Under Powell, Wall Street expects steady victories on regulation

By Jesse Hamilton and Robert Schmidt

 

Bloomberg News

WASHINGTON — In Jerome Powell, banks won’t get a Federal Reserve chairman who is hell-bent on ripping up financial rules. But in some ways, that’s better for Wall Street.

With a resume steeped in industry experience and longstanding relationships with financial executives, Powell is expected to take a measured approach to rolling back regulations adopted after the 2008 economic crisis. He’s seen as a practical, not ideological, watchdog who will be able to get things done.

That gibes with what big banks have long expected from President Donald Trump’s presidency. They want the Fed and other agencies to take the lead in easing post-crisis constraints, particularly because the Republican-controlled Congress has made little headway dismantling the Dodd-Frank Act.

“For Wall Street, Powell is a solid choice,” said Ian Katz, an analyst with Capital Alpha Partners in Washington. “He supports deregulation but not to an extreme. He’s a known quantity and he’s regarded as a thoughtful consensus-seeker. The finance industry views him as safer choice than someone who would want to blow up the place and scrap all the Dodd-Frank rules.”

While Powell’s views on bank oversight are important, they will take a back seat to his duties steering the U.S. economy. He is likely to support the Fed governor responsible for bank oversight, Randal Quarles, an old friend with a similar outlook.

Since joining the Fed board in 2012, Powell has backed a number of new regulations, even as he sometimes questioned their potential effects on lending and other bank activities. A central theme in his speeches has been that the government should “protect these core reforms,” while making adjustments rather than major changes. He reiterated those views after Trump nominated him Thursday.

“Our financial system is without doubt far stronger and more resilient than it was before the crisis,” Powell said. “Our banks have much higher capital and liquidity, are more aware of the risks they run, and are better able to manage those risks.”

In some ways, Wall Street sees Powell as the best of both worlds: he will continue Janet Yellen’s low-interest rate monetary policy, while going further than she would in watering down burdens such as the Volcker Rule and bank stress tests. Big banks have already spent billions of dollars to comply with Dodd-Frank, so they prefer regulators who will tweak regulations instead of killing them.

Goldman Sachs CEO Lloyd Blankfein said he was “not one bit disappointed” in the pick. He said Powell has a “terrific background.”

Powell, a former investment banker and executive at private-equity firm Carlyle Group, is likely to do the same with Quarles, whom the Senate confirmed last month as Fed vice chairman of supervision. The two worked together at the Treasury Department in the 1990s, and each had stints at Carlyle. They’re seen as reasonable and careful, not the kind of turbulent officials the administration has put in other key roles.

The two men’s willingness to recast bank rules broadly corresponds with the Trump administration’s goal of cutting back government red tape. And the Fed has already begun softening some of the major demands it placed on Wall Street after the crisis.

For example, the yearly stress tests meant to assess whether banks can endure sustained economic slumps are getting easier to endure. Another annual Dodd-Frank requirement, that lenders submit “living wills” outlining how they could be dismantled in a failure, is moving toward a less-frequent schedule. And the Fed has become increasingly clear in its view that regulations for smaller banks should be cut.

 

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