WASHINGTON, Nov 8 (Reuters) - Randal Quarles, who served as the U.S. Federal Reserve's vice chair for supervision and most powerful bank regulator until last month, announced Monday he will step down as a bank governor at year's end, closing a four-year term during which critics said he was too friendly towards Wall Street.
Quarles's exit also will open up another slot for President Joe Biden to fill in what could be a broad remake of the Fed's seven-member board. Biden faces upcoming decisions on whether to reappoint current Fed Chair Jerome Powell to a second four-year term, a replacement for Quarles, and another governor to fill a vacant seat.
Vice Chair Richard Clarida also has a board term ending in January, potentially giving Biden the chance to make his mark on a majority of the board's positions.
The departure of Quarles could see the Fed reprise the tougher stance it took on the banking industry following the 2007-2009 financial crisis, as it tackles thorny issues including climate change risks, bank capital requirements, and fair lending.
But in an interview with Reuters Monday, Quarles said the resilient performance of banks during the COVID-19 pandemic crisis had proven he was right to make changes that had eased compliance burdens, which he expected would not be reversed.
"I came in thinking we could make the regulatory system much more efficient....while still having it be every bit as strong. I think the performance of the system during COVID demonstrated that, so I think we passed the test,” he said.
"If you come in with a measured, analytically sound, consequential but not revolutionary approach, that will last," he said. "I think that’s likely to be the case."
Appointed in 2017 by Republican then-President Donald Trump, Quarles was the first vice chair for supervision, a role created after the financial crisis but never officially filled during President Barack Obama's administration.
His term as head of the Financial Stability Board, an international regulatory group, expires at the beginning of December. Quarles officially stepped down as the head of the Fed's internal regulatory committee when his term as vice chair for supervision expired in October.
CUTTING RED TAPE
As a former Wall Street lawyer and private equity investor, he was widely seen at the outset as an industry ally who would execute the Trump administration's pledge to cut red tape.
With the backing of Fed chair and friend Jerome Powell, Quarles went on to ease a raft of post-crisis rules, arguing they were too blunt and onerous, drawing ire from Democrats who said the changes saved Wall Street tens of billions of dollars while increasing systemic risks.
Among the most contentious changes Quarles spearheaded were revisions to the “Volcker Rule” curbing speculative bank investments; scrapping a requirement for big banks to hold capital against certain swap trades; stripping the Fed of its power to fail banks on their annual “stress tests” based on subjective concerns; and easing capital, leverage and liquidity rules for all but the biggest lenders.
Quarles, 64, frequently said he had tailored the rules to banks' specific risks, a stance supported by some regulatory experts.
As chair of the multilateral Financial Stability Board from 2018, Quarles wielded global influence. Under his watch, the body stepped up scrutiny of the ballooning non-bank sector, in particular money market funds.
Wall Street executives, for their part, were often disappointed with Quarles, saying privately he did not go far enough in loosening post-crisis rules, a complaint shared by some congressional Republicans.
Several of his revisions were opposed by fellow Fed Governor Lael Brainard who said they went too far and increased systemic risk, a rare public fissure for an institution known for consensus. Brainard is considered a leading candidate to replace Quarles in the vice chair role.
"If this happens, we would expect a gradual push to tougher bank capital requirements. It also should mean tougher reviews for regional bank mergers," wrote Jaret Seiberg, an analyst at Cowen Washington Research Group, in a note.
FULL AGENDA FOR SUCCESSOR
Whoever succeeds Quarles will have a jam-packed agenda tackling the gamut, from capital rules and fair lending to digital assets, fintech and climate change. read more
When it came to monetary policy, Quarles generally took Powell's lead. He backed the chair's swift introduction of extraordinary monetary stimulus as the pandemic raged last year, and endorsed Powell's push for a monetary policy stance that allows for higher inflation.
In a May policy speech, Quarles appeared more eager to start a discussion on reducing Fed bond buying than some of his colleagues, due to fears over inflation. But he added that he agreed with the core of Fed officials who expected much of the recent pressure for higher prices would pass.
"I am not worried about a return to the 1970s," he said.
A Utah-raised Mormon, amateur pilot and multimillionaire, Quarles was not a typical Washington insider, preferring to spend time at home with his family rather than frequent the capital's cocktail party circuit.
Described by multiple executives and associates as thoughtful, principled and highly erudite, Quarles frequently peppered his speeches with classical and cultural references, including the occasional Star Trek analogy.
Quarles' wife, Hope Eccles, is the great-niece of Marriner S. Eccles, Fed chair from 1934 to 1948, a close family connection which Quarles has said imbued him with a deep reverence for the central bank.
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