Washington Wrap — Winds of change blowing at the Fed

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At the White House

After months of delays, President Donald Trump finally named Randal Quarles as his pick to be the Federal Reserve's first ever vice chair of supervision on July 10, setting up a key avenue for the administration to deregulate aspects of the post-crisis Dodd-Frank Act financial regulatory framework.

Ironically, the position of vice chair of supervision was created by Dodd-Frank but has remained vacant. Quarles' nomination was sent to the U.S. Senate on July 11.

Quarles is largely expected to break down some regulations on the banking industry, which has been asking for stress-testing reform and changes to the Volcker rule. Quarles has publicly criticized Dodd-Frank, specifically taking issue with a regulatory emphasis on higher capital requirements, which Quarles characterized as "arbitrarily taking an ax to big banks."

Trump is also reportedly thinking about the biggest Fed appointment: someone to replace Janet Yellen as chair when her term ends on Feb. 3, 2018. On July 11, Politico reported that National Economic Council Director and former Goldman Sachs Group Inc. executive Gary Cohn is at the top of Trump's list. Citing anonymous sources "close to the president," Politico said former Fed governor Kevin Warsh would be the most likely pick if Cohn were not to get the job.

House Financial Services Chair Jeb Hensarling, R-Texas, chimed in on the rumors at an event July 13.

"I think Mr. Cohn is a very, very smart individual," Hensarling said, before suggesting that he would also support Stanford professor John Taylor as Fed chair. Hensarling championed Taylor's formula for rules-based monetary policy as a "more predictable" way to lead the central bank.

The White House will have to return to the drawing board to get a new nomination at the Federal Deposit Insurance Corp., after James Clinger withdrew his nomination to tend to family issues.

Trump nominated Clinger as the next FDIC head on June 16, but Clinger said July 12 that he had turned the offer down because of problems that have "grown more challenging." Clinger was a former lead staffer for the Republican side of the House Financial Services Committee.

With the Quarles nomination, the White House only has one other nomination in the pipeline: Joseph Otting as head of the Office of the Comptroller of the Currency. The Trump administration now has an FDIC chair, an FDIC director, and two Federal Reserve governor seats to fill.

At the CFPB

The Consumer Financial Protection Bureau had an eventful week after issuing a final rule July 10 banning the use of arbitration clauses in many financial products. The rule would expose financial companies to class-action lawsuits that they had previously been able to prevent by requiring customers to agree to arbitration clauses.

When the agency announced the rule, Director Richard Cordray said he expected Congress to fight the rule. The morning after the rule was introduced, Sen. Tom Cotton, R-Ark., announced he would be starting efforts to repeal the rule through the Congressional Review Act.

But the CFPB also received harsh criticism from another banking regulator: the OCC. Acting Comptroller of the Currency Keith Noreika, who was tapped by the Trump White House when former Comptroller Thomas Curry's term ended in April, wrote a letter to the CFPB shortly before it finalized the rule, expressing "safety and soundness" concerns with how the rule might damage bank reserves, capital, liquidity and reputations.

Cordray fired back on July 12, writing that Noreika's concerns have "no basis" given the success of products that currently operate without arbitration clauses. Cordray also added that, prior to Noreika's letter, the OCC had never protested any part of the rule during its multiyear conception. Noreika was named acting comptroller on May 3.

"The Acting Comptroller has received the letter, is reviewing it, and considering his response," OCC spokesperson Bryan Hubbard said in an email.

The tussle between the OCC and the CFPB reveals tension between a Trump administration ally and an Obama appointee at an agency created by Dodd-Frank.

On the Hill

Federal Reserve Chair Janet Yellen endured two days of hearings on Capitol Hill as part of her semiannual monetary policy report to Congress.

On July 12, Yellen testified to the House Financial Services Committee, where she reiterated that the Fed is committed to pursuing a "gradual and predictable" wind down of its $4.5 trillion balance sheet. She flagged inflation as a "considerable uncertainty" but said the Fed still hopes inflation can reach its 2% target over the next couple of years.

The next day, Yellen fielded a number of questions on regulatory reform from the Senate Banking, Housing and Urban Affairs Committee. Yellen said she was broadly in support of revisiting the enhanced supplementary leverage ratio and could work with congressional efforts to change the threshold for systemically important banks. However, Yellen said she thinks some parts of the Treasury recommendations expose the economy to the possibility of another crisis, claiming that it is "critically important" to maintain capital standards on the most systemic banks.


The FDIC held a meeting on community banking July 12, where regulators said community banks are growing loans but facing rising liquidity issues. The FDIC said risks are building up as banks see an outflow of its noncore funding, challenging bank management to find deposits to support the increase in lending, particularly in commercial real estate, agriculture and construction.

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