WASHINGTON (Reuters) - Big banks keen to see bottom-line benefits from U.S. President Donald Trump’s pledge to cut red tape are pinning their hopes primarily on Randal Quarles, the new head of bank supervision at the Federal Reserve.
With the Republican-controlled Congress’s attempts to roll back laws introduced in the wake of the 2007-2009 financial crisis largely stalled, banks are looking to regulators, particularly the U.S. central bank, to loosen the reins through rule tweaks and more lenient supervision.
Quarles, a former Wall Street lawyer and private equity investor nominated to the Fed by Trump last summer and sworn in this month, will have the most influence in such efforts due to the central bank’s extensive financial oversight powers.
“Normally, when you get a new governor at the Fed, you don’t see anything for a few months,” said Wayne Abernathy, executive vice president at the American Bankers Association and a former colleague of Quarles at the Treasury Department under President George W. Bush.
“I think the expectations for Quarles are higher, because there was so much fanfare about the position. He’s going to feel some kind of pressure to show something.”
The Fed declined to comment.
With Quarles on board, banks and analysts expect the Fed to ease aspects of everyday examination and supervision, in particular reducing the number of post-inspection notices demanding fixes to technical compliance issues, ranging from sales practices to outsourcing contracts.
These ‘Matters Requiring Attention’ notices were originally conceived to raise specific concerns but are increasingly being used by watchdogs to police hundreds of activities, bogging down boards and senior managers in paperwork.
The Treasury has also identified several areas where the Fed has unilateral power to ease the liquidity and capital requirements on foreign banks operating in the United States, in some cases by simply deferring to their home rules.
The Fed’s annual stress tests analyzing how a bank would cope with market shocks - known as CCAR - are another key area where Quarles is likely to quickly make his mark.
“Now that Randal Quarles is in place, what we expect is that in fairly short order there will be some modifications to the way the CCAR works, because that is something that can largely be done at the behest of supervision,” Guy Moszkowski, managing partner at financial analyst firm Autonomous Research, told a conference on Tuesday.
Quarles, who turned 60 last month, will be the first vice chair of banking supervision, a role created after the financial crisis but never filled during President Barack Obama’s administration. He will also serve as a Fed governor.
Former Fed Governor Daniel Tarullo effectively ran banking supervision until he stepped down in February, overseeing a strict implementation of the 2010 Dodd-Frank Wall Street reform law and administering rigorous “stress tests.”
Banks have complained that the testing process, which combines both quantitative and qualitative information, is too opaque, based on overly-conservative assumptions, and insensitive to different business models.
The Fed has indicated it is willing to refine stress tests, but Quarles is expected to push ahead with an overhaul - making the assumptions more generous, giving banks more information on the models, or moving to a less onerous two-year cycle. He is also likely to phase-out the qualitative aspect of the tests which gives the Fed wide-ranging discretion to fail lenders, bank lobbyists said.
The effort will be no cakewalk.
Quarles will be closely scrutinized by Democrats and consumer advocacy groups who are worried that deregulation will allow banks to return to their pre-crisis risky behavior.
Dodd-Frank does not give Quarles extensive unilateral powers, and he will have to get approval from the Fed board for any major changes, such as easing capital rules.
Trump is also expected to name a new Fed chief in the next couple of weeks. The front-runners, current Fed Governor Jerome Powell and Stanford University economist John Taylor, have both said there is a need to reduce the regulatory burden on banks and are expected to support Quarles’ efforts.
But for other measures, including relaxing the Volcker rule, which restricted banks’ ability to trade with their own cash, other regulators will also need to agree.
The Federal Deposit Insurance Corporation (FDIC), currently headed by an Obama-era appointee who has generally opposed rolling back rules, is expected to be a drag on the inter-agency process until a Trump pick is named and confirmed as a replacement, likely this spring. Reaching an agreement even then will be tough, say lawyers, due to the complexity of the rule, which is hundreds of pages long.
Still, those who know Quarles believe he is well-suited in terms of experience and personality to navigate the Fed’s halls of power. They point to his success in helping to negotiate trade deals during his time at the Treasury.
“He isn’t the kind of person that bows to consensus,” said the ABA’s Abernathy. “He’s the type of person who makes consensus.”
Editing by Carmel Crimmins and Paul Simao