FED PICKS LEAVE OPEN QUESTION ON HOW CENTRAL BANK WILL REGULATE WALL STREET / THE WALL STREET JOURNAL

Fed Picks Leave Open Questions on How Central Bank Will Regulate Wall Street

Renominated Chairman Jerome Powell says he will defer to President Biden’s forthcoming nominee on financial regulation

By Andrew Ackerman and Orla McCaffrey

Under Federal Reserve Chairman Jerome Powell, the central bank has eased some bank regulations enacted after the 2008-09 financial crisis. / PHOTO: TOM WILLIAMS/ZUMA PRESS

WASHINGTON—President Biden’s decision to reappoint Jerome Powell as Federal Reserve chairman and elevate governor Lael Brainard signals continuity on monetary policy but leaves open questions on the direction the central bank will take in regulating Wall Street.

The extent to which the Fed will spend the next several years tightening regulatory policy—after easing rules under Trump-appointed officials—will depend on whom Mr. Biden ultimately picks to succeed Randal Quarles, the departing central bank governor who served as its regulatory point man until last month.

Mr. Powell has said he would defer to whoever fills that role in setting the central bank’s approach to regulation. 

Mr. Biden said on Monday that he would soon nominate a new supervisory chief.

“I respect that that’s the person who will set the regulatory agenda going forward,” Mr. Powell told reporters in September. 

“It’s fully appropriate to look at—for a new person to come in and look at the current state of regulation and supervision and suggest appropriate changes.”

Departing governor Randal Quarles served as the Fed’s regulatory point man until last month. / PHOTO: KYLE GRILLOT/BLOOMBERG NEWS

During Mr. Powell’s nearly four years as head of the Fed, the central bank has revamped big-bank stress tests, including eliminating pass-fail grades, tailored its rules for U.S. lenders based on their size, and simplified key postcrisis regulations such as the Volcker rule prohibition on proprietary trading.

Mr. Powell and supporters of those changes have referred to them as a tailoring of complex rules. 

Some Democratic critics say that the changes, while each modest individually, have in their totality substantially weakened the original overhauls.

Ms. Brainard, an important ally of Mr. Powell on monetary policy, has regularly dissented from his decisions to ease bank regulations enacted after the 2008-09 financial crisis. 

Ms. Brainard has said generally that the Fed’s moves to soften regulations have gone too far. 

If confirmed as vice chairman of the Fed board, Ms. Brainard would have a vote on regulatory matters before the central bank but wouldn’t set its regulatory agenda.

Industry officials welcomed Monday’s Fed nominations.

“We expect regulators will continue to hold the largest banks to the high regulatory and supervisory standards that have remained in place to support a resilient and essential part of the U.S. financial system,” Kevin Fromer, chief executive officer of the Financial Services Forum, which represents the largest U.S. banks, said in a written statement.

In addition to the Fed vacancies, several top financial posts remain unfilled. 

These include vice chairman at the Federal Deposit Insurance Corp. and a full-time director for the Federal Housing Finance Agency, which oversees government-controlled mortgage giants Fannie Mae and Freddie Mac.

Saule Omarova, Mr. Biden’s nominee to head the Office of the Comptroller of the Currency, which oversees national banks, faced bipartisan skepticism at a hearing last week and faces an uncertain path to confirmation. 

Another nominee, Rostin Behnam, is awaiting confirmation to head the Commodity Futures Trading Commission, the top U.S. derivatives overseer. 

Mr. Behnam currently serves as the CFTC’s acting chairman.

Gary Gensler, who as Mr. Biden’s Securities and Exchange Commission chairman has outlined an aggressive agenda that threatens to squeeze the financial industry’s profit margins, was confirmed in April. 

Rohit Chopra, a former adviser to Sen. Elizabeth Warren (D., Mass.) and Mr. Biden’s pick to head the Consumer Financial Protection Agency, was confirmed Sept. 30.

If Mr. Powell and Ms. Brainard win Senate approval for their posts, three openings would remain on the Fed’s seven member board: the position of vice chairman for supervision and two separate governors’ seats.

Lael Brainard, who was nominated as Fed vice chairman on Monday, has regularly dissented from Mr. Powell’s decisions to ease bank regulations. / PHOTO: AL DRAGO/BLOOMBERG NEWS

The Fed’s recomposed board will be tasked with approving or denying a bevy of bank deals announced over the past year. 

Bank mergers and acquisitions are on pace in 2021 for their biggest year since at least 2008, when some large banks were forced to sell in the face of collapse.

The vice chairman for supervision could spearhead a review of the central bank’s framework for reviewing bank deals. 

That approach is more likely if the nominee shares Ms. Brainard’s view that the Fed should more closely scrutinize bank mergers.

“The Fed probably just won’t be in a huge rush to approve mergers until the new nominees get settled and kind of develop a strategy on what they want to do on bank mergers,” said Jeremy Kress, an assistant professor of business law at the University of Michigan who researches financial regulation.

Mr. Biden in July issued an executive order asking bank regulators and the Justice Department to deliver “more robust scrutiny” of bank deals.

Also on the Fed’s regulatory agenda is what steps should be taken to address financial risks posed by climate change, the level of regulation needed around cryptocurrencies and how banks should treat Treasurys and deposits they hold at the central bank.