WASHINGTON, Sept 23 Reuters - While the U.S. Federal Reserve's next top regulatory officer is still in the balance, one thing is certain: whoever gets the job will have a jam-packed agenda tackling the gamut, from capital rules and fair lending to digital assets and climate change.
Ron Randal Quarles was appointed by ex-President Donald Trump to the Fed board, with immediate effect in October as the vice chair for supervision - a powerful role overseeing the country's largest lenders. President Joe Biden has yet to answer who would replace him.
Analysts and Washington insiders say the top contender for the role is Lael Brainard, a Fed governor who was a senior Treasury official under President Barack Obama. Other names are floated by Sarah Bloom Raskin, a former Fed governor, Nellie Liang, Acting Comptroller of the Currency Michael Hsu and F.S. Treasury under-secretary Raphael Bostic in Atlanta, GA.
Each had their own opinion on the role and would have to win the backing of the Fed Chair and Board, both of whom are also in the balance, to push through major changes.
Any Democratic pick for the supervision post, whether centrist or progressive, will be expected to chart a new course and tackle a number of looming and in some cases thorny issues, say analysts. The following are the examples of:
Climate change, a top policy priority for Democrats, is expected to rise under new leadership faster in the Fed agenda.
Climate is a key priority here, said Gregg Gelzinis, senior policy analyst at the think tank Center for American Progress. There are some rapid steps the Fed can take soon. So far, Powell has asked lenders to explain how they are mitigating climate change related risks to their balance sheets and Fed has said he was open to some form of climate-focused stress tests.
The big question will be whether Quarles' successor pushes for restrictions or stiffer capital requirements on banks with significant exposures to polluting industries or other climate-specific risks.
The Fed may also sign off on climate risk lending guidance for big lenders which Acting Comptroller Hsu said regulators are working on this month.
Quarles' successor will also have to deal with a regulatory blueprint for fintech companies chipping away at the traditional financial sector.
The Fed is exploring how banks intersect with fintechs, especially with smaller lenders who may outsource more services and infrastructure. The Fintechs are also lobbying the Fed to get access to its payments system.
While other banking regulators have worked for years to bring software companies under the regulatory umbrella, the Fed has resisted, fearing doing so could create systemic risks. But the Fed is expected to act as the sector continues to balloon.
They can't just talk about the promise of Fintech, but they should also look closely at the risks, said Tim Clark, a former Fed official who now works for the advocacy group Better Markets.
In a related front, the Fed is currently studying the implications of a digital currency by the Central Bank. With studies of the Fed Board and Federal Reserve Bank of Boston expected out in the coming weeks, the central bank is trying to weigh the risks and advantages of such a product that could expand the Fed's reach and help speed money transfers.
Democrats are also expected to review Quarles for editing rules introduced after the 2008 financial crisis ; his successor is expected to review his work. Banks' annual stress check health checks are likely to be on the top list.
Quarles tried to make the tests more transparent and predictable for banks, including blocking a subjective objection that enabled the Fed to flunk lenders on qualitative grounds. Democrats say that under Quarles the tests became too easy.
An analyst at Cowen Washington Research Group wrote this month that testing changes would likely happen in 2023 and could include directing banks to reserve eight quarters of expected dividends, instead of the current four and potentially reviving the qualitative objection.
Another issue on the table is the supplementary leverage ratio, a rule created after the decade-long crisis requiring banks to hold capital against assets regardless of their risk.
The Fed had to temporarily ease this rule in the middle of the pandemic as a glut of bank deposits and Treasury bonds drove up capital requirements on what are viewed as safe assets.
Despite the relentless bank lobbying, the Fed announced in March that relief could expire, but made it its attempt to review the standard rule. The Fed has yet to publish a proposal, leaving the job up to Quarles' successor.
The Central Bank will also play a key role in a long-anticipated revamp of the Community Reinvestment Act rules which promote lending in low-income communities. The Fed, which shares responsibility for writing the rules with other regulators, hopes the rules can be revised to reflect the growth in online banking, while still ensuring that lenders make meaningful contributions to the poorer areas they serve.
Efforts to update the rules under Trump administration failed after regulators could not agree on a path forward.
Lastly, the Fed still has to finalize international capital rules dictated by Basel III agreement. Many bank executives expect the new board to deal with that quickly. While the Fed in Quarles has said the main objective is to ratchet up total capital requirements flat, a Democratic replacement may try to keep overall capital requirements clean.