U.S. bank stocks rose on Monday after President Joe Biden nominated Jerome Powell for a second term as Federal Reserve chairman and picked Lael Brainard for the No. 2 spot. But the White House for now has left open the critical vacancy on the Fed oversight of banks.
Brainard’s name had come up as a possible replacement for departing Trump appointee Randal Quarles as the top bank regulator at the Fed. But that position now remains open for another Biden nominee who could take adversial stance.
At an event officially nominating Powell and Brainard, the president said he “looked forward in coming weeks” to nominating additional members of the Fed, including the new vice chair for supervision.
Markets seemed to breath a sign of relief that Powell was nominated for a second-term.
“A lot of investors are probably comfortable with Powell as a known entity,” said Ian Katz, managing director of Capital Alpha Partners, in an email to MarketWatch. “The eventual vice chair for supervision, not the vice chair, will drive the bus on regulatory matters. That person will be more aggressive on regulatory matters than the Fed has been under Randy Quarles in that position, but investors already know that.”
Columbia Law School professor Kathryn Judge said the selection of Powell signals Fed continuity, which banks support. Banks are more focused on the debate around Biden’s controversial nomination of Saule Omarova for the Comptroller of the Currency, but will also keep watch on the impact of the Fed on bank regulations.
Brainard has been a supporter of mandating counter cyclical capital buffers to protect bank balance sheets during economic downturns, but she’s been less vocal about it after the COVID-19 pandemic sparked layoffs and pressure on U.S. businesses.
With Brainard as vice chair of the Fed, it’s more likely that counter cyclical buffers for banks will be mandated, but much of this outcome also hinges on Biden’s selections for the governor of supervision and other open board seats at the Fed, Judge said.
Given that the vice chair for supervision has been unfilled for some time, it may take a while for any potential candidates to be vetted by the White House and introduced to Senate members ahead of a nomination approval process.
“It’s important that we get that slot filled,” Judge said.
Raymond James analyst Ed Mills said the choice of Powell instead of Brainard for Fed chair is a “clear positive” for banks.
“From a regulatory perspective, a Brainard-led fed would have likely seen more aggressive stress testing and an upward bias in capital standards,” Mills said in a research note. “There will still be more aggressive regulation versus the last four years, but Powell’s leadership likely softens the impact.”
In a research note on Monday, Katz of Capital Alpha Partners said he’s not surprised Brainard took the vice chair spot over vice chair for supervision.
“We had been musing for a while that the supervision job just wasn’t big enough for her after having been a candidate for both Fed chair and Treasury secretary at different times,” Katz said.
The role of vice chair for supervision will likely remain vacant for a while, with potential candidates including Atlanta Fed president Raphael Bostic, former Fed governor Sarah Bloom Raskin and acting comptroller of the currency Michael Hsu, among others. Former Fed vice chairman Roger Ferguson could also be in the mix.
Monday’s announcement could pave the way for the Fed to OK some major bank acquisitions, but those administrative hurdles may have to wait until the U.S. Senate confirms Powell, Katz said.
Cowen analyst Jaret Seiberg said Biden may use the vice chair of supervision nomination as a bargaining chip to win votes for Powell and Brainard from the liberal wing of the Democratic Party in the Senate. The process could take a year, he said.
“He could pick a vice chair of supervision that progressives want in exchange for their votes for the two,” Seiberg said in a research note.
Cowen’s top contender for the vice chair of job is Atlanta Fed chief Bostic.
“Not only would he be a pragmatic pick, but he also would help Biden answer demands for more diversity on the Federal Reserve Board,” he said. “It is hard to see how Democrats or Republicans could oppose his selection, though progressives may not see him as sufficiently tough on big banks.”
Other potential names include Sarah Bloom Raskin, the former Treasury official.
“We believe she would be more negative for banks than other picks,” Seiberg said. “Any choice will push higher capital and tougher [stress] tests, but we see Raskin as more political and less pragmatic.”
Meanwhile, some of the political rhetoric around Powell is also ramping up.
Sen. Elizabeth Warren, D, Mass., said she would vote against Powell and support Brainard and that the next vice chair of supervision “must be filled by a strong regulator with a proven track record of tough and effective enforcement.”
American taxpayers bailed out large financial institutions enough times, she said.
“It’s the job of the Federal Reserve to ensure large financial institutions do not put our economy at risk,” Warren said on her Twitter feed. “I will use every oversight tool within reach to make sure that the Federal Reserve works for Americans and families and not Wall Street.”