has put forward.
“I think we’re just sort of in a different era now where dissent is more acceptable,” he said. “We have seen in the past few years more of a willingness from board governors to speak up and dissent when they disagree with an issue.”
Dissents can even be preferable to consensus, said Vartanian.
“When the board is working right, everybody shouldn’t agree, because that’s the basis upon which sound policy is made,” he said.