President Trump’s nomination of Jerome Powell as chairman of the Federal Reserve comes at an inflection point for the central bank.
If confirmed by the Senate, Powell will begin serving as chairman in February, replacing current Fed Chair Janet Yellen.
Responsible for establishing monetary policy, the Federal Reserve has also taken on an increased regulatory role in the aftermath of the Financial Crisis. It has placed liability-based limits on bank mergers and acquisitions, imposed risk-based capital surcharges on “global systemically important bank holding companies” and tackled large credit exposures between financial institutions, a practice that led to financial instability during the Financial Crisis.
There are also annual stress tests, the Fed’s Comprehensive Capital Analysis and Review, an assessment of whether bank holding companies with $50 billion or more in total consolidated assets have effective capital planning processes and adequate assets on-hand to absorb losses during stressful conditions.
Powell, a Republican, has served as a member of the Federal Reserve’s Board of Governors since May 2012. Among the rare non-economists to chair the Fed, he would bring nearly three decades of business experience to the Fed and a world view that is bound to be more “real world” than academic.
Viewed through a regulatory prism, Powell can be considered a compromise candidate, positioned between regulatory zealots and evangelists for deregulation. Until recently, he served as the Fed’s chief regulatory official, a position created by the Dodd-Frank Act. He has expressed the need to preserve the safety of the financial system, while guarding against burdensome, one-size-fits-all” regulatory regimes.
American Bankers Association President and CEO Rob Nichols was among those praising Powell’s nomination. “He has demonstrated sound judgment in his handling of monetary policy since joining the Federal Reserve,” he said in a statement. “He has also demonstrated a keen understanding of the important relationship between monetary policy and sound regulatory policy, and how the two can work together to reinforce economic growth.”
Among the key takeaways from a client advisory and analysis by Allianz Global Investors:
“Powell is also widely seen as a ‘continuity’ candidate who is expected to carry forward most of the policies favored by current Fed Chair Janet Yellen; the markets should appreciate his relatively dovish views.”
“A Powell-led Fed may favor fewer and weaker enforcement of regulations, which could support financials; the danger is if this leads to too much risk-taking.”
“It remains to be seen how Powell will make his own mark on the U.S. central bank, though his keen interest in regulatory and payments systems issues make them likely areas of focus.”
Financial deregulation “is perhaps the one area in which Powell differs most from Chairman Janet Yellen. He has indicated that he is willing to roll back or temper some Dodd-Frank regulations.”
Powell has repeatedly made it clear that he favors fewer regulatory burdens on banks, wants to ease Dodd-Frank rules, and provide relief for regional and community banks. He advocates easing annual stress-testing requirements for smaller regional and community institutions.
Powell’s nomination shows that the Trump administration “doesn’t see a lot of gain to be had by rocking the boat” and “understands the importance of having a steady hand at the Fed,” says Paul Forrester, banking and finance partner at law firm Mayer Brown.
“There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets, a balance that must be constantly weighed. More regulation is not the best answer to every problem.”
Fed Chair Nominee Jerome Powell
“Powell has said he is open to regulatory reforms,” Forrester says. “Some might categorize his ideas as modest and corrective, but he is certainly more open-mined than the current chairman, who certainly has really dug in on some regulatory matters and certainly has not demonstrated the same openness to reform.”
One of the first things we may see, under a Chairman Powell, is revisiting the thresholds that trigger enhanced prudential standards, Forrester predicts. Another is Powell’s likely ability to work with Randal Quarles, the former Treasury Department official that Trump nominated to join the Fed’s Board of Governors for a 14-year term expiring in 2032.
Now confirmed, Quarles is also the first-ever supervision chief for the Federal Reserve, overseeing the agency’s regulatory agenda. That role was created by the Dodd-Frank Act, but lingered unfilled throughout the Obama Administration.
“You have the potential for a very powerful partnership there,” Forrester says, referencing the private sector experience they share.
Regulatory views. Given Powell’s zeal for public speaking, it is unlikely that his views on top regulatory topics will come as much of a surprise.
