WASHINGTON — President-elect Donald Trump's victory poses a unique quandary for the Federal Reserve both before and after he is sworn in — whether the central bank should attempt to finish the many rules still in process or keep its head down to avoid provoking a hostile Congress.
The Fed has a raft of rules still outstanding, many of which relate to the Basel III accords and Dodd-Frank requirements that remain incomplete.
Wayne Abernathy, executive vice president of Regulation at the American Bankers Association, said the big question is whether the agencies — including independent ones like the Fed — will push to complete those rules before Trump takes office.
"Will there be a rush on the part of these agencies … to rush things through before the new president is inaugurated in January?" Abernathy said. "I don't think there are as many opportunities to do that as in the past … but there might be some."
Karen Shaw Petrou, managing partner at Federal Financial Analytics, said that there typically is a rush at the end of each calendar year to get rules out the door, and that this tendency is heightened during administration changes — even between terms of the same president.
But with this particular transfer of power, where there are major ideological differences between the parties relinquishing control and those assuming it, that normal rush will likely be intensified — even if just to make policies that much harder to reverse.
"I think that will be hyperactive policymaking, because I think the Obama administration and the federal regulators will try … to get as much done as they can before the new president and structure come in," Petrou said. "I think they will try to finish as much as they can to try to force policy reversals through a more lengthy, deliberative process."
There are a number of outstanding rules on the Fed's docket, some of which may be finalized.
The most likely regulation to be completed by the end of the Obama administration is the total loss-absorbing capacity rule, or TLAC, which the Fed proposed last October and which would require the U.S. global systemically important banks to hold unsecured debt that can be used to recapitalize a successor institution should it fail.
Fed Gov. Daniel Tarullo, who chairs the Fed Board's Committee on Supervision, said in an appearance at Columbia Law School last month that TLAC and other resolution rules are critical elements in the regulatory toolbox — elements that cannot be replaced by simply mandating higher capital standards, because capital can be expended in a crisis and when it is, the firm has nothing with which to recapitalize itself.
"At some point, the firm … is no longer in an actively capitalized state. So in a sense it doesn't matter where your capital level was beforehand, you now have to stipulate that they don't have it anymore — that's why they're in resolution," Tarullo said. "That's why you need an identifiable set of instruments which will, by definition, not have been eroded in the run-up to the stress period, which will then be available to the FDIC to convert into equity, thereby recapitalizing the firm."
The Fed is also considering a net stable funding ratio — another regulation outlined in Basel III — which is designed to ensure that the largest banks have stable funding sources to maintain operations for one year. That rule, which was proposed in April, hewed closely to the Basel outline but was still criticized by banks as unnecessary.
Other regulations include a single counterparty credit limit proposed in March, a plan to set capital weights for banks' commodity assets that was proposed in September, and an advance notice of proposed rulemaking — a kind of regulatory pre-proposal — for capital and supervisory standards for systemically important nonbanks in June. Tarullo also outlined a series of changes to the Comprehensive Capital Analysis and Review stress tests in a speech in September, but those changes have for the most part not been formally proposed.
The Fed — along with the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp., the National Credit Union Administration, the Securities and Exchange Commission and the Federal Housing Finance Agency — issued a proposal in April limiting incentive-based compensation for banking executives. That plan has been a high priority for the Obama administration, but its progress has also been uncommonly slow, owing in large part to the challenges of coordinating a single rule across multiple agencies.
Trump himself has been inconsistent in his attitude toward the central bank and its chair, Janet Yellen. He has by turns praised her stance on monetary policy as wide and measured, and has also criticized the same policies as being designed to benefit his Democratic opponent, Hillary Clinton. He was critical of Wall Street during his campaign, even attempting to pick up former supporters of Democratic presidential candidate Sen. Bernie Sanders of Vermont by touting his antipathy to the finance industry.
But his fellow Republicans in Congress have criticized the Fed more consistently and on a range of issues. Yellen has routinely faced questions during her semiannual congressional testimonies about the virtues of a rule-based monetary policy, the need for the Government Accountability Office to audit the central bank's monetary policy decisions, scrutiny about a leak from the Federal Open Market Committee in 2012, and questions about the Fed's payment of Interest on Excess Reserves.
One banking industry official who asked not to be quoted on the record said that the Fed should take Congress' hostility into account when it considers whether to attempt to finish its regulatory agenda, particularly as it pertains to Basel commitments.
The Basel Committee on Banking Supervision — which is charged with outlining the accords — has been in a public feud with the European Union for months about whether and to what extent the final Basel rules will amount to higher capital requirements for member banks. EU officials have suggested that if that were the case, the bloc would simply not abide by them, whereas Basel officials have suggested that the rules would not amount to a substantial increase in capital.
The Fed would be ill-advised if it seeks to finalize a series of rules related to Basel before Republicans take over Washington in January, the banking official said, because it could draw unwanted attention and give Congress reason to push for the kinds of structural changes to the Fed that the central bank has fought so hard to avoid.
"I think they have a lot of reason for concern in a Republican Washington, which is interested in auditing the Fed, restructuring the Fed, and doing any number of things to the Fed," one banking industry official said. "I think this would be an inopportune time of them to be seen as subverting both the transition process for the administration and the Basel process by rushing out rules that the rest of the world is retreating from."
While Trump's views on bank capital requirements may be hazy, others in his transition team might have more definitive stances. If the Fed were to beat feet to try to get those rules out the door before Trump takes office, that might push the new president to put people in place who, like the EU and Asian countries, are loath to increase capital requirements for banks.
"There's a reason the Basel accords are fracturing in Europe and Asia, and it's because … the finance ministries have concluded that higher capital requirement are hurting their economic growth," the official said. "I wouldn't be surprised if some people in the Trump orbit have a similar belief, or come to have that belief. I would be very surprised if the Fed were unwise enough to rush out rules before the Trump administration comes in. That would probably be a very unwise thing to do in terms of their long-term interests."
Others are not so sure that a Trump administration would be easy on the banking industry. Upon arrival, Trump will have two vacancies to fill on the Fed board, one of whom could also be appointed as vice chairman for supervision — a yet unfilled position created by Dodd-Frank designed to focus a top official on banking supervision. Tarullo, whose term expires in 2022, is also widely expected to resign if and when Trump nominates someone else to that position, which would create a third vacancy within months of the new administration.
Former FDIC Chair Sheila Bair said that Trump could pick someone as vice chairman for supervision who could meet his congressional counterparts' demands for a more hawkish monetary policy on the FOMC and also be tough on Wall Street. FDIC Vice Chairman Thomas Hoenig, current Kansas City Fed President Esther George and Richmond Fed President Jeffrey Lacker would all meet those criteria, she said, and those picks would likely face a relatively easy confirmation.
"I'd love to see a Tom Hoenig, Jeff Lacker, Esther George or some of those regional Fed presidents" take the job, Bair said. "Regional Fed presidents would be good candidates that would get bipartisan support. I could see some common ground."