The White House’s ambition to bring new oversight to the banking industry and reverse Trump-era deregulation was dealt a blow Monday when Sen. Joe Manchin said he would vote "no" on President Biden's nominee for vice chair for supervision of the Federal Reserve.
The nomination of Sarah Bloom Raskin, a former Fed board governor and deputy Treasury secretary, could still overcome the West Virginia Democrat’s dissent if the Biden administration can swing a Republican vote in her favor on the Senate floor. But first she would have to make it through the Senate Banking Committee, which is already at an impasse over her nomination. Republican members have vowed to block Raskin, citing concerns about her past advocacy of using banking policy to address climate change.
The move by Manchin is likely a deathblow to Raskin’s candidacy, according to the policy analytics firm Capital Alpha Partners. “Given that Republicans appear united in their opposition to her, Manchin’s decision is very likely to doom Raskin’s nomination,” Ian Katz, the firm’s managing director, wrote in a report published Monday afternoon.
Katz predicted Raskin will withdraw from the nomination within the next two weeks and the process for filling the vice chair for supervision position will be dragged out for another “several months at the least.”
The delay could pose a serious threat to the Biden administration's bank regulatory agenda. Pressing regulatory matters — including the future of the supplementary leverage ratio, potential changes to bank merger oversight and the implementation of the international regulatory framework known as the Basel III endgame — have already been paused until a vice chair for supervision is confirmed.
Raskin is one of five Biden administration nominees for the Federal Reserve board of governors. Others include Jerome Powell, who has been tapped to remain chair, Lisa Cook, an economics professor at Michigan State University, and Philip Jefferson, a former Fed economist and current administrator at Davidson College. Fed Gov. Lael Brainard has been nominated for the vice chair position, which also requires congressional approval.
After initially boycotting votes on all of the White House’s nominees, Republicans on the Senate Banking Committee have agreed to allow a vote on all but Raskin. Sherrod Brown, the top Democrat on the committee, told reporters Monday he would continue to push for a vote on Raskin and that he believed she still had a viable path to confirmation.
There is nothing statutorily preventing the shorthanded Fed board of governors from tackling key policy issues, said Derek Tang, co-founder of the research group Monetary Policy Advisory. However, he expects them to remain tabled until a new vice chair is in place, pointing to Powell’s politically moderate disposition and the challenges of bringing new leadership into the middle of an ongoing policy change process.
“It's far better for a sitting vice chair for supervision to be spearheading things,” Tang said. “If you think a vice chair for supervision is going to join soon, you're not likely to make big moves, and certainly Powell isn't. Powell is very cautious politically.”
The Fed has been without a vice chair of supervision since the term of Gov. Randal Quarles ended in October. During a Senate Banking Committee hearing in November, Powell said he would respect the right of Quarles's successor to put their stamp on bank supervision, both by introducing new initiatives and weighing in on existing ones.
In the meantime, the committee on supervision and regulation has continued to meet as necessary without a chair. Only issues that have a “broad consensus among the committee members” can be passed along to the full board, according to a Fed statement issued in October.
Policy priorities
New initiatives that would align with the Biden administration’s big-picture objectives, such as accounting for the risks of climate change and addressing racial inequality in the financial system, have been sidelined indefinitely.
Since January, Gov. Michelle Bowman, a Trump appointee, has been the lone member of the supervision and regulatory committee, according to the Fed’s website, following the exit of Brainard from the group. This puts Bowman nominally in charge of the institution’s regulatory agenda, though it is unclear whether she can introduce new initiatives on her own or if the committee must wait until a new vice chair is confirmed.
Either scenario bodes poorly for the Biden administration, said Jeremy Kress, an assistant professor at the University of Michigan and former Fed lawyer.
“The only person now who is running supervision and regulation at the Fed is a Trump appointee,” Kress said. “By not having a confirmed vice chair for supervision, that means that not only are Democrats not going to make progress on regulatory initiatives that need to be a near-term priority, but we could see continued deregulation at the Fed.”
Leaving the vice chair for supervision position open raises questions about the administration of key duties, including the design of stress-testing scenarios, said Kate Judge, a Columbia Law School professor.
“Stress tests are going to be most helpful when they're providing feedback about the ability not to handle just historically possible adverse scenarios, but adverse scenarios the financial system might actually hit,” Judge said. “We're suddenly in the midst of tensions with China that could grow in scope and inflation that we haven't seen in 40 years. So I would like to see a macro scenario that directly flows from possible bad outcomes from the actual challenges that we're facing.”
Stress testing was a major focus for Quarles, who was appointed by former President Donald Trump and whose tenure largely aligned with the administration’s preference for deregulation. Among his biggest achievements was streamlining the stress-testing process to make it less burdensome for large banks. Part of this work was the creation of the stress capital buffer, a capital requirement that the Fed now assigns to each major bank holding company based on its stress-test performance.
