WASHINGTON — With Gov. Randal Quarles no longer serving as the Federal Reserve Board's head of bank supervision, regulatory matters have been effectively sidelined until the Biden administration fills key leadership posts at the central bank, experts say.
In addition to his role as a Fed governor, Quarles was confirmed by the Senate in 2017 to the newly created post of vice chair for supervision, but his term ended Wednesday and the administration has yet to name a successor.
That could set up gridlock on bank regulatory matters. Up to now, Quarles chaired the Fed's powerful internal committee dealing with supervision, of which Govs. Lael Brainard and Michelle Bowman are also members. But a Fed spokesperson
“It will be very hard to make any major changes to regulatory policy, because Quarles is probably not enthusiastic about any single action that Brainard wants to take and vice versa, and probably Bowman is somewhere in the middle,” said Robert Perli, head of global policy at Cornerstone Macro and a former Fed staffer.
The committee will decide what issues to bring to the Fed board's attention if there is consensus among the members, the Fed said.
But such consensus will likely be hard to come by, especially on matters such as stress tests and capital requirements. Brainard, rumored to be a potential Biden pick for vice chair for supervision or even to succeed Jerome Powell as Fed chair, has dissented from many decisions spearheaded by Quarles. Those include reducing the frequency of large-bank resolution plans and revising the Volcker Rule to allow venture capital investments.
Any gridlock could mean a pause in the Fed’s consideration of permanent changes to the supplementary leverage ratio — a rigorous capital measure for the largest banks — to account for dramatic deposit growth and how to implement so-called Basel III endgame capital rules. It could also stall the Fed's bank merger approval process.
Adding to the uncertainty is Powell's term as Fed chair expires in February. The administration will be confronted with a difficult choice whether to reappoint him or bow to pressure from progressives who want a new Fed chair.
“When you look at the matters that are on the board's regulatory agenda, things like reforming the supplementary leverage ratio, or finally completing the Basel III endgame, those matters are unlikely to happen while we still have uncertainty about who the Fed chair is going to be and who the vice chair for supervision is going to be,” said Jeremy Kress, a business law professor at the University of Michigan and a former Fed attorney.
To be sure, much of the Fed’s work will continue moving forward, including its monetary policy work, oversight of the payments rails and a much-anticipated report on digital assets.
But some of the more hot-button issues could be delayed until a permanent vice chair for supervision and chair of the Fed are confirmed, said Karen Petrou, managing partner at Federal Financial Analytics.
“There has been a de facto moratorium on anything controversial during the increasingly lengthy and parlous uncertainty over Powell’s renomination, and that's not going to change until there is certainty over both the nomination and, depending on how that goes, confirmation,” said Petrou.
For progressives, Quarles’ departure from the role of vice chair is a positive development to the extent it will prevent the Fed from pursuing further deregulation — a hallmark of the Trump era. Still, Quarles's term as a Fed governor lasts until 2032, meaning he could be sticking around for a while.
“The head of the supervision and regulation committee at the Fed directs the supervision and regulation staff and tells them what to work on, or what not to work on,” said Todd Phillips, director of financial regulation and corporate governance at the Center for American Progress. “Having Quarles not there, and not telling the staff, ‘pencils up’ on a deregulatory rule, in my book, is a plus.”
If President Biden wanted to appoint a sitting Fed governor such as Brainard as the new vice chair of supervision, the designation would still require Senate confirmation. Alternatively, Biden could nominate a new member of the Fed board to fill a vacant seat and submit that person's name to the Senate as the vice chair of supervision.
Quarles, appointed in 2017 by former President Donald Trump, was the Fed's first vice chair of supervision after the position was created by the 2010 Dodd-Frank Act. During the Obama administration, former Fed Gov. Daniel Tarullo effectively oversaw supervisory matters as the chair of the Fed’s committee on supervision and regulation.
Senate Banking Committee Chairman Sherrod Brown — whose support will be important for any Fed chair and vice chair for supervision nominees in order to receive confirmation — urged the agency this week to delay important decisions until key leadership posts are filled.
In a letter addressed to Powell, the Ohio Democrat requested that the board “cease any further deregulatory actions” until the Biden administration has named candidates for the open roles at the Fed and Congress has had the opportunity to examine their nominations.
In addition to vice chair for supervision and the position of Fed chair, there is also
“A new direction for financial regulation must be determined by whomever the President chooses, and Congress confirms, to critical leadership positions on the Board,” Brown said.
Few have any expectation that the Fed will weigh in on politically charged questions in financial regulation in the absence of White House nominations.
“The Fed is functioning,” Petrou said. “It's just not touching anything that would influence political perception of the chairman and the nomination at this very delicate moment.”
But financial reform advocates say prolonged stasis from the Fed will translate to wasted time as the Biden administration approaches its second year in power. Plus, the midterm elections next year could bring a divided government back to Washington, which would complicate the future of any Biden nominees in Congress.
“There's no better day to nominate a vice chair of supervision than today,” said Phillips.
Others point out that hot-button issues are exactly what left-leaning advocates are most eager for policymakers to address.
“We've assured that there's not going to be significant additional deregulation, but that's not the goal, right?” said Kress. “The goal is to undo the harmful stuff that Randy Quarles did, and to affirmatively address some emerging risks that the board has been ignoring, like climate, like stress tests, like nonbanks and cryptocurrencies.”
Ultimately, the move to run the Fed's supervision and regulation committee by consensus, without a chair, could be short-lived so long as Biden nominates a full slate of Fed nominees soon.
“I don't think this decision affects a lot of things, assuming in a few months, we'll have a permanent vice chair" of supervision,” said Perli.
The question of whether Powell will be renominated continues to dominate broader debates around financial policy under Biden.
"It's pretty clear that the Fed chair nomination is driving the timeline, and the administration doesn't want to fill any of the vacancies until it's sure about who it wants to fill all of the vacancies,” Kress said. “And I think it's unfortunate if that means that we are sacrificing the regulatory agenda in the near term."
