Fed bank regulator walks tightrope on Dodd-Frank

Fed bank regulator walks tightrope on Dodd-Frank
© Stefani Reynolds

The Federal Reserve's chief of financial regulation defended the central bank's plans to ease strict Dodd-Frank Wall Street banking rules on Wednesday in the face of bipartisan criticism from the House Financial Services Committee.

Randal Quarles, the Fed vice chairman of supervision, has found himself walking a tightrope over his efforts to loosen critical capital and leverage rules.

Republicans are demanding Quarles push President TrumpDonald John TrumpJulián Castro: It's time for House Democrats to 'do something' about Trump Warren: Congress is 'complicit' with Trump 'by failing to act' Sanders to join teachers, auto workers striking in Midwest MORE’s financial deregulatory agenda further along before Democrats who will take control of the House in January try to jam the Fed's gears.

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Democrats, on the other hand, have fiercely opposed GOP efforts to weaken key banking laws. The hearing, the first by the committee since last week's midterm vote, also previewed the tougher scrutiny regulators can expect from the incoming House Democratic majority.

Democrats warned Quarles that they would fight any attempt to water down the post-crisis banking reforms and urged the Fed to tread carefully in 2019.

“Make no mistake: Come January in this committee, the days of this committee weakening regulations and putting our economy once again at risk of another financial crisis will come to an end,” said Rep. Maxine WatersMaxine Moore WatersBipartisan housing finance reform on the road less taken Manufacturing group leads coalition to urge Congress to reauthorize Ex-Im Bank Democrats' impeachment message leads to plenty of head-scratching MORE (Calif.), the top Democrat on the Financial Services panel.

Waters, a fierce defender of Dodd-Frank, is poised to chair the Financial Services Committee next year and lead the Democratic opposition to the regulatory rollbacks proposed by Trump officials.

The sharp divide and conflicting warnings only highlighted the difficult balancing act facing the Federal Reserve and other financial regulators in 2019 as they look to follow through on easing regulations without enraging skeptical liberal lawmakers.

Democrats are furious at the Fed for seeking to ease rules on banks with hundreds of billions of dollars in assets, and are concerned about a multiagency effort to revamp a law meant to ensure banks serve struggling communities.

Republicans, though, are irritated that the Fed hasn’t expanded the scope of its regulatory rollbacks to foreign banks operating in the U.S. or eased rules for some banks with hundreds of billions of dollars in assets.

Wednesday’s hearing was one of the last chances for the GOP to use its full control of Congress to pressure the Fed, while Dems are previewing their efforts to use the House majority to protect Dodd-Frank and other banking rules.

“Each of these as they stand should again be viewed simply as first steps and insufficient to truly propel our economy to sustained 4 percent economic growth,” said Rep. Jeb HensarlingThomas (Jeb) Jeb HensarlingHas Congress lost the ability or the will to pass a unanimous bipartisan small business bill? Maxine Waters is the Wall Street sheriff the people deserve Ex-GOP congressman heads to investment bank MORE (R-Texas), the panel’s retiring chairman, urging the Fed to intensify its regulatory rollback.

Trump-appointed financial regulators at the Fed, Office of the Comptroller of the Currency, Securities and Exchange Commission and Federal Deposit Insurance Corporation have joined forces to loosen strict Dodd-Frank rules long targeted by Republicans and the financial industry.

After Trump in May signed a bipartisan bill ordering the Fed to loosen parts of Dodd-Frank, the central bank last month proposed a plan to loosen rules on U.S. banks with less than $700 billion in assets, exempting dozens of firms from stricter federal oversight.

Quarles will now have to navigate even tougher political waters with a Democratic House.

He insisted the proposed rollbacks would have a limited impact on system-wide capital and liquidity, though analysts say several major banks would experience much looser standards.

“It’s a recognition of differing risks. It does not affect the largest banks in the system and it would reduce the overall high quality liquid assets in the system by 2 percent,” Quarles said.

But he also made the case that the central bank has appropriately eased regulations.

“We’ve added multiples of liquidity that existed before the crisis,” he added.

The Fed also unveiled plans in April to tailor the capital buffers for banks to their risk and recalculate the minimum ratio of a bank’s leverage to core capital. Both actions are meant to make rules intended to strengthen banks clearer and less costly for smaller firms.

The Fed also announced earlier this year that they would share greater details about the annual Dodd-Frank stress tests with banks. That concession came after years of pushback from financial firms who said the central bank needed to be more transparent.

While Republican have welcomed the proposals, they’ve also urged the Fed to expand relief to foreign banks and reveal more information about the yearly stress tests.

“I must admit that I’m still somewhat uncertain as to what will be released about these tests,” Hensarling said.

“The rule of law works best when you actually know what the law is. We haven’t known. It’s been kind of a gotcha kind of game.”