President Obama’s next chairman of the Federal Reserve is likely to be the most powerful in the bank’s history.
The Fed’s authority and reach have grown since the passage of the Dodd-Frank Act in 2010, which put in place new capital standards intended to ensure that the financial crisis is never repeated.
Outside advocates and analysts say those new authorities highlight the need for the White House to select a replacement for Ben Bernanke who has a deep background in crafting regulations.
“I think Dodd-Frank itself has had a huge affect on the Fed and turned it into much more of a regulator,” said Hester Peirce, a senior research fellow at the Mercatus Center at George Mason University. “Because of that I think you do need to have someone who has a sensitivity to regulatory issues.”
She added, “The Fed was probably the most effective lobbyist during Dodd-Frank and they managed to expand their jurisdiction quite a lot.”
Among the central bank’s new responsibilities is oversight of insurance companies, commercial lenders and any other financial companies that the new 10-member Financial Stability Oversight Council deems critical to the financial system.
The Fed’s oversight of the “systemically important” institutions makes it more influential than ever.
“It’s a lot more power to the Fed, which is kind of ironic since during the development of Dodd-Frank a lot of people in Congress wanted to reduce the powers of the Fed, but Dodd-Frank increased it” said Phillip Swagel, a professor at the University of Maryland and visiting scholar at the conservative American Enterprise Institute.
Additionally, the Fed will also be responsible for implementing new requirements on the amount of reserves the country’s banks will have to keep on hand, along with other provisions of the international Basel III agreement.
Those new regulatory responsibilities will likely play a part in President Obama’s decision-making process as he seeks a replacement for Bernanke, who is expected to leave his position as Fed chairman when his term ends Jan. 31.
“I think being a cop on a beat is really important for being in the Fed because I think that is one of the two or three obligations that the Fed has, is bank cop,” said Bartlett Naylor, a financial policy advocate with the consumer nonprofit Public Citizen.
Obama has said he would nominate a replacement for Bernanke in the coming months.
While new candidates might emerge, the top two contenders appear to be former Treasury Secretary and National Economic Council Director Lawrence Summers and current Fed Vice Chairwoman Janet Yellen.
Yellen’s supporters have been vocal in recent weeks, pointing to her background regulating banks, among other qualifications.
In a letter urging Obama to chose Yellen for the post, a group of congressional Democrats said the Federal Reserve needs a leader “with a solid record as a bank regulator” and praised Yellen’s “independence, intellectual rigor and willingness to challenge conventional wisdom regarding deregulation.”
The desire among Democrats to steer the financial system away from deregulation could tip the scales against Summers, who served in influential policy roles in both the Obama and Clinton administrations.
As Treasury secretary during the Clinton administration, Summers helped roll back financial regulations that critics argue would have made the 2008 financial crisis less severe. He also oversaw the demolition of the wall that had separated commercial and investment banking under the Glass-Steagall Act.
Summers’s track record has led many on the left to criticize him as a deregulator unsuited to lead the Fed, especially as the central bank moves to issue new rules.
But some say that characterization of Summers isn’t quite fair because he recently served as head of the National Economic Council while the Dodd-Frank law was being written and passed. Others note he was working in the 1990s under the priorities set by his boss, former President Clinton.
“Anyone who says ‘I don’t like Larry Summers’s deregulation’ really should say ‘I don’t like President Clinton’s deregulation,’ ” said Swagel, who called the blame game “ironic.”
Still, that criticism will likely stick with Summers, he said.
“It’s obviously a headwind for Larry,” Swagel said.
The perception that Summers is friendlier to Wall Street than Main Street is likely to be strengthened by newly disclosed consulting he did on behalf of Citigroup, the nation’s third largest bank, as well as other financial institutions.
“He’s not a regulator; he is a banker. A bank apologist,” said Naylor, who said he supports Yellen for the post.
Obama has given few clues into his thinking on Bernanke’s replacement.
In a recent interview with The New York Times, however, he said that the bank should play an important role in preventing the conditions that preceded the 2008 crash.
He wants a Fed chair, he said, who recognizes that “if the markets start frothing up, let’s make sure that we’re not creating new bubbles.”