Trump feuds hurting U.S. banking regulators' influence abroad
WASHINGTON — President Trump's recent comments alienating European allies and continued espousing of protectionist trade positions is hurting Federal Reserve Vice Chairman for Supervision Randal Quarles' apparent efforts to lead the G-20-affiliated Financial Stability Board.
The continued tension between Trump and European leaders may also weaken U.S. regulators' influence abroad.
Quarles' names is reportedly being floated by the Treasury Department as a successor to Mark Carney, the governor of the Bank of England, whose term expires in December and who has headed the FSB since 2011. There are currently no U.S. leaders of international financial standard-setting bodies. Such a role would give the U.S. more sway over the body, and also may make the U.S. more inclined to follow FSB recommendations.
But Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that the president’s recent comments may have hurt Quarles’ chances of leading the FSB as well as U.S. officials' ability to influence or shape international discussions on bank regulation.
“The trade war and the rhetoric surrounding it has far-reaching implications, not only for the ability of Americans to head global decision-making bodies, but even to be listened to on them,” Petrou said.
That could have dire consequences for banks, particularly large international institutions, as they seek to coordinate and harmonize regulations abroad.
Neither the Fed nor Treasury would confirm Quarles' nascent bid to head the board, but he made something of a gesture to fellow regulators on the FSB in a speech last month when he praised the work of the board and said it is vital to U.S. and international financial stability and commerce.
“I believe America's active participation in the FSB is important to our nation, and even, as remote as it might seem, relevant to your businesses,” Quarles told a group of bankers in Utah. “If the FSB had been in place before the crisis and working on identifying and assessing vulnerabilities to financial stability, that may have allowed us to take action at an earlier stage, frame our response with more information, and possibly mitigate some of the devastating consequences.”
In April, Quarles rebuked some members of his own party by emphasizing the importance of international bodies for establishing minimum standards in financial regulation and cautioning against abandoning those groups for protectionist reasons.
“To ensure a level playing field for our banks, we need to be able to influence those decisions,” Quarles said. “I think that we can improve their transparency — even they have acknowledged that. But I do think that we should remain engaged in them.”
But those gestures came before the president railed against many of the same countries whose representatives would have to select Quarles to lead them on the FSB.
Earlier this month, Trump referred to the European Union as a “foe” with respect to trade imbalances. That comment came on the heels of a summit with North American Treaty Organization allies in Brussels in which Trump accused other member countries of being “delinquent” in their defense budgets.
The administration has also implemented trade tariffs against China and other trading partners, a move that JPMorgan Chase Chief Executive Jamie Dimon said could lead to “reversing some of the benefits” of economic growth in recent years.
John Pachkowski, senior banking analyst at Wolters Kluwer, said the trade issues might not have hurt Quarles much in isolation, but the president’s more inflammatory comments after the NATO summit may be harder for European FSB members to ignore.
“Up to a couple weeks ago … I think the tariffs wouldn’t have been as much of an issue,” Pachkowski said. “I think more of the rhetoric ... where the EU is ‘a foe,’ may hurt his chances.”
One added complication, according to Petrou, is that foreign central banks tend to be less politically independent than the Fed, and so foreign counterparts — rightly or wrongly — assume that U.S. central bank officials are carrying water for the administration’s policies.
“In the U.S., the Fed is independent of the president, and that is not only on monetary policy but also regulatory policy. Outside the U.S., that is far less true, and generally not believed,” Petrou said. “Everybody expects … Fed officials to speak to the administration’s priorities, and at the moment, the mood on those priorities is not exactly good.”
An FSB spokesman declined to comment on the board’s succession processes.
The FSB announced in October that it had extended Carney’s term — which was slated to expire on Nov. 4 — to Dec. 1, 2018. Under the board’s procedural guidelines, members may nominate a plenary member to serve as chairperson to a seven-member nomination committee, and plenary members select a chairperson from among those nominees.
The U.S. has three members — the Fed Board of Governors, the Treasury and the Securities and Exchange Commission. There are 58 member agencies of the FSB.
Richard Herring, the Jacob Safra Professor of International Banking at the University of Pennsylvania’s Wharton School of Business, said other considerations are at play besides the president’s trade and defense posture.
The FSB is a relatively new organization. Created in April 2009 in the wake of the global financial crisis from its antecedent, the Financial Stability Forum, the group has only had two formal leaders: European Central Bank President Mario Draghi and Carney. The group prefers to work through consensus and emphasizes central banking experience.
“The tradition has been to proceed by consensus,” Herring said. “Apart from the politics just now, I would say that probably the main obstacle [Quarles] would face is that he’s simply not very experienced … as a central banker, and they tend to view that as very important.”
Nevertheless, as Herring noted, the political challenge that Trump poses to FSB members could cut both ways — it could lead members to distance themselves from U.S. leadership, but also could lead some to conclude that a U.S. leader is more likely to remain committed to the forum.
“If you put politics into it, I think it could play a few different ways,” Herring said. “I don’t think there’s any doubt that the U.S. is regarded as a bully and institution-buster, and there are a lot of people who do not want to reward it for that. But on the other hand, I can imagine a few people would think that putting Randy in would assure that the U.S. doesn’t walk away from the FSB.”
Pachkowski said the FSB chair — as opposed to other international forums — wouldn’t necessarily have the power to bend the body to its will, because under the board’s charter, the FSB chair may work only to forward the agenda of the board, not its home jurisdiction.
“If people in the U.S. think, ‘We’ve got somebody from the U.S. leading this thing, we can be running the show,’ that’s not the case,” Pachkowski said. “The chair has a duty only to the FSB and the FSB members.”
Petrou said the challenge that faces the FSB — and all international deliberative bodies, for that matter — is maintaining relevance in an isolationist era. The Basel Committee on Banking Supervision narrowly averted that fate last December when it completed its final standards associated with the Basel III accords, sometimes referred to as Basel IV.
“They’re fragile,” Petrou said. “The only reason [Basel IV] ultimately got resolved the way it did was because there was an ongoing commitment by the warring sides to the process. Without that there really is a race to the bottom.”