What Vartanian as Fed vice chair would mean for bankers

WASHINGTON — The Trump administration is reportedly widening its search for a nominee to head the Federal Reserve’s banking supervisory responsibilities and is considering corporate attorney and Dodd-Frank Act critic Thomas Vartanian for the role.

Vartanian, a former official in the Office of the Comptroller of the Currency in the Reagan administration and partner at Dechert LLP, has hammered the 2010 financial reform law, recently deriding the "regulatory spaghetti" that was created after the 2008 financial crisis.

“It created a regulatory bias against large institutions, an operational obstacle course for community-based institutions, and a regulatory tax on growth. But it failed to provide a vision of how financial services will be permitted to be delivered in this country on a long-term basis,” Vartanian wrote in an op-ed in American Banker just after the election. “Financial executives deserve a clear and consistent picture of government policies so that they can steer a course to profitability."

The Wall Street Journal first reported Monday that Vartanian is being considered as the Fed’s vice chairman of supervision. Vartanian did not immediately respond to a request for comment.

Vartanian is a familiar figure in the banking industry, and frequently weighs in publicly on issues in the editorial pages of American Banker. As a result, if he receives the nomination, his views will be well known compared with other potential candidates, many of whom do not have as extensive a public record.

In a piece published in December, Vartanian suggested that bank supervision has evolved incrementally from a principles-based framework to a more command-and-control rules-based framework. He said a return to a principles-based regime that retains close supervision would be less onerous for both the banks and the regulators alike.

“Given the near permanence of many laws and regulations, and the tendency to solve every past problem with a new law or regulation, the pendulum has swung too far in the direction of a rules-based system,” Vartanian said. “This factor may be contributing to regulatory systems actually being less effective. That is not to say that the system should be entirely principles-based. Principles only work to the extent that entry into the banking business is highly scrutinized, the standards for financial health are closely monitored and breaches of conduct are appropriately enforced and remedied.”

Vartanian also was a critic of the Financial Stability Oversight Council’s process for designating nonbanks as systemically important financial institutions.

In an op-ed published last July, Vartanian said that the debate may seem like “a huge fight between the titans of the financial world and the gods of prudential regulation,” and that the practices that might ultimately emerge from such nonbank regulation will likely trickle down throughout the rest of the financial services sector. For that reason, greater scrutiny must be applied to the FSOC’s exercising of its authority to apply prudential regulation to institutions that do not accept deposit insurance, he said.

“Achieving the right balance between a federal government that affirmatively alters the profile of markets to presumably prevent a crisis, and a government that seeks to monitor risks and be prepared to respond to financial crises is a difficult and challenging one for Congress and regulators,” Vartanian said. “Since Dodd-Frank put these issues on the table, every financial institution, large and small, must participate in the debate since it will determine the climate in which they must draw their operating breaths.”

Vartanian served in the OCC as a special assistant to the senior counsel, and later served at general counsel for the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp. In private practice, he served many top corporate clients — including Bank of America, Wells Fargo and IndyMac, where Treasury Secretary Steven Mnuchin was an executive and which is now OneWest.

Ian Katz, an analyst with Capital Alpha, said that if Vartanian is nominated, Democrats will likely make much of his corporate ties to discredit him. But they tried that method with Jay Clayton, Trump’s pick to head the Securities and Exchange Commission, and it didn’t gain traction. By contrast, Vartanian would likely be popular among Republicans, so his nomination would probably be successful, Katz said.

“Vartanian will be seen as an ardent deregulator and likely receive the full-throated support of Republicans in Congress,” Katz said. “It’s highly unlikely [Democrats] would be able to derail either Clayton or Vartanian, if he’s nominated. Republicans have enough votes to get their men in.”