Under Powell, Wall Street expects wins on regulation
In Jerome Powell, banks won’t get a Federal Reserve chairman who is hell-bent on ripping up financial rules. But in some ways, that’s better for Wall Street.
With a resume steeped in industry experience and long-standing relationships with financial executives, Powell is expected to take a measured approach to rolling back regulations adopted in the wake of the 2008 economic crisis. He’s seen as a practical, not ideological, watchdog who will be able to get things done.
That gibes with what big banks have long expected from President Donald Trump’s presidency. They want the Fed and other agencies to take the lead in easing post-crisis constraints, particularly because the Republican-controlled Congress has made little headway dismantling the Dodd-Frank Act.
“For Wall Street, Powell is a solid choice,” said Ian Katz, an analyst with Capital Alpha Partners in Washington. “He supports deregulation but not to an extreme. He’s a known quantity and he’s regarded as a thoughtful consensus-seeker. The finance industry views him as safer choice than someone who would want to blow up the place and scrap all the Dodd-Frank rules.”
While Powell’s views on bank oversight are important, they will take a back seat to his duties steering the U.S. economy. He is likely to support the Fed governor responsible for bank oversight, Randal Quarles, an old friend with a similar outlook.
Since joining the Fed board in 2012, Powell, 64, has backed a number of new regulations, even as he sometimes questioned their potential impact on lending and other bank activities. A central theme in his speeches has been that the government should “protect these core reforms,” while making adjustments rather than major changes. He reiterated those views after Trump nominated him Thursday.
“Our financial system is without doubt far stronger and more resilient than it was before the crisis,” Powell said from the White House Rose Garden. “Our banks have much higher capital and liquidity, are more aware of the risks they run, and are better able to manage those risks.”
Powell’s comfort with bank rules prompted some conservative aides in the Trump administration to oppose his candidacy, according to people with knowledge of the matter. In recent weeks, a few GOP lawmakers had also raised concerns to White House officials about Powell’s commitment to deregulation, said people familiar with the overtures.
But megabanks, including Goldman Sachs Group Inc., made clear they would support Powell’s selection, according to people familiar with their thinking.
In some ways, Wall Street sees Powell as the best of both worlds: he will continue Janet Yellen’s low-interest rate monetary policy, while going further than she would in watering down burdens such as the Volcker Rule and bank stress tests. Big banks have already spent billions of dollars to comply with Dodd-Frank, so they prefer regulators who will tweak regulations instead of killing them.
On Thursday, before Powell was officially nominated, Goldman Chief Executive Officer Lloyd Blankfein said he was “not one bit disappointed” in the pick.
If confirmed by the Senate, Powell would be able to exert as much influence over rules as he wants, though chairmen often delegate bank oversight. When Ben Bernanke and then Yellen led the Fed, they allowed former governor Daniel Tarullo to set the agenda.
Powell, a former investment banker and executive at private-equity firm the Carlyle Group LP, is likely to do the same with Quarles, who the Senate confirmed earlier this month as Fed vice chairman of supervision. The two worked together at the Treasury Department in the 1990s, and each had stints at Carlyle. They’re seen as reasonable and careful — not the kind of turbulent officials the administration has put in other key roles.
The two men’s willingness to recast bank rules broadly corresponds with the Trump administration goal of cutting back government red tape. And the Fed has already begun dialing back some of the major demands it placed on Wall Street after the crisis.
For instance, the yearly stress tests meant to assess whether banks can endure sustained economic slumps are getting easier to stomach. Another annual Dodd-Frank requirement, that lenders submit “living wills” outlining how they could be dismantled in a failure, is moving toward a less-frequent schedule. And the Fed has become increasingly clear in its view that regulations for smaller banks should be cut back.
Additional targets for Powell and Quarles, 60, might include softening Fed scrutiny of bank directors, revising a key rule on leverage to free up firms’ capital and relaxing Volcker Rule restrictions on lenders making speculative bets with their own money.
On a separate issue, overhauling the mortgage-finance market, Powell has said that more could be done by the government to promote competition for Fannie Mae and Freddie Mac. In a July speech, Powell said that the Fannie-Freddie duopoly was akin to having only two banks that offered federal deposit insurance. The Fed has no direct role in overseeing the companies, but it does own about $1.8 trillion of securities tied to home loans.