President Donald Trump looks set to nominate Randal Quarles to replace the outgoing Daniel Tarullo as the Federal Reserve’s point-man on regulation. Or in this case, deregulation, given the president’s stated intention of doing a “big number” on the Dodd-Frank rules adopted to prevent a repeat of the 2008 financial crisis.
This time, the role will be official: Tarullo, a governor like any other, was never actually nominated to the position of Fed Vice Chair for Regulation, ironically created by the very Dodd-Frank law Trump has vowed to shred. President Barack Obama did not want to waste political capital on a nomination that would likely have faced stiff opposition from Senate Republicans.
Historically, regulators have been relegated to second-class status at a central bank where top officials were always more focused on the mightier subject of monetary policy — the ebb and flow of interest rates. The new, Dodd-Frank empowered role was supposed to change that.
So what do we know about Quarles? He’s about as inside the beltway as it gets. He started his career as a banking lawyer for Davis Polk but, having been an acolyte of President George H. W. Bush, eventually served in the Bush administration on international Treasury matters. He later served under President George W. Bush as Treasury undersecretary for domestic finance, a position he held for about a year. Most recently, Quarles started his own investment firm, The Cynosure Group.
For many years, he worked at the Bush-linked private equity powerhouse Carlyle Group. Quarles will be the second of seven Fed governors to be a veteran of Carlyle Group. Jerome Powell was partner at the firm from 1997 to 2005.
Quarles’ appointment is in line with Trump’s propensity for surrounding himself with Wall Street bankers despite deriding them during the campaign to the delight of his political base. Trump’s top economic advisor is Gary Cohn, former president of too-big-to-fail poster-child Goldman Sachs.
“The Vice Chair for Supervision will help orchestrate a broad deregulatory agenda for the nation’s banks, with a focus on increasing stress test transparency, altering the Volcker Rule, and securing relative regulatory relief for regional/community banks,” write analysts at Compass Point in a research note. “We caution, however, that these changes will be measured in years, not months.”
That could spell trouble for bank stock valuations that have surged on expectations of somewhat higher interest rates accompanied by sharply lower regulations and compliance costs.
Mike Mayo, the prominent independent bank analyst, told Bloomberg TV Quarles’ appointment to the Fed is “the most important regulation banking pick by the Trump administration. It reflects the pendulum swinging from tougher regulation to more neutral regulation at a minimum.”
At a minimum is right. More likely, the directive from the top will be a sweeping overhaul of the post-crisis rules that will face stiff opposition from Democrats, who have been empowered by Trump’s embarrassing loss on healthcare.
Quarles has spoken publicly on Dodd-Frank before. In a 2015 interview with Bloomberg TV, he said repealing the law would be “politically very difficult” but that lawmakers should consider significant alterations.
In the same interview, Quarles hinted that he could have hawkish inclinations on monetary policy, very unlike his predecessor Daniel Tarullo, who tended to favour keeping rates lower for longer. “An important element of Republican thinking about monetary policy currently is that it ought to be more rules based,” he said, referring to monetary policy rules such as the Taylor rule, which if followed strictly would have already guided official rates substantially higher.
Quarles has extensive international policy experience, having represented the United States at major international conferences during his stints at Treasury, and managed crises such as the fallout of the Argentine debt default as undersecretary for international affairs.
Earlier in his career, while at Treasury in 2006, Quarles advised Congress against regulating the hedge fund industry, another frequent target of Trump’s rhetoric during the campaign. Hedge funds led by major banks like BNP Paribas and Goldman Sachs were some of the first to fail during the credit crisis that began in the summer of 2007 and accelerated the following year with the downfall of Bear Stearns and Lehman Brothers.
With Dodd-Frank’s murky future under Trump, Tarullo himself has sounded open to changes toward the end of his term. But he said in a final speech, an inauguration address at Princeton University, that one element of the reforms must not be abdicated.
“As proposals for regulatory change swirl about, it is crucial that the strong capital regime be maintained, especially as it applies to the most systemically important banks,” Tarullo told students but also pleaded with future regulators. It was, in effect, a message to the incoming Quarles, whose nomination is unlikely to face major hurdles in the Senate given his prior government experience.
“Neither regulators nor legislators should agree to changes that would effectively weaken that regime, whether directly or indirectly. It would be tragic if the lessons of the financial crisis were forgotten so quickly,” Tarullo said.
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