WASHINGTON — The next president could significantly reshape the regulation of financial services with a single appointment: the Federal Reserve's vice chairman for supervision.
The post was created by the Dodd-Frank Act but never filled, giving the winner of this year's presidential election a huge opportunity to define the role. Exactly how much power that job has is unclear and in part may depend on how much leeway the eventual vice chair is afforded by Fed Chairman Janet Yellen.
"Because of the ambiguity of the way it's structured in the statute, it really does heavily depend on the two personalities that are there as chair and vice chair," said Mark Calabria, director of financial regulation studies at the Cato Institute. "A different chair and vice chair could operate very, very differently."
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The job was created by the financial reform law in order to shepherd the additional regulatory and supervisory requirements outlined in the law. But the White House chose not to select a nominee, instead leaving the job for Gov. Daniel Tarullo — who heads the Federal Reserve Board's supervisory committee — to fill on a de facto basis.
Tarullo and Yellen have what appears to be an implicit but stable arrangement regarding their spheres of influence — Yellen is the public face of the Fed's monetary policy and Tarullo acts as the public face of the Fed's regulatory policy, and neither gets in each other's way.
Yellen said during testimony before the House Financial Services Committee in November that Tarullo was doing an "outstanding job" heading the board's banking supervision committee, but she was quick to push back on assertions that he was acting as vice chairman for supervision.
"I guess I wouldn't call it an acting position," Yellen said, responding to a question from Rep. Steve Stivers, R-Ohio. "We have a committee system in which up to three governors oversee particular functions that we carry out. Supervision is one of those functions."
The Federal Reserve Board is governed somewhat differently than other federal agencies, in that it exhibits less of a top-down organizational model than a "council of elders" style. The chair directs staff and is the head of the agency, but he or she also only has one vote along with other members of the board. Different chairs manage this structure in different ways. Yellen has done so by delegating and building consensus, but Alan Greenspan — who headed the central bank from 1987 until 2006 — was widely seen as having a more hands-on approach.
Aaron Klein, policy director of the Initiative on Business and Public Policy at the Brookings Institution, said a prime example of that kind of hands-on intervention is when Greenspan
"It was one of the most consequential errors of the Federal Reserve in the last 30 years," Klein said.
Brian Gardner, managing director at Keefe, Bruyette & Woods, said those personality conflicts and convergences on the Fed board are a feature, not a bug. Fed governors are supposed to be free to act independently — even independently of the administration that may have elevated them to the post.
"Even if they're both nominated by the same president, it doesn't mean they work well together, it doesn't mean they see eye to eye on everything, there could be personality conflicts," Gardner said. "I don't think we have a lot of good answers going forward on how this is all going to work."
Gardner added that this may particularly come into play when it comes to Fed staff personnel. The power to hire and fire staff lies with the Fed chair, but if a future vice chairman of supervision wants to replace existing staff with their own people, some of that power may shift, with broad and significant consequences.
"I think that is actually one of the more underappreciated aspects of the job," Gardner said. "Who is going to be holding key spots within the Department of Supervision at the Fed? Would the first vice chairman start moving people around, bring in [his or her] own people? We just don't know."
Calabria said that future Fed chairs could conceivably be more in Greenspan's mold and might exert their power more directly. If combined with a weaker or ideologically identical vice chair for supervision, more of the power could roll back to the chair, he said.
"If we had another Greenspan-type character who wanted to be more controlling, you could see that," Calabria said. "If you had someone who was a more dominant chair and someone who is relatively unknown as the vice chair for supervision, you could see a lot of that power moving back to the chair."
But Klein said that is precisely the effect that the position was created to prevent. Dodd-Frank sought to ensure that the regulatory failings that led to the crisis were not repeated, and the Fed kept a sizable portion of its attention on regulatory issues, he said.
"That experience [of the crisis] is scarred in the minds of those who lived through it, but like all memories it will fade," Klein said. "Dodd-Frank established a vice chairman for supervision and regulation to elevate the importance and profile of regulation at the Federal Reserve for all time. It is of critical importance that the next president nominate somebody to fill that position and Congress act on that nomination."
Whether that will happen or not is anyone's guess. Both Tarullo and Yellen have directed questions about the vacancy to the White House, which did not respond to a request for comment. None of the three active presidential campaigns responded to questions for comment.
Whether there is an appointment at all also may depend on the outcome of the election. Presumptive Republican nominee Donald Trump has said he would replace Yellen as chairman, and it would stand to reason that he might end Tarullo's tenure as de facto regulatory policy leader as well by appointing someone else as vice chairman for supervision.
But Karen Shaw Petrou, managing partner at Federal Financial Analytics, said Clinton could allow Tarullo and Yellen to keep the current working arrangement.
"If it's Clinton, and Tarullo wants things the way they are, things will stay the way they are," Petrou said.
Calabria said the question rests not only with the outcome of who wins the presidency but also whether Democrats or Republicans emerge with control of the Senate. If Democrats win both, Tarullo will likely be elevated to vice chair because there would be little reason not to, he said.
Since the passage of Dodd-Frank, Democrats have had either only a slight edge in the Senate — dependent on not-always-reliable conservative Democrats from conservative states — or have been in the minority. Sending the nomination up only to fail is a fight the White House likely chose not to pick, he said.
"The worst-case scenario from the Fed's perspective, from Tarullo's perspective, is that they send up his nomination and it gets voted down," Calabria said. "How do you continue to do the job in an acting capacity after you've been rejected? And even if you can get to 60 votes, what kind of promises do you have to make?"
