By Pete Schroeder

WASHINGTON, (Reuters) – The Federal Reserve’s newly appointed regulatory chief is facing a problem: How much time and political capital should he spend on revisiting Wall Street breaks in the past years and focusing instead on new issues such as climate change or fintech?

Joe Biden, President of the United States, is likely to soon nominate Fed’s Vice Chair for Supervision. Among the names are former Fed Governor Sarah Bloom Raskin and Atlanta Fed President Raphael Bostic. Also, U.S. Treasury Under Secretary Nellie Liang, Richard Cordray (ex-consumer watchdog chief), and Nellie Liang, who will be naming the Fed’s new vice chair for Supervision.

Progressive groups and influential Democrats are keen for the new choice to take on Wall Street, and tighten up the rules that Randal Quarles (a Republican appointee) has relaxed.

However, they want the Fed’s climate change and financial risk management to be increased, community lending rules changed, and a regulatory plan for financial technology companies created. These changes were opposed by Republicans.

Quarles will be restructured, which could eat up political and financial resources that are needed for these priorities. Washington insiders said that it may also be opposed from fellow regulators, and some centrist Democratic lawmakers.

Todd Phillips, director at the Center for American Progress (a liberal think-tank), stated that “it’s crucial for whomever the next vice chairman for supervision is really to really take a whole holistic look at this regulatory landscape.”

They’ll have to take some difficult decisions.

Quarles was opposed by progressives at every stage of his trial. They also accused him, and Trump’s former administration, of undermining the security measures that were put in place after the crisis of 2007-2009.

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

Quarles stated that he tailored rules to bank’s risks, and that industry’s outstanding performance during the economic crisis caused by the pandemic showed that he didn’t weaken the system. Quarles told Reuters that he used a more moderate approach to increase the chances of his reforms being accepted by a new administration.

“I came in with the intention of trying to make changes that would be durable,” he told Reuters in an interview last month.

“If you come in with a measured, analytically sound consequential but not revolutionary approach, that will last and I think that’s likely to be the case.”

Experts in regulatory affairs said it will prove difficult to unravel his work. Some of the rules can be complex so revisions will take time. This is especially true when major changes may be open to public feedback.

The Fed and four agencies took approximately 3.5 years to create the Volcker Rule, with another 2.5 years for tweaking aspects.

This inter-agency process becomes even more difficult when one of these regulators (the Federal Deposit Insurance Corporation) is still being run by Jelena McCWilliams, a Republican appointee. McWilliams has indicated that she will continue to serve until June 2023.

Analysts say that Democrats aren’t united on prudential bank rules. Although they are generally in agreement about the importance of consumer protections, there is some support from centrists for the idea that the post-crisis regulations should be rewritten.

Quarles had made many significant improvements, such as the 2018 bank deregulation law which required simpler capital and liquidity requirements, which was supported by several Democrats.

It could also make major changes politically dangerous.

“Some progressives call for broad changes in Trump-era policy changes, but we’re skeptical, given the fact that most of those changes were mandated by Congress and fairly modest,” stated Isaac Boltansky (director of policy research at brokerage BTIG).

QUICK WINS

Analysts said that Quarles’ successor could still be able score quick wins to keep the progressives away.

Quarles utilized discretionary power Congress gave the Fed to provide relief for larger banks in 2018’s law. These breaks could be reversed by lawmakers without being overruled, they claimed.

Experts in regulatory affairs also believe that the Fed’s next regulation chief will be more strict with stress tests. These aren’t regulations, and the central bank can change them on an as-needed basis.

Lawyers expect that the Fed will take a harder line in examining big bank mergers which, according to progressives, harm consumers as well as when regulating big banks.

“There’s only so many staff, there’s only so many hours in the day,” said Phillip Basil, director of banking policy with the Wall Street reform group Better Markets.

However, there are some very fundamental safety and soundness concerns that need to be addressed.