Explainer-Raskin’s withdrawal from Fed nomination means more delays for rule changes

© . FILE PHOTO: Sarah Bloom Raskin, nominated vice chair for oversight and member of the Federal Reserve Board of Governors, gestures during a Senate Banking, Housing and Urban Affairs Committee hearing on Capitol Hill in Washington, D. By Pete Schroeder WASHINGTON () – Sarah Bloom Raskin’s decision Tuesday to revoke her appointment as Wall Street agent of the Federal Reserve further delays rule changes that have been in limbo since Randal Quarles stepped down as vice chairman for oversight in October. A Democrat-controlled Fed will pursue the same broad agenda regardless of who sits in the oversight chair, and the staff and governors may be able to work on some measures as the White House searches for a new candidate, analysts say. But key policy decisions will need to be guided and supported by a confirmed Fed official to gain support in Congress. Here’s the regulatory agenda that will fall under a confirmed Vice-President: DE-REGULATION REDUX? Over the past four years, Quarles led a review of regulations introduced after the global financial crisis of 2007-2009, arguing that they were too blunt and heavy. Democrats have accused Quarles of saving Wall Street billions of dollars while increasing systemic risk, and they want the Fed to rethink some of those changes. Among the most controversial were revisions to the “Volcker Rule” that curbed speculative banking investment; removing a requirement for major banks to hold capital against certain swap transactions and stripping the Fed of the power to make banks fail their annual “stress tests” based on subjective concerns. Whoever replaces Quarles should choose which of these to address. Even if Raskin was confirmed quickly, the process of revising many of these rules was expected to be extremely time-consuming. CLIMATE CHANGE RISKS Climate change, a top priority for Democrats, is expected to quickly get on the Fed’s agenda under new leadership. So far, the Fed has asked lenders to explain how they are mitigating climate change risks to their balance sheets, with the industry expecting to begin a formal analysis of the climate change scenario in 2023, reported. Those projects are expected to accelerate. The big question will be whether the Fed will push for restrictions or stricter capital requirements for banks with significant exposure to polluting industries or other climate-specific risks. Fed officials may end up being more cautious than progressives had hoped, as Raskin’s appointment was ultimately scuttled by concerns she would be too aggressive on climate risk. Bank Mergers and Acquisitions The delay in finding Quarles’ replacement could put a block on approving bank acquisitions since last year due to uncertainty over the Fed’s staffing changes. Some pending deals have been approved following the renomination of Fed Chair Jerome Powell, but the industry is still waiting for the Fed and the Justice Department to decide on a possible new policy on bank deals. The next head of the regulator is expected to lead the committee investigating possible links, suggesting that any new merger policy also needs her support. Without that assurance, bankers and lawyers have said they would be reluctant to enter into new partnerships. FINTECH FRAMEWORK The Fed is also expected to address a regulatory blueprint for “fintech” companies that are rapidly tearing down the traditional financial sector. It examines how banks interact with fintechs, particularly with smaller lenders who may outsource more services and infrastructure. Fintechs are also lobbying the Fed for access to its payment system. While other banking regulators have worked for years to bring fintechs under their regulatory umbrella, the Fed has resisted, fearing it could create systemic risk. But as the sector continues to grow, the Fed is expected to spring into action. ADDITIONAL LEVERAGE RATIO Another issue that comes up is the supplemental leverage ratio, a rule introduced after the crisis ten years ago that requires banks to hold capital against assets, regardless of their risk. The Fed had to temporarily ease that rule in the midst of the pandemic, as an abundance of bank deposits and government bonds pushed up capital requirements for what are considered safe assets. Despite intense lobbying from the banks, the Fed allowed that exemption to expire last year, but promised to review the general rule. The Fed has not yet published a proposal. COMMUNITY REINVESTMENT ACT The central bank will also play a key role in a much-anticipated review of the Community Reinvestment Act (CRA) rules, which promote lending to lower-income communities. The Fed, which shares the responsibility for writing the rules with other banking regulators, hopes the CRA can be updated to reflect growth in online banking, while also ensuring that lenders make meaningful contributions to the poorer areas that they serve. There would probably have to be a new Fed regulator before the Fed can sign the changes.

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