The Future of Financial Regulation Just Got Much More Interesting
Last week brought news of two major appointments at the Fed: Mark Van Der Weide, a long-time lawyer in the Fed’s supervision and regulation division, will be the new general counsel, and Randy Quarles has been nominated (and is expected to be confirmed) as the first Vice Chair for Supervision and member of the Fed’s seven-person Board of Governors.
I’ve written about the significance of both of these posts before. (See here for an op-ed on the importance of the general counsel; here for a policy brief with Simon Johnson on the Board of Governors and the Vice Chair generally). While most political attention these days is on Russia and health care reform, these are big appointments that could shape the future of financial regulation.
These changes could effect policy immediately, no matter what happens with respect to pending legislation that would substantially overhaul Dodd-Frank. It’s worth pausing to reflect on why this would be. My co-author Sean Vanatta and I are writing a history of bank supervision in the United States. One theme we see isn’t only a trend toward “deregulation,” but “desupervision,” or the habit of supervisors to reroute supervisory priorities even in the face of regulatory and legislative stability. With Obamacare apparently in place for the foreseeable future, it’s quite possible that Senate Republicans will also lack the enthusiasm for gutting Obama’s other principal legislative achievement. But whether they do or don’t–and, I’ll admit, the politics of financial reform are very tricky to predict–these supervisory appointments will have enormous impact.
What’s fascinating about these two appointments, then, is not only that they have occurred. It is the potential for a clash between them. Quarles is seen as much more sympathetic to a deregulatory bent favored by House and Senate Republicans. But Van Der Weide was a key member of the small group of lawyers, led by former Fed Governor Dan Tarullo, that put the current apparatus in place. Will Quarles and Van Der Weide clash on their vision of what the Fed should be as a regulator or supervisor?
Perhaps. It’s too early to say. The Fed has survived and thrived as a political institution in part because those who seem most likely to oppose it are generally swept up in a defensive enthusiasm once they are placed inside. And in any event Quarles’s views on bank regulation and supervision are not widely and publicly known in the first place, so maybe there’s not much daylight between them.
If there is a conflict though, my money will be on Van Der Weide, despite the fact that he will be Quarles’s inferior on the Fed organizational chart. The reason is that Congress created the Vice Chair for Supervision as a public face with nebulously defined authority. The Vice Chair “shall develop policy recommendations for the Board,” but the Board still retains its committee structure. The statute does give the Vice Chair the authority to “oversee the supervision and regulation” of the firms under the Fed’s bailiwick, but how that authority fits within the context of the Fed’s broader governance structure is unknown. Quarles will be the first. At the very least, expect other governors (not least the Fed Chair) to continue their active roles in this space.
The Fed’s general counsel, on the other hand, is different. Some have called the position the Fed’s “eighth governor,” but I would go further than that. The Fed as an institution is a place that respects technical skills. Banking law is certainly technical. But the general counsel can navigate this in ways that will be very difficult to oppose. If the general counsel’s verdict on a hard question of law is that the Fed must do X, but an eager new governor would prefer Y, watch the incumbent governors prefer not to contradict the lawyers, whether because of perceived litigation risk or simply on the principle that the non-political staff should have wide latitude in determining hard questions.
Of course, the irony here is that the harder the question of law, the more value-laden the judgment. This is one reason why I think making the Fed’s general counsel subject to presidential appointment is a cost-beneficial proposal. There are costs, to be sure, but the benefits of increased accountability for so important a position are probably greater.
I doubt this conflict, if there is one, will be public, at least initially. But watch how the Fed’s stress tests and other supervisory relationships with the largest banks start to play out. My sense is that there will be minor tweaks, not major changes. And if that’s the case, it will be in part because of the influence of the Fed’s general counsel.