By Jesse Hamilton and Robert Schmidt / Bloomberg News
WASHINGTON — 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 after 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 has backed a number of new regulations, even as he sometimes questioned their potential effects 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. “Our banks have much higher capital and liquidity, are more aware of the risks they run, and are better able to manage those risks.”
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.
Goldman Sachs CEO Lloyd Blankfein said he was “not one bit disappointed” in the pick. He said Powell has a “terrific background.”
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 Federal Reserve Governor Daniel Tarullo to set the agenda.
Powell, a former investment banker and executive at private-equity firm Carlyle Group, is likely to do the same with Quarles, whom the Senate confirmed last 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’s goal of cutting back government red tape. And the Fed has already begun softening some of the major demands it placed on Wall Street after the crisis.
For example, the yearly stress tests meant to assess whether banks can endure sustained economic slumps are getting easier to endure. 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.
Additional targets for Powell and Quarles 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.
Powell has said Volcker was “implemented in a way that’s too costly” and goes beyond what Dodd-Frank called for.
On another 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.
Powell isn’t in lockstep with Wall Street. In June, for example, he told lawmakers that strong regulations on big lenders “produce more sustainable credit availability and economic growth.”
He also probably won’t be swayed by arguments that rules are strangling the industry, as he said U.S. banks are “as strong as any in the world, as shown by their solid profitability and healthy lending.”
Joe Light contributed to this report.