By Pete Schroeder

WASHINGTON (Reuters] – While it is not clear who the U.S. Federal Reserve will nominate as its next regulatory chief, there are certain things: Whoever is appointed to the position will have a packed agenda covering everything, including capital rules, fair lending, digital assets, and climate change.

Randal Quarles, the Fed’s supervisor chief, resigned in October. He will be leaving the central bank by the end of this year. The White House announced Monday that it would renominate Jerome Powell to the Fed Chair position, but it did not specify who would assume the important supervision role of overseeing Wall Street’s largest lenders. The White House said the announcement will be made next month.

Washington insiders as well as analysts have long believed Lael Brainard would be the leading contender to fill the Fed governor’s role. But she will now take over the Fed vice chair position.

Others include Sarah Bloom Raskin (a former Fed Governor); Atlanta Fed President Raphael Bostic, acting Comptroller for the Currency Michael Hsu, U.S Treasury under-secretary Nellie Liang, and Mehrsa Bandaran, who is a law professor, which were previously considered for the Comptroller position.

Each person would take the lead and would need to get the support of both the Fed board and chair, which would be in balance in order to make major changes. Continue reading

Analysts say that any Democratic choice for the post of supervision, regardless of whether they are progressive or centrist, will have to set a new course and address a variety of pressing and sometimes thorny problems. They include:

DE-REGULATION REDUX?

Quarles was responsible for reviewing regulations in the wake of the 2008-2009 financial crisis. He argued that they were too rigid and burdensome. Quarles was accused by Democrats of saving Wall Street billions and increasing systemic risk.

Among the most contentious changes were revisions to the “Volcker Rule” curbing speculative bank investments; scrapping a requirement for big banks to hold capital against certain swap trades; and stripping the Fed of its power to fail banks on their annual “stress tests” based on subjective concerns.

This will be an expensive and time-consuming decision that the new chief of supervision must make.

CLIMATE CHANGE RISKS

The Fed’s agenda for climate change under new leadership is likely to quickly rise.

The Fed asked lenders to describe how they mitigate climate-related risk to their balances so far. In 2023, the Fed expects the industry to complete a formal climate scenario analysis, Reuters reported.[nL1N2RF1IC]

These projects should accelerate. Quarles’ replacement will need to push for tighter capital requirements and restrictions on banks with large exposures to the polluting industry or climate-specific risks.

The Fed might also agree to climate risk lending guidance for large lenders that Acting Comptroller Hsu said banks regulators are currently working on.

FINTECH FRAMEWORK

Quarles’ successor must also address a regulatory framework for fintech companies, which are rapidly threatening the traditional financial industry.

Fed explores ways banks could interact with fintechs. Particularly with small lenders, which may seek to outsource infrastructure and services more efficiently. Fintechs lobby the Fed for access into its payments system.

Other banking regulators tried for many years to include fintechs within their regulatory framework, but the Fed has been resistant, afraid that it could pose systemic risk. However, as this sector expands, it is likely that the Fed will take action.

“You hear a lot about the promise of fintech, but they should also be looking very closely at the risks,” said Tim Clark, a former Fed official who now works with the advocacy group Better Markets.

A related topic is that the Fed is studying the potential consequences of central bank digital currencies. Fed Board studies and Federal Reserve Bank of Boston will soon be available. The central bank wants to evaluate the benefits and risks of a digital currency, which may help increase its reach and accelerate money transfers.

STRESS TESTS

Quarles will be looking at the annual health “stress tests” of banks.

Quarles made the bank testing more transparent and predictable. He also removed a objection called “qualitative”, which allowed the Fed subjectively to reject lenders. Quarles, according to Democrats, made the tests too straightforward.

Cowen Washington Research Group analyst Jaret Seiberg wrote that in September, stress tests would be changed. This could mean banks being directed to hold eight quarters instead of four of anticipated dividends and possibly reviving objection.

SUPPLEMENTARY LOEVERAGE RATIO

A second issue is the supplementary lever ratio. It was created following the decade-old crisis and requires that banks hold capital in order to protect assets from risk.

Because of the panic caused by a glut in bank deposits and Treasury bond, the Fed was forced to temporarily loosen that restriction. This is because capital requirements were higher for assets deemed safe.

The Fed allowed the relief to expire in March despite intense lobbying from banks, but said it would review the entire rule. Quarles is the next in line to take over as Fed President.

COMMUNITY REINVESTMENT Act

A long-awaited overhaul to the Community Reinvestment Act regulations, which encourage lending in low-income areas, will be a major role for the central bank. With other banks regulators, the Fed also has responsibility for creating the rules. It hopes to update the rules to reflect online banking’s growth while still making sure lenders give meaningful support to poorer communities.

After disagreements among regulators, attempts to revise the Trump-era rules failed.