Quarles’s approach to deregulation often drew criticism from Democrats and pro-regulatory policymakers, including Brainard, who frequently opposed Quarles's proposals. Kress said he would expect Raskin to undo many Quarles-era changes to stress testing if she were confirmed.
“Because we are now using the stress test to set capital requirements, those have to be strengthened,” he said. “That would be, for a new vice chair for supervision, one of her top priorities.”
Tabled for now
During a November Senate Banking Committee hearing, Sen. Elizabeth Warren pressed Powell on how he would treat a new vice chair for supervision, once one was installed.
Powell said he would respect the position's "legislative grant" to set the regulatory and supervisory agenda, even if he didn’t agree with it. He noted that the vice chair will have to persuade the rest of the board to go along with their objectives, but he maintained that he wouldn’t infringe on that right.
That approach is being applied to some of the board’s top regulatory priorities, too. High on that list is how the supplementary leverage ratio will be handled moving forward.
A key metric for assessing a bank holding company's ability to absorb losses, the supplementary leverage ratio measures how much capital it holds against its investments. At the beginning of the COVID-19 pandemic, the Fed excluded U.S. Treasuries and reserves held at the central bank from the equation — a response to its own asset buying program that caused reserves to swell. This allowed banks to issue more loans without running up against the SLR cap.
The exemption lapsed last year, but the Fed promised to revisit the capital buffer policy to prevent it from becoming a binding constraint. In a press conference last June, Powell said given the expansion of reserves, U.S. Treasuries and other safe assets, the SLR is “ceasing to be the intended backstop for big firms that we want it to be.”
“So we do think it’s appropriate to consider ways to adapt it to this new high-reserves environment, and, and we’re looking hard at the issue,” he added. “We would also, just to be really clear, we will take whatever actions are necessary to assure that any changes we do make or recommend do not erode the overall strength of bank capital requirements.”
Similarly, Powell has signaled the Fed’s intention to work with the Justice Department on revising standards for mergers involving bank holding companies, something the Biden administration called for in an executive order last summer. Unlike the Justice Department, the Fed is not obligated to adhere to such orders from the White House, but Powell said the two entities would “closely coordinate” on the initiative.
“We haven't made any decision to change our merger standards, but we would certainly monitor that carefully,” he said in a July press conference. “And act appropriately.”
The Fed is also due to implement its portion of Basel III early next year. Kress said policymakers still need to make crucial decisions about how that rollout will impact the biggest banks.
“The U.S. banking agencies are going to have to implement the remainder of the Basel III framework,” he said. “There's a big question about whether the agencies do that in a capital neutral way or in a way that increases or decreases banks’ capital cushions.”
Politics at play
Quarles is the only Fed vice chair for supervision to receive congressional approval. The role became a presidentially appointed as part of the Dodd-Frank Act, but was not formally filled during the Obama administration. Instead, Gov. Daniel Tarullo held the position by default. Appointed to the board of governors in 2009, Tarullo chaired the committee on supervision and regulation for four years and led the implementation of Dodd-Frank at the Fed.
Judge of Columbia Law School said the gridlock over Raskin’s appointment is indicative of the politicization that has taken hold of formerly apolitical positions within the regulatory system.
Judge and others regulatory watchers see similarities between Raskin’s nomination process and that of Saule Omarova, the Cornell Law School professor Biden nominated as comptroller of the currency. Omarova, an academic whose writings advocated for a substantial restructuring of the financial system, ended up withdrawing in the face of stout Republican opposition.
Leaving key positions open or occupied by temporary leaders could lead to oversight gaps at a time when the financial system needs stability, Judge said.
“There are a lot of moving pieces right now," from Russia's attack on Ukraine to inflation, she said. “There's too much going on to not have somebody with their finger on the pulse working with other confirmed leaders to understand what's going on in the financial system broadly in terms of long-term stability and emerging risks. That lack of perspective can have costs. It might not manifest immediately, but it has costs.”
Democrats on the Banking Committee have argued that blocking Biden’s nominees is hindering the Fed's ability to address rampant inflation. Yet, with Powell serving as chair pro tempore and three other members in place, the board of governors is still able to adjust its benchmark interest rate, Tang said. The board is widely expected to raise the benchmark rate during this week’s Federal Open Market Committee meeting.
The only thing hampered by the board’s vacancies is its ability to create new regulatory policies, Tang said, adding that Republicans who supported Quarles’s efforts to cut back on regulations want to protect the status quo. To do that, they only need Powell to remain chair. Beyond that, they can roll the dice on keeping the vice chair for supervision seat open until after the midterm elections in November.
“Ultimately, Democrats are going to blink and they're going to let the four nominees go through without Raskin, because time is not on their side,” Tang said. “Republicans already got what they wanted: Powell to be chair instead of anyone else."
