Wall Street no debe temer a Lael Brainard

Paul J. Davies

Banking regulation is a routine activity. It’s all about endless details and complexities. Sometimes to make people worry, you have to make it a little melodramatic.

And expect there to be a lot of that surrounding speculation that the board member of the Federal Reserve, Lael Brainard, he could soon succeed Randal Quarles as the central bank’s vice president for financial supervision, or even replace Jerome Powell as president.

Brainard and Powell have not always agreed on some of the simplifications and adjustments made to banking rules in recent years, and to exacerbate the drama, Sen. Elizabeth Warren has already given Powell a nickname.

But this is not a fight for an award. This is not a confrontation between Jerome “dangerous man” Powell, the king of making life easier for banks, versus (to put it in some way) Lael “the great dissident” Brainard, the scourge of greed and recidivism .

Since central bank independence became the guiding principle more than two decades ago, these roles are not and should not be political. Sure, Brainard has a very unusual record of voting more than 20 times against regulatory changes discussed by the Fed board since early 2018. But his opposition has been nuanced and specific, appropriate to the context. That doesn’t make her an advocate for progressives any more than Powell was previously in his role as herald to President Donald Trump, who wanted to undo much of the post-2008 regulation.

In reality, neither wants banks to go back to doing anything like gambling with depositors’ money, or to operate with an extremely small capital base. “We are committed to preserving and strengthening the key improvements implemented since the crisis, particularly those related to capital, liquidity, stress tests and resolution,” the Fed chairman said in a 2018 speech that could well have been from Brainard, though it was actually Powell’s.

When you have voted against changes, your reasons have often been more related to a subject of degree, than to differing outright. That was observed last year when he disagreed on how to introduce a new stress capital reserve requirement and on the final form of the rules on banks’ funding sources and their reliability.

It was also evident in the Fed’s action on dividends and bank buybacks last year. Brainard wanted payments to come to a complete halt during the worst of the covid crisis, while the rest of the board members chose to only limit them. Given the tens of billions in excess capital that the largest lenders have today, perhaps she protested too much. But bank stocks would hardly have performed worse if Brainard’s view had been adopted.

His rejection was most fundamental against changes to the Volcker Rule, which is named after former Fed Chairman Paul Volcker and is designed to prevent banks from using deposits to help fund their own market bets. He was concerned that they would invest in a broad pool of venture capital, private equity, and credit funds in a manner similar to what caused the contagion and losses in the financial crisis.

But banks may still be limited in the way they use this freedom through stress testing and oversight if the regulators of tomorrow don’t like the aspect of the risks they are beginning to take. In fact, Bloomberg Intelligence analysts believe that capital requirements could already increase next year.

Brainard is more progressive in other ways. She speaks regularly, for example, about how to incorporate more women into careers in the economic sector, and specifically black women. He has also led efforts to speak with low-income and minority communities to better understand how to improve the Community Reinvestment Act, which the Fed is trying to modernize.

American banks should support this work. They have become increasingly vocal about their own social and financial inclusion efforts.

Brainard has also been the leading voice at the Fed on how to incorporate climate change risks into their long-term financial stability assessments. The Fed has been slower on this issue than central banks in Europe and the UK, but it is heading towards the same kind of focus on risk and stability. Powell has received criticism about it, but has supported the same approach.

The bottom line is that the covid pandemic highlighted the importance of the largest banks and the focus on capital since 2008: They did not amplify the crisis, but were a reliable conduit for the massive support deployed by the Fed and the Treasury.

Lael Brainard is not a radical who advocates an ever-increasing increase in bank capital. Rather, she is a cautious voice of resistance against forgetting past crises and being prepared for future ones.

This year, the profitability of the banks and the billions paid to investors is due as much to that as anything else.