“Our financial system is without doubt far stronger and more resilient than it was before the crisis,” he said, commenting on the new nomination. “Our banks have much higher capital and liquidity, are more aware of the risks they run, and are better able to manage those risks. While post-crisis improvements in regulation and supervision have helped us to achieve these gains, I will continue to work with my colleagues to ensure that the Federal Reserve remains vigilant and prepared to respond to changes in markets and evolving risks.”
ABOUT JEROME H. POWELL
Jerome H. Powell took office as a member of the Board of Governors of the Federal Reserve System on May 25, 2012, to fill an unexpired term. He was reappointed and sworn in on June 16, 2014, for a term ending Jan. 31, 2028.
Prior to his appointment to the Board, Powell was a visiting scholar at the Bipartisan Policy Center in Washington, D.C., where he focused on federal and state fiscal issues. From 1997 through 2005, he was a partner at The Carlyle Group.
Powell served as an Assistant Secretary and as Undersecretary of the Treasury under President George H.W. Bush, with responsibility for policy on financial institutions, the Treasury debt market, and related areas. Prior to joining the Administration, he worked as a lawyer and investment banker in New York City.
In addition to service on corporate boards, Powell has served on the boards of charitable and educational institutions, including the Bendheim Center for Finance at Princeton University and The Nature Conservancy of Washington, D.C., and Maryland.
Powell was born in February 1953 in Washington, D.C. He received an A.B. in politics from Princeton University in 1975 and earned a law degree from Georgetown University in 1979. While at Georgetown, he was editor-in-chief of the Georgetown Law Journal.
He is married with three children.
Source: Federal Reserve
In an October 2017 speech, at the Federal Reserve Bank of New York, Powell delved into his regulatory posture. “There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets, a balance that must be constantly weighed,” he said. “More regulation is not the best answer to every problem.”
Nevertheless, he highlighted key areas of focus for regulatory reform: simplification and recalibration of regulation of small and medium-sized banks; extending the cycle for living will submissions from annual to once every two years; eliminating or relaxing aspects of the Volcker Rule in ways that do not undermine the rule’s main policy goals; enhancing the transparency of stress testing; and taking a fresh look at the enhanced supplementary leverage ratio.
In March 207, speaking before an audience at the Yale Law School Center for the Study of Corporate Law in New Haven, Connecticut, the conversation turned to how new technology impacts everyday financial business.
In Powell’s view, there are three specific areas where technological innovation is driving change: creating a real-time retail payments system; using distributed ledger technology to develop new clearing and settlement services; and the issuance of digital currencies by central banks.
“Those of us in the public sector will insist on safety and security, while also working to assure that our citizens benefit from payments system innovation,” he said. “It will be important that we keep end-users in mind as the new real-time environment evolves, emphasizing inclusion, safety and trust, and consumer education and protections.”
Powell also addressed the idea of digital currencies issued by central banks to the general public.
“In a sense, the idea of a digital currency is merely a 21st century analog of paper currency,” he said. “While this is a fascinating idea, there are significant policy issues that need to be analyzed … A digital currency issued by a central bank would be a global target for cyberattacks, cyber-counterfeiting, and cyber-theft. A digital currency would also be a prime target as a potential vehicle for global criminal activities, including money laundering.”
Demands for banks’ boards of directors would be streamlined and more focused under a Powell-led Fed. He addressed this in an August 2017 speech.
“After the crisis, the Federal Reserve significantly raised our expectations for the boards of directors of large banking firms,” he said. “Our reforms were designed to assure that boards of directors understand and approve the strategy of the company and the risks inherent in that strategy, and that the institution has the capital, liquidity, and risk management capabilities necessary to manage those risks … Today, the role of a director of a large banking firm is more expansive, more challenging, and more important than ever.”
Over time, guidance has increased the number of specific directives aimed at boards well into the hundreds, “which may have fostered a check-the-box approach by boards,” he said, adding that there is a widespread feeling that enhanced supervision has downplayed the difference in roles between boards and management.
A new, principles-based Fed framework, endorsed by Powell, would distinguish the board from senior management.
“We do not intend that these reforms will lower the bar for boards or lighten the loads of directors,” he said. “The intent is to enable directors to spend less board time on routine matters and more on core board responsibilities: overseeing management as they devise a clear and coherent direction for the firm, holding management accountable for the execution of that strategy, and ensuring the independence and stature of the risk management and internal audit functions.”