President expected to nominate Jerome Powell to succeed Janet Yellen as Federal Reserve chair

Financial Services Regulatory Alert

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White House sources have indicated that President Donald Trump will nominate Federal Reserve Governor Jerome Powell to succeed Janet Yellen as chair of the Federal Reserve, subject to Senate confirmation. Yellen's four-year term expires in February 2018.

If confirmed, Powell would be the first Fed chair without a PhD in economics since 1979.

Financial markets are expected to react positively, or at least calmly, to Powell's nomination. Analysts have described him as a "safe bet" who would not diverge significantly from current Fed monetary policy, especially with respect to very measured interest rate increases and a gradual unwinding of quantitative easing.

With regard to regulatory reform, Powell's expected nomination and confirmation, in conjunction with the recent confirmation of Randy Quarles as the Fed vice chair for supervision, provides a high degree of certainty that the Fed will be supportive of meaningful reform within the existing regulatory structure − but will not seek, and would likely not be supportive of, dramatic alterations to that structure, such as a complete repeal of the Dodd Frank Act, the Volcker Rule or the CFPB.

Powell and Quarles were partners together at the Carlyle Group and are expected to work well together. They are also both pragmatic individuals with prior government service who fully appreciate how dangerous the 2008 financial crisis was, how much stronger the financial system is now as a result of post-crisis legislation and regulation, and how politically difficult it would be to dramatically alter the legislative and regulatory structure that was put in place to prevent a repeat of 2008.

That said, both Powell and Quarles have publicly expressed strong convictions that multiple aspects of the existing regulatory structure were overreactions to the crisis, are overly burdensome and could be relaxed and/or streamlined without endangering financial stability.

More specifically, a review of speeches and testimony by Powell and Quarles indicates that some of the particular reforms they are likely to be supportive of include:

  • Increasing the $50 billion threshold that triggers the application of enhanced prudential standards (including the "living will" requirement) under Dodd Frank.
  • Increasing the $10 billion threshold that triggers company-run stress tests and risk committee requirements.
  • Extending the cycle for "living will" submissions from annually to every two years or longer depending on institutional size and risk.
  • Greater transparency around the models the Fed uses in the CCAR process.
  • Possibly removing the qualitative objection from CCAR for those firms that achieve and sustain high-quality capital planning capabilities.
  • Revisiting some particularly controversial CCAR assumptions regarding balance sheet and capital distributions (such as the current assumptions that firms would continue to both increase their balance sheets and pay dividends even when they are under stress).
  • Reducing the Volcker Rule's compliance burden by, among other things, eliminating the rebuttable presumption that assets held for 60 days or less constitute proprietary investments, expanding the market making exemption, reducing the amount of documentation and analysis required to justify hedging transactions, and exempting from the rule in its entirety banking organizations with $10 billion or less in total consolidated assets.
  • Recalibrating the enhanced supplementary leverage ratio, including the possibility of removing off-balance sheet assets from the calculation (which would be a huge win for the custody banks).
  • Recalibrating the minimum long term debt ratio in the final Total Loss Absorbing Capital (TLAC) Rule.
  • Recalibrating the Fundamental Review of the Trading Book, which is currently expected to increase capital requirements by as much as 20 percent.

Importantly, it is possible that a Powell / Quarles combination may lead to a slight moderation in the number of adverse Fed exam findings (matters requiring attention and matters requiring immediate attention) and perhaps even of enforcement actions. Fed field staff were aware that Governor Daniel Tarullo, who was previously responsible for supervisory matters, generally interpreted MRAs / MRIAs and enforcement actions as positive indications that the field staff was being appropriately aggressive and had not been subject to "regulatory capture" by the banks. It is possible that Governor Quarles in particular may bring a more discriminating eye to MRAs/MRIAs and enforcement actions to confirm that they are serving a constructive purpose and are not being generated by the field staff just to demonstrate that they have not been captured by the institutions they supervise.

Powell appeared to have the strong backing of Treasury Secretary Steven Mnuchin, who led the search for a new Fed chair and has indicated that he believes he could work well with Powell. Powell and Mnuchin are thought to have collaborated on "A Financial System that Creates Economic Opportunities: Banks and Credit Unions," the Treasury report that was issued in June, and Powell is presumably supportive of much of that report.

Powell's confirmation by the Senate is virtually certain. While some Republicans have previously criticized Powell for being too "dovish" on monetary policy and not sufficiently aggressive about regulatory reform, Trump's support and Powell's credentials as a Republican with private sector experience make it unlikely that many, if any, Republican senators will actually oppose his nomination. Likewise, Powell's record of consistently voting with Yellen on monetary policy and regulatory matters will likely play well (or at least well enough) with Democrats.

Learn more about the ramifications of this appointment and about developments within the Fed by contacting the author.