Attention has turned to President Joe Biden's choice to regulate the country's bank holding companies after he reappointed Chair Jerome Powell to his post and tapped Fed Governor Lael Brainard to be vice chair.
It is one of three remaining Fed appointments, and the White House said Biden will announce them starting early this month. Fed watchers are discussing several candidates to replace the former vice chair for supervision, Randal Quarles, whose term ended Oct. 13. The nominee is likely to be on the progressive side, they said.
Biden is likely to appoint an advocate for stricter regulation of banks, said David Wessel, senior fellow in economic studies at The Brookings Institution and director of the Hutchins Center on Fiscal and Monetary Policy. Brainard, who is perceived as tough on bank regulation, will back up the vice chair for supervision, so even though she was not chosen for that role, "the banks shouldn't be breathing a sigh of relief," Wessel added.
"The banks are not going to be happy with whoever it is that Biden appoints," Wessel said. "The double whammy of Lael Brainard and whoever the vice chair for supervision is will provide much tougher regulation and oversight of the banks than we got from Randy Quarles."
Of the potential candidates, no one is a "clear front-runner," but it is expected to be a progressive or aggressive pick, Edward Mills, a managing director and Washington policy analyst at Raymond James & Associates Inc., wrote in a note to clients.
The candidates
The White House is considering former Consumer Financial Protection Bureau Director Richard Cordray, according to The Wall Street Journal.
Cordray might be "a natural choice" given his prior role, said Derek Tang, an economist at Monetary Policy Analytics.
"But his experience in consumer protection might not translate perfectly to the VC Supervision role though," Tang wrote in an email. "The Fed is much heavier on bank oversight and monitoring of the financial system as a whole."
If confirmed, the Senate vote would likely be along party lines, according to notes by Mills and Ian Katz, managing director at Capital Alpha Partners LLC.
Given that the Biden administration wants to ensure financial market stability following the recent turmoil brought about by the COVID-19 pandemic, "it would behoove leadership to continue to keep sort of known variables in the mix," Lindsey Piegza, chief economist at Stifel Financial Corp., said in an interview.
Politically, a "better and smoother choice" than Cordray would be former Fed Governor Sarah Bloom Raskin, Piegza said. Raskin, a professor at Duke University School of Law and former commissioner of financial regulation for the state of Maryland, might be the most likely choice, partially because adding a woman will help with diversity, the lack of which is an ongoing progressive criticism of the central bank, she added.
Biden "is committed to improving the diversity in the Board's composition," the White House said in a statement Nov. 22.
Atlanta Fed President Raphael Bostic is another possibility. He received an award for his work on the Community Reinvestment Act when he was a member of the Federal Reserve Board of Governors staff. He is also the first Black and first openly gay Fed president.
Other possibilities that analysts have mentioned are Lisa Cook, an economist who teaches at Michigan State University; acting Comptroller of the Currency Michael Hsu; and Morgan Stanley Global Chief Economist Seth Carpenter, who also previously worked at the Fed.
"They all seem reasonable choices to me," Wessel said, after naming Hsu and Raskin.
Chief Economist to the AFL-CIO William Spriggs, Council of Economic Advisers Chair Cecilia Rouse, and Valerie Wilson, an economist and director at the Economic Policy Institute, are other possibilities Tang mentioned. He said Spriggs has "superbly" represented the labor union sector, which separates him from other candidates who have worked in government or academia. Wilson's research focus has been on economic inequality.
A White House spokesperson declined to comment on candidates and did not update the president's timeline for making announcements. A Fed spokesperson declined to comment.
Divisive regulatory issues
Former Vice Chair for Supervision Randal Quarles took some regulatory actions that progressives strongly disagreed with, Tang said. One was easing regulations from the Dodd-Frank Wall Street Reform and Consumer Protection Act like the Volcker rule, which prohibits banks from engaging in proprietary trading.
Another was failing to activate the countercyclical capital buffer, which would raise banks' capital requirements during economic expansions in an attempt to limit the buildup of systemic risks.
A final progressive point of contention was that the Fed has been too easy on bank merger approvals. From 2017 through 2020, no more than 5% of proposals were withdrawn each year, according to Fed data, whereas 6% were withdrawn in 2016, and 8% to 12% were withdrawn in each of the years between 2011 and 2015.
"The Fed has been criticized by progressives for just waving through bank mergers," Tang wrote in an email. "This doesn't really reflect how much work goes on behind the scenes."
The nominee might make the merger regime more restrictive, he added.
Biden changing the Fed
With the vice chair for supervision nomination still to come from the White House, Fed watchers speculated that Brainard might have asked Biden to nominate her to the role of vice chair instead.
Some analysts expressed surprise that she was not nominated to be vice chair for supervision, while others had predicted it.
The vice chair role is more focused on monetary policy and elevates her importance in that arena, said Joseph LaVorgna, chief economist for the Americas at Natixis. It also potentially puts her in place to eventually replace Powell.
A Fed spokesperson did not provide a comment from Brainard.
The White House described her as "one of our country's leading macroeconomists" and said her key leadership role has involved "working with Powell to help power our country's robust economic recovery."
"This is only the first installment in the Biden makeover of the Federal Reserve Board, and I suspect that all of the Biden appointees will be kind of tough on the banks in favor of worrying about financial stability," Wessel said.