With or without a permanent Federal Reserve vice chair for supervision, the US banking industry is bracing for an easing of regulations.
But how, when and what gets rolled out, are still open questions.
The vice chair for supervision plays a key role in the bank regulatory landscape, and the position is set to become open with the resignation of Michael Barr, who is slated to leave by Feb. 28 or earlier if someone is confirmed to succeed him. However, Barr will stay on the board, so there will not be a vacancy, which means an existing board member would need to be nominated by the president and confirmed by the Senate as the new vice chair for supervision.
Federal Reserve Board Governor Michelle Bowman, a former state bank commissioner of Kansas who has been outspoken about bank regulation, is considered the likely successor either officially or on a de facto basis. Another mentioned candidate is Fed Board Governor Christopher Waller. President Donald Trump nominated Bowman and Waller to the Fed board during his first term.
Ian Katz, managing director at Capital Alpha Partners LLC, predicts a nomination, probably Bowman, will be made "in the next few weeks," according to a Jan. 27 note.
However, some view that there may be little rush to name a vice chair for supervision. Jeremy Swan, managing principal for the financial sponsors and financial services industry at CohnReznick LLP, said in an interview that many feel filling the role is not a requirement to enact change in regulations.
Leaving the position open would not be unprecedented. During former President Barack Obama's administration, then-Fed Governor Daniel Tarullo was a de facto vice chair for supervision.
A possible approach the Trump administration can take is emphasizing the tailoring of supervision and regulation, not just pursuing deregulation, according to Jason Shafer, of counsel in Paul Hastings LLP's bank regulatory practice. Tailoring means imposing regulations differently based on factors such as a bank's size. This has been done for some regulations, including the Volcker rule revisions in 2019 during Trump's first term.
Either way, banks are hopeful that the administration being led by a member of the Republican Party, which tends to be more business-friendly, will lead to a change in supervision.
"The field examiners have been kind of going a little rogue, and it's causing so much uncertainty in examinations that there needs to be clarity," Kelly Brown, chairman and CEO of Ampersand Inc., said in an interview. "The banking industry is looking for clarity on, 'If we're going to be regulated, and we're following the rules, then when we go through an exam, we expect that if we're following the rules that we're not penalized because somebody is interpreting those rules differently than they're written.'"
Changes from court cases
Some industry participants would like to see the administration pursue deregulation, which could involve issuing new regulations that would essentially undo previous ones. The requirements for issuing regulations are included in the Administrative Procedure Act, and that process can be long and cumbersome, said Ed Mills, a managing director and Washington policy analyst at Raymond James & Associates.
"Courts are a much faster and efficient way of implementing deregulation," Mills said in an interview.
There are many pending court cases related to regulatory actions. For example, bank trade groups sued over the Community Reinvestment Act rules and the Consumer Financial Protection Bureau's open banking rule under Section 1033 of the Dodd-Frank Act.
Alternatively, the court cases could inspire regulators to change their rules, according to Ampersand's Brown.
"Ongoing litigation could prompt the regulatory agencies to revisit and just amend existing rules," said Brown, who said she works with banks and talks with bank CEOs daily.
However, Brown added that while courts can address some of the concern, she wondered how quickly cases could lead to more refined and robust regulations. "I think some of that stuff could also extend the timeline for the finalization," she added.
Potential new rules
Potential changes to the long-term debt rule are something that observers are expecting. Katz of Capital Alpha Partners predicted it will be discarded or significantly changed.
"The long-term debt proposal, released by the three bank regulators in August 2023, was aimed mainly at the large regionals," Katz wrote in the Jan. 27 note. "It will likely be meaningfully changed before being finalized, or dropped altogether. It's hard to know without knowing who will be making the decision, but it's unlikely that the current proposal will be finalized."
Raymond James' Mills also said the long-term debt rule is something he is watching, and he noted that Bowman voted in favor of the issuance of the long-term debt rule proposal. The analyst said that sometimes rules with bipartisan support can still get watered-down in an effort to prevent future administrations from making changes that the current administration would view as less favorable.
"We saw this during the first Trump administration, most notably with the fiduciary rule," Mills said.
Basel III endgame
Swan of CohnReznick predicted that there will probably be a different Basel III endgame proposal, though it is difficult to say what it would look like.
"I think with the priorities of the Fed here, the priorities of the new administration coming in," Swan said, "it's not going to be very high on the priority list, if there's anything that gets done."
However, the whole idea could just go away, according to former Kansas City Fed President Thomas Hoenig, now a distinguished senior fellow at George Mason University's Mercatus Center. Hoenig predicted that Bowman "would let it just atrophy" and did not think other board members would challenge her.
The US can go in its own direction with the Basel III endgame because countries can develop their own rules based on internationally agreed-upon minimum standards.
"Basel sort of is emblematic of everything the incoming administration hates," Lawrence Kaplan, counsel and chair of Paul Hastings LLP's bank regulatory group, said in an interview.
