Brainard from the Fed online for a key banking position. What this means for Wall Street

The increased influence of Federal Reserve Governor Lael Brainard likely means substantial changes and challenges for the country’s banking system.

Seen as a progressive who favors a tightening of the reins on financial institutions, especially the Wall Street powers, Brainard is expected to feature prominently as President Joe Biden assesses who will chair the central bank and who will specifically oversee the banks.

She is expected to secure either of these two positions in the coming months.

“Anyone can see that the Fed is moving towards a more progressive stance, and it wouldn’t be a big shock to see it get more power as chairman of the Fed or vice chairman of regulation.” , said Ed Yardeni, president of Yardeni Research. . “As the Fed has historically focused more on monetary policy than regulation, one of its new progressives mandates is now to pay more attention to regulating banks.”

These issues were brought to the fore last week when Senator Elizabeth Warren, D-Mass., A progressive leader and former presidential candidate, called current President Jerome Powell “dangerous” because of the Fed to relax banking regulations.

Warren then announced that she would oppose Powell’s re-appointment. Powell’s term ends in February, although Biden is expected to make a decision long before that.

Various reports have placed Brainard as the first choice for Warren, although the senator has not made a public commitment to a candidate. Efforts to reach Brainard for comment were unsuccessful.

“The issue right now is the reappointment of Fed Powell chairman. I’ve made my position clear on this,” Warren said in an interview with CNBC earlier this week. “I’m not going to talk about the other nominees.”

For what they are worth, betting markets don’t expect a change at the top of the Fed. PredictIt gives Powell about a 73% chance of being confirmed by the Senate, with Brainard at just 18%.

Powell also has enough support in the Senate to come through the banking committee and on the House floor, according to a Bloomberg News report.

Even without securing the post of chairman, Brainard can have a major influence on banks. If she is not named president, odds are she will be named vice president of oversight, a position the current incumbent, Randal Quarles, is not expected to keep when her term expires this month. -this.

“The presumption is that if Powell is re-appointed, not only will Brainard be the vice president of oversight, but also that she will have a reasonable amount of carte blanche,” said Tom Graff, head of Brown Advisory. “Obviously, Brainard would be a stronger and tighter regulator than Quarles was.”

There are probably three areas where its influence would be felt the most: climate change, the implementation of a central bank digital currency, and the incentive for banks to raise capital in good times. The latter problem is characterized in the banking sector as countercyclical capital buffers, which Brainard argues and Quarles objected to.

While the third issue takes banks back to the days of pre-high risk finance, the first two are uncharted waters. The Fed is expected to release a study soon on the viability of a Fed-backed digital dollar, of which Brainard has been a strong advocate, although other officials have been more skeptical.

Climate change is an area in which Brainard is particularly interested.

On Thursday, she gave a speech on “Climate Scenario Analysis”, essentially a move to get institutions to start planning for the financial risks they might face as a result of climate-related issues. However, she also discussed the possibility of subjecting banks to stress tests for climate risk.

In the speech, she noted that such planning should involve “consistent, comparable and, ultimately, mandatory disclosures” on the climate, indicating that at some point banks will be forced to report on the threat. .

“Together, these efforts can help ensure that the financial system is resilient to climate-related risks and well positioned for the transition to a sustainable economy,” she said.

Investors are already wary of bank stocks this year as weak loan demand and extremely low interest rates have hampered operating margins.

Having Brainard as a direct regulator at the Fed could shake up the industry even more, although experts watching the industry generally don’t expect it to be seen as a major threat. The talks, however, come as Biden appointed Saule Omarova, who is seen as tough on the banks, as head of the Office of the Comptroller of the Currency.

“Brainard has the experience of [vice chair for supervision]. She has done this before. That’s for sure, “said Christopher Whalen, president of Whalen Global Advisors.” Her progressive leanings on the monetary side, if she was president I’d be concerned. “

Brainard’s experience includes a three-year career as Under Secretary for International Affairs at the Treasury during the Obama administration. She has held several positions at the Fed, including chairing its financial stability and payments, clearing and settlement subcommittees.

On monetary policy, it has been one of the main conciliatory voices, which means that it has supported low interest rates. She was seen as an ideological soul mate to former President Janet Yellen – now Secretary of the Treasury – so much so that Fed watchers viewed Brainard’s speeches as reliable indicators of Yellen’s position on policy. monetary.

The Fed leadership intrigue comes at a time of ethical turmoil that has seen two regional presidents, Eric Rosengren of Boston and Robert Kaplan of Dallas, resign following announcements that they were making major transactions in their businesses. individual investment portfolios. A third official, Federal Open Market Committee Vice Chairman Richard Clarida, was also quoted in news reports showing he executed trades on the eve of a Powell speech in February 2020.

Like other Fed officials, Brainard has remained silent on the issue as the handicap continues over the direction the central bank is taking.

“Powell was the path of least resistance for the White House,” said Graff of Brown Advisory. “If this story continues to matter and breathes new life into Warren’s argument that he is not keeping a close eye on his own people or the banks, it may well change the politics of [Biden’s] decision.”