By Pete Schroeder

(Reuters) – The U.S. Federal Reserve relaxed a raft bank regulations and requirements that were introduced after the financial crisis of 2007-2009. Former President Donald Trump was the Republican leader.

Former Fed Governor and Progressive Sarah Bloom Raskin will take over the role of vice-chair for supervision, which Randal Quarles left last month. This is a significant opportunity to reverse many of the changes that have occurred in the past four years.

These are the controversial changes that Democrats and advocacy groups have criticized Lael Brainard (the Fed’s sole Democratic governor) for weakening the financial system protections.

CAPITAL AND LIQUIDITY TAILORING

The 2018 law was passed by Congress to direct regulators that they ease liquidity and capital requirements for all banks other than the country’s biggest banks. This follows lawmakers who argued the previous post-crisis guidelines were too restrictive for small banks and hurting the economy.

The Fed was the first to “tailor” the rules. The law provided only relief for lenders up to $250 Billion in assets. Quarles, however, used the discretionary power the law gave the Fed to grant relief to banks up to $700 Billion in assets.

According to analysts, Quarles’ replacement is most likely to consider whether the discretionary relief could be reversed with no legislative intervention.

BANK – ‘LIVING WILLS’

Additionally, the 2018 law directed the Fed not to require banks with large assets to file “living wills”, which detail how they might be wind down in an emergency.

Quarles also went beyond what Congress had required. Quarles allowed banks holding assets up to $700 Billion to file a complete plan every six years, instead of annually, as was previously the case.

REWRITE VOLKER RULE

One of the most contentious regulatory projects that emerged from the financial crisis was the implementation of the Volcker Rule. This prevents banks investing in speculative assets on their own.

Quarles was keen to streamline this complicated rule when he first joined the Fed. But it took Quarles, four other regulators and two-and a half years to complete its rewriting.

Critics claimed that the financial system was at risk from the proposed changes, however, analysts say reviewing them could eat up lots of resources.

STRESS TESTS

Quarles made several changes to “stress tests” at big banks. These are annual health checks which often pose the largest constraint for lenders and determine their capital requirements.

He tried to make these tests more transparent and predictable, something that was long condemned by banks as subjective and opaque.

Most importantly, the Fed was no longer able to “flunk” banks because it is based more on qualitative than quantitative grounds.

Many analysts believe Quarles will be replacing Quarles. He could order lenders to keep enough cash aside to cover future dividend payments for eight quarters instead of just four.

SWAPS INTER-AFFILIATE

Quarles made many changes that were targeted at smaller banks and medium-sized institutions, but one of them was an immediate victory for Wall Street lenders.

Industry estimates show that the Fed and other regulators reached an agreement in 2020 to lower the amount of collateral that banks must hold to secure certain swap trades.

Critics warn that the Fed’s decision could lead banks to hold large swap positions, and they suggest the Fed reconsider it.