Trump can further bank agenda with new Fed appointment
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In recent days, news organizations have reported that former Treasury Department official David Nason is a leading candidate for appointment as the Federal Reserve’s vice chairman for supervision.

Others mentioned for that position include former SEC Commissioner Paul Atkins and FDIC Vice Chairman Thomas Hoenig.

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The position of vice chairman for supervision was created by the Dodd-Frank Act, but no member of the Federal Reserve’s Board of Governors has been nominated to fill that position. The Board of Governors already has a vice chairman, Stanley Fischer, who serves in the absence of Fed Chair Janet Yellen.

Board member Daniel Tarullo had been thought by many to be the logical candidate for that position, given his focus on regulatory matters, along with his advocacy of tough regulation and high capital requirements for the largest financial firms, but President Obama did not make that appointment. 

The existence of two vacancies on the Board of Governors gives President Trump the opportunity to fill one of those slots with someone he would also nominate as vice chairman for supervision.  

If that occurs, the speculation is that Tarullo would resign from the Board of Governors, creating another vacancy for President Trump to fill.

Dodd-Frank specified that the vice chairman for supervision “shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms.” 

The vice chairman for supervision also must testify to Congress on a semiannual basis regarding the Fed’s supervisory activities, similar to how Fed Chair Yellen now testifies about the country's economic outlook and monetary policy.

The Federal Reserve System, consisting of the Fed's Board of Governors and the twelve Federal Reserve Banks, have long regulated commercial banks, as well as bank and financial holding companies.

The creation of the new vice chairman’s position, though, highlights and centralizes within the Fed its responsibilities for ensuring the safety and soundness of the U.S. financial system and its major financial institutions. 

How well this increased focus on the Fed’s supervisory activities will coexist with the Fed’s monetary responsibilities has yet to be determined.  

In the short run, that determination will be a function of changes in the scope of financial regulation laws, specifically Dodd-Frank, and the Trump administration’s financial regulatory appointees.

There is every indication that the president’s appointees will favor financial deregulation and a greater reliance on market forces to prevent excesses within the financial system that would increase the risk of financial instability. 

These appointees will include senior officials at the Treasury Department, new Federal Reserve Governors, a new head of the Office of the Comptroller of the Currency, board members and, eventually, a new chairman of the FDIC and commissioners at the Securities and Exchange Commission and the Commodity Futures Trading Commission.

While legislation creates the legal framework within which financial regulations must fit, the details of those regulations, as well as their enforcement, will fall to the officials President Trump appoints. The new Fed vice chairman for supervision will be one of those key players.

The Fed Board of Governors, though, will have to approve whatever regulations the vice chairman for supervision proposes, as well as actions to enforce Fed regulations. Thus, the vice chairman will need the backing of his or her fellow governors.

It will be interesting to see how the first Fed vice chairman for supervision proceeds in establishing the functioning of this new position and its ability to work with Congress, the administration and fellow regulators in shaping financial regulation.  

It will take a few years, though, before that result is known.

 

Bert Ely is the principal of Ely & Company, Inc., where he monitors conditions in the banking and thrift industries, monetary policy, the payments system, and the growing federalization of credit risk. 


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