While Republican lawmakers in Congress gear up for a drive to cut regulation on the financial sector, bankers and lobbyists have their eyes on another institution in the US capital — the Federal Reserve.
On Wednesday Daniel Tarullo, the Fed governor who has been supervising US banks, leaves the institution after eight years during which he assumed a hardline reputation overseeing the rebuilding of US finance from the shattered wreckage of the crash.
For the White House, the power to choose a new regulatory chief at the Fed presents a major opportunity. The Trump administration has vowed to roll back elements of post-crisis regulation, and it sees its power over appointments as a vital tool in reshaping the landscape amid the risk of legislative logjams in Congress.
Banks and their advisers view the Fed reshuffle as being of potentially greater significance than anything that may emanate from Capitol Hill in the near future.
“There’s not much hope for legislation to get through the Senate, and most of the problems are not with the legislation in any event,” said one top bank lobbyist. “More than anything else what the industry wants is sensible appointments to agencies.”
The administration has yet to name a candidate to fill the position of vice-chair for supervision. When the Fed’s new regulatory overlord finally arrives, the critical area lobbyists are watching is how he or she approaches the Fed’s so-called stress tests on major US banks.
The rigour of the stress-testing process has radically driven up standards at large US banks, allowing the likes of Citigroup and Bank of America in theory to weather a crisis worse than the one triggered by the collapse of Lehman Brothers investment bank in 2008.
Yet while some bank chief executives profess to value the exercises — one comparing them to an annual health check-up that ensures cholesterol and blood pressure stay low — others decry their complexity, lack of transparency, and the discretion they confer on the Fed.
“We’re all better off doing more capital planning,” said one chairman and CEO of a big lender. “But the whole process was blown into such an enormous mathematical exercise.”
Jon Faust, a professor at Johns Hopkins University who served as a special adviser to Fed chair Janet Yellen, said the new vice-chair potentially had the power to loosen a regime that has become central to how large financial institutions are regulated. “It would be really easy to allow much greater risk-taking,” he said.
The influence of the Fed’s new regulation chief will be felt over a range of other important initiatives — among them so-called living wills that force banks to set out how they would wind themselves up without burdening taxpayers. Lobbyists are also watching for any changes in how the Fed handles rules on bank liquidity. There is also scope for regulators to ease some of the details of the Volcker rule on proprietary trading without Congress having to act.
However, while the stress tests are the sole prerogative of the Fed, many of these other regulatory battlegrounds involve multiple US regulatory agencies, making reform laborious. And the new governor’s ability to change the regime is hardly unfettered within the Fed, given the central bank’s powers are ultimately overseen by the board of governors including its chair.
One top lobbyist said: “Somebody who expects the next Fed vice-chair to wield the same influence as Tarullo is wrong. I think we’ll see more of a return to collaborative decision-making.”
He predicted there was scope for a more immediate change of approach at the Office of the Comptroller of the Currency, another bank regulator, where the chief is due to step down at the end of the month.
Mr Tarullo’s influence was not only far-reaching at home; the Fed under his watch has been a central voice internationally behind the post-crisis drive for a more shockproof banking sector. Regulators elsewhere are questioning America’s future attitude to big international bodies such as the Basel Committee, given that Mr Trump has shown limited appetite for taking the lead in multilateral institutions.
It is in the realm of international regulatory co-operation that the administration’s anti-regulation ethos may be most quickly felt. Already other regulators have been awaiting clearer direction from the US on the fate of proposed rules that would stop banks from underestimating the riskiness of their assets.
That uncertainty overseas about regulation under Mr Trump is likely to persist for some time. Appointment processes have been glacial across the federal government. Last month one leading candidate for the Fed supervisory role, David Nason, chief executive of GE Energy Financial Services and a former Treasury official, withdrew. Among the current names in the frame is Hal Scott, professor of international financial systems at Harvard Law School.
Even when the new regulation chief finally arrives at the Fed, it will take time for them to establish their influence within the US’s sprawling regulatory arena, at a time when the Fed’s board could see a host of other changes, including the possible replacement of Ms Yellen when her term expires in early 2018.
Mr Faust said: “Daniel Tarullo had wide discretion, but he earned that through the crisis. So it is unclear how much discretion the new vice-chair will have immediately.”
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