By Pete Schroeder
WASHINGTON (Reuters) – Republicans’ Tuesday boycott of a vote to advance the nomination of Sarah Bloom Raskin as the Federal Reserve’s Wall Street cop will further delay regulatory changes which have been in limbo since Randal Quarles stepped down as Vice Chair for Supervision in October.
While Fed staff are able to work on some measures in the background, Raskin would need to sign off on any major policy decisions. Here are some key ones likely to be affected:
DE-REGULATION REDUX?
Over the past four years, Quarles led a review of regulations introduced following the 2007-2009 global financial crisis, arguing they were too blunt and onerous. Democrats accused Quarles of saving Wall Street billions of dollars while increasing systemic risks and want Raskin to revisit some of those changes.
Among the most contentious were revisions to the “Volcker Rule” curbing speculative bank investments; scrapping a requirement for big banks to hold capital against certain swap trades; and stripping the Fed of its power to fail banks on their annual “stress tests” based on subjective concerns.
Raskin would have to pick which of these to address. Even without the nomination delay, the process of overhauling many of these rules was expected to be extremely time-consuming.
CLIMATE CHANGE RISKS
Climate change, a top policy priority for Democrats, is expected to rapidly rise on the Fed agenda under new leadership.
So far, the Fed has asked lenders to explain how they are mitigating climate change-related risks to their balance sheets, with the industry expecting to progress to a formal climate change scenario analysis in 2023, Reuters has reported.
Those projects are expected to accelerate. The big question will be whether Raskin pushes for restrictions or stiffer capital requirements on banks with significant exposures to polluting industries or other climate-specific risks.
Raskin may have to tread more carefully than progressives had hoped given Republicans have cited her stance on climate change as one of the reasons for opposing her appointment.
BANK M&A
The delay in nominating Raskin may compound a logjam in approving bank tie-ups that had slowed during the past six months due to uncertainty over Fed personnel changes.
Some pending deals were approved following Fed Chair Jerome Powell’s renomination, but the industry is still waiting for the Fed and the Justice Department to decide on a potential new policy for bank deals. Raskin is expected to lead the committee that scrutinizes potential tie-ups, suggesting any new merger policy may also need her backing.
Without that certainty, bankers and lawyers have said they would be reluctant to pursue new tie-ups.
FINTECH FRAMEWORK
She will also have to tackle a regulatory blueprint for “fintech” companies that are quickly chipping away at the traditional financial sector.
The Fed is exploring how banks intersect with fintechs, particularly with smaller lenders that may outsource more services and infrastructure. Fintechs are also lobbying the Fed for access to its payments system.
While other banking regulators have worked for years to bring fintechs under their regulatory umbrella, the Fed has resisted, fearing doing so could create systemic risks. But as the sector continues to balloon, the Fed is expected to act.
The controversy over Raskin’s role in helping fintech Reserve Trust gain access to a key Fed service could also complicate that process.
SUPPLEMENTARY LEVERAGE RATIO
Another issue on the table is the supplementary leverage ratio, a rule created after the decade-ago crisis requiring banks to hold capital against assets regardless of their risk.
The Fed had to temporarily ease that rule in the midst of the pandemic as a glut of bank deposits and Treasury bonds drove up capital requirements on what are viewed as safe assets.
Despite intense bank lobbying, the Fed let that relief expire last year but promised to review the overall rule. The Fed has yet to publish a proposal, leaving the job up to Raskin.
COMMUNITY REINVESTMENT ACT
The central bank will also play a key role in a long-awaited overhaul of the Community Reinvestment Act (CRA) rules which promote lending in lower-income communities.
The Fed, which shares responsibility for writing the rules with other bank regulators, hopes the CRA can be updated to reflect the growth in online banking, while still ensuring lenders make meaningful contributions to the poorer areas they serve.
Raskin would likely have to be in place before the Fed could sign off on the changes.
(Additional reporting by David French; Editing by Michelle Price and Andrea Ricci)
