Over the past four years, Quarles has led a review of regulations introduced in the wake of the 2007-2009 global financial crisis, saying they were too harsh and onerous. Democrats have accused Quarles of saving the stock market billions of dollars while increasing systemic risk.
Among the most contested changes are the revision of the “Volcker rule”, which limits speculative investments by banks, the elimination of the obligation for large banks to hold equity in return for certain swap transactions, and the elimination the power of the Federal Reserve to fail banks in their annual “stress tests” on the basis of subjective considerations.
The new supervisor will have to decide whether to roll back these changes, a potentially long and delicate exercise.
RISKS RELATED TO CLIMATE CHANGE
Climate change, a top political priority for Democrats, is expected to move rapidly up the Fed’s agenda under new leadership.
So far, the Fed has asked creditors to explain how they are mitigating climate change risks on their balance sheets, with the sector expecting to pass a formal analysis of climate change scenarios in 2023, according to Reuters.
These projects should be accelerated. The big question will be whether Mr Quarles’ successor will push to impose restrictions or tougher capital requirements on banks with high exposure to polluting industries or other climate-related risks.
The Fed could also approve guidelines on climate-risk lending for large creditors, which Acting Comptroller Hsu said bank regulators were working on.
The successor to Mr. Quarles will also have to tackle the development of a regulatory plan for “fintech” companies, which are rapidly breaking into the traditional financial sector.
The Fed is studying how banks intersect with fintechs, especially with smaller creditors who can outsource more services and infrastructure. Fintechs are also lobbying the Fed for access to its payment system.
While other banking regulators have struggled for years to bring fintech into their regulatory framework, the Fed has resisted, fearing it would create systemic risks. But as the sector continues to gain momentum, the Fed should act.
“You hear a lot about the promise of fintech, but you also need to look very closely at the risks,” said Tim Clark, a former Fed official who now works with advocacy group Better Markets.
In a related area, the Fed is currently exploring the implications of a central bank digital currency. With studies from the Fed Board and the Federal Reserve Bank of Boston expected soon, the central bank is trying to weigh the risks and benefits of such a product, which could expand its reach and help accelerate money transfers. silver.
Banks’ annual health checks, called “stress tests,” will likely top the list of changes Quarles makes that Democrats will want to revisit.
Quarles has tried to make the tests more transparent and predictable for banks, including removing the “qualitative” objection that allowed the Fed to fail creditors on subjective grounds. Democrats say under Quarles, testing has become too easy.
Jaret Seiberg, an analyst with the Cowen Washington Research Group, wrote in September that the changes in stress tests would likely come in 2023, and could include requiring banks to bank eight quarters of expected dividends, instead of four current ones, and the possibility of relaunching the qualitative objection.
THE ADDITIONAL LEVERAGE RATIO
Another issue on the table is the additional leverage ratio, a rule created after the crisis of the previous decade, which requires banks to hold capital against assets regardless of their risk.
The Fed had to temporarily relax that rule amid the pandemic, as a glut of bank deposits and Treasury bonds have pushed up capital requirements on what are considered safe assets.
Despite intense lobbying by the banks, the Fed let this easing expire in March, but promised to review the general rule. The Fed has yet to release a proposal, leaving the task to Quarles’ successor.
COMMUNITY REINVESTMENT ACT
The central bank will also play a key role in the long-awaited overhaul of the rules of the Community Reinvestment Act, which encourages lending in low-income communities. The Fed, which shares responsibility for drafting these rules with other banking regulators, hopes that the rules can be updated to reflect the growth of online banking, while ensuring that creditors make meaningful contributions to areas the poorest they serve.
Efforts to update the rules under the Trump administration failed after regulators could not agree on a way forward.