Don't Expect Powell Vs. Brainard on Fed Bank Rules

(Bloomberg Opinion) -- Banking regulation is a grind. It’s all endless details and complexity. To make people care, the drama sometimes has to be manufactured.

Expect much of that around the speculation that Federal Reserve board member Lael Brainard may soon succeed Randal Quarles as the central bank’s vice-chair for financial supervision, or even take over from Jerome Powell as chair.

Brainard and Powell haven’t always seen eye-to-eye on some of the simplifications and tweaks made to bank rules in the past couple of years — and to help the drama, Senator Elizabeth Warren has already come up with a nickname for Powell.  

But this is no prize fight. It isn’t Jerome “dangerous man” Powell, the king of making life easy for banks, in the red corner versus (let’s call her) Lael “the great dissenter” Brainard, the scourge of greed and backsliding, in the blue.

Since central bank independence became the guiding principle more than two decades ago, these roles aren’t and shouldn’t be political. Sure, Brainard has, very unusually, voted against more than 20 Fed board decisions on changes to regulation since the start of 2018. But her complaints have been nuanced and specific — suited to the field. They don’t make her a champion of progressives any more than Powell was previously a herald for President Donald Trump, who wanted to undo lots of the post-2008 regulation.

In reality, neither wants banks to go anywhere near gambling with depositors’ money again, or running on ultra-thin capital bases. “We are committed to preserving and strengthening the key improvements since the crisis, particularly those in capital, liquidity, stress testing, and resolution,” is a quote from a 2018 speech that could be from Brainard, though it was actually Powell.

In voting against changes, her reasons have often been a matter of degree rather than outright difference. That was true last year of her dissent on how to introduce a new requirement called a stress capital buffer and on the final form of rules on sources of banks’ funding and how reliable they are. 

It was also true in the Fed’s action on bank dividends and buybacks last year. Brainard wanted payouts stopped completely during the worst of the Covid crisis; her fellow board members chose only to cap them. Given the tens of billions in excess capital the biggest lenders have today, maybe she protested too much. But bank stocks would hardly have performed any worse had Brainard’s view been adopted.

Her pushback was more fundamental against changes to the Volcker Rule -- named after former Fed Chair Paul Volcker and designed to stop banks using deposits to help fund their own market bets. She was concerned about their investing in a wide set of venture capital, private equity and credit funds in similar ways that caused contagion and losses in the financial crisis.

But banks can still be limited in how they use this freedom through stress testing and supervision if tomorrow’s regulators don’t like the look of the risks they start taking on. Indeed, analysts at Bloomberg Intelligence think capital requirements could already rise next year. 

Brainard is more progressive in other ways. She speaks regularly for example on how to bring more women into the economics profession — and black women specifically. She has also led efforts aimed at talking with low-income and minority communities to understand better how to improve the Community Reinvestment Act, which the Fed is trying to modernize.

American banks should be supportive of this work. They have become increasingly vocal about their own efforts on social and financial inclusion.

Brainard has also been the leading voice at the Fed on how to bring climate-related risks into its assessments of long-term financial stability. The Fed has been slower on this issue than central banks in Europe and the U.K., but it is moving toward the same kind of approach focused on risk and stability. Powell has taken some stick on this, but he has backed the same approach.

The bottom line is that the Covid pandemic underscored the importance of stronger banks and the focus on capital since 2008: They didn’t amplify the crisis but instead were a reliable conduit for the massive support rolled out by the Fed and Treasury.

Lael Brainard is no radical banging the drum for ever higher bank capital. She is more a prudent voice of resistance against forgetting past crises and being prepared for future ones.

The profitability of banks this year and the billions being paid out to investors is down to that as much as anything else.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.

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