The Chair and the Vice Chair for Supervision
Two exchanges from Jerome Powell's Senate hearing this week
On Wednesday Federal Reserve Chair Jerome Powell appeared before the House Financial Services Committee. During that appearance, Chair Powell indicated that there will be “broad material changes” to the Basel Endgame capital rules proposal released by the U.S. federal banking regulators last summer. Chair Powell also said he was “confident that the final product will be one that has broad support at the Fed and in the broader world.”
The next day, these statements led to questions from Senator Warren suggesting that, by staking out this sort of position on a regulatory matter, Chair Powell was going back on previous commitments he made about how he, as Chair, would interact with the Board’s Vice Chair for Supervision. A few public interest groups also picked up on what they saw as a contradiction.1
I am not sure I see it that way, but first let’s take what I hope is a fair look at the context.
The Statute
The Dodd-Frank Act amended Section 10 of the Federal Reserve Act to provide that one of the seven members of the Board of Governors of the Federal Reserve System should be designated by the President (subject to Senate approval) as the Vice Chair for Supervision.
As amended, the Federal Reserve Act assigns to the Vice Chair for Supervision two responsibilities. First, he or she “shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board.” Second, he or she “shall oversee the supervision and regulation of such firms.”
2017 Powell Statement
The Vice Chair for Supervision role was left vacant for many years after its creation, as President Obama never nominated someone to fill the role. (The duties were performed by Governor Daniel Tarullo in a de facto capacity.)
The first Senate-confirmed Vice Chair for Supervision, Randy Quarles, was appointed by President Trump, confirmed by the Senate, and then sworn into the job in fall of 2017. Jerome Powell, then a Governor, was in the process of being nominated as Chair around that same time, and so the worry in some quarters was that Powell would be too deferential to the Vice Chair for Supervision.2
For example, after Powell’s nomination hearing, Senator Sherrod Brown asked him these questions for the record:3
Q.1.a. If you are confirmed, what will you do to oppose the [Trump Administration] recommendations you believe would be harmful to financial stability, consumers, and safety and soundness?
Q.1.b. Randy Quarles is now in the role as Vice Chair for Supervision at the Federal Reserve. If you are confirmed as Chair, how do you see your role in relation to the Vice Chair of Supervision’s when it comes to regulatory policy?
Powell responded to the first half of this question with fairly generic comments about preserving the core pillars of post-financial crisis regulatory reform while making appropriate adjustments, and so on.
Then, in response to the second half of the question, Powell wrote:
As for my role as Federal Reserve Board (Board) Chair vis-a-vis the Vice Chairman for Supervision, if I were to be confirmed, I expect that the Vice Chairman will be the Board’s primary point person on regulatory and supervisory matters and will lead the committee that is responsible for formulating recommendations to the Board on such matters.
Decisions about regulations and material supervisory policies are made by all of our Board members, however, rather than by any one person.
2021 Powell Statements
Four years later, Vice Chair for Supervision Quarles was nearing the end of his term in that role, giving the Biden Administration the opportunity to, eventually, install its own Senate-confirmed Vice Chair for Supervision.
In light of this anticipated change in views of the Board’s regulatory point person, Chair Powell was asked at a press conference in September 2021 how he saw the Vice Chair for Supervision role:
VICTORIA GUIDA. Hi, Chair Powell. So I wanted to ask about the Vice Chair of Supervision position and just—I was wondering if you could speak about how you view that role and the extent to which you defer to that person on regulatory policy. And then, just sort of a related question: As you know, Randy Quarles’s vice chairmanship ends next month, and I was wondering if he’s going to retain the supervisory portfolio until he’s replaced in that role.
CHAIR POWELL. Sure. So Dodd-Frank created this position, Vice Chair for Supervision, and it’s, there’s actually a specific assignment in the Dodd-Frank language, as I’m sure you know. And, effectively, what it means is that the Vice Chair for Supervision is charged with setting the regulatory agenda. And, you know, it’s a specific grant of authority. And in the 10 years, almost, that I’ve been at the Fed, that person has really done that. Dan Tarullo certainly did it, and Vice Chair Quarles did it as well. And I would, I think—I respect that authority. I respect that that’s the person who will set the regulatory agenda going forward, and I would accept that.
And, furthermore, you know, it’s fully appropriate to look at—for a new person to come in and look at the current state of regulation and supervision and suggest appropriate changes, and I welcome that.
When it came time for his (re)nomination hearing, Chair Powell again fielded questions from Senators about how he intended to interact with the Vice Chair for Supervision. This time, the roles had reversed and there was a concern that Chair Powell would be insufficiently deferential.4
In particular, there was this exchange with Senator Warren.5
Senator Warren: Chair Powell, you recently stated that it would be appropriate, quote, ‘‘for a new person to come in and look at the current state of regulation and supervision and suggest appropriate changes,’’ end quote. Is that still your position?
Chair Powell: Yes, it is.
Senator Warren: The press also reported this as your agreement to defer to the Vice Chair for Supervision. So I want to ask you a specific example of how that deference would work in practice. If you are confirmed and if the new Vice Chair for Supervision suggests a regulatory action that you disagree with, will you bring that matter before the full Federal Reserve board for consideration?
Chair Powell: So let me just say that what the law does is the law gives the Vice Chair for Supervision the authority to set the regulatory and supervisory agenda. And I would expect to have a perfectly normal, good, constructive working relationship with a new Vice Chair for Supervision. I would not see myself as stopping those kinds of proposals from reaching the Board since the law seems to indicate that that is the job of the Vice Chair for Supervision.
Senator Warren: Good. I am just trying to be clear on your understanding of it. So you would bring that before the full board for consideration, even if you personally disagree?
Chair Powell: You know, that would be my general intent, yes.
Senator Warren: OK.
Chair Powell: Yes. I mean, I cannot cover every possible conceivable situation, but yes. That is my understanding of how—this the only other office that has specific legislative grant is the Vice Chair for Supervision, and that is what the job is.
Senator Warren: OK. I appreciate that. So you are saying you would do it and you would actually feel like you were legally bound to do it.
Chair Powell: I would say that is how I read the law.
Senator Warren: OK. If the Vice Chair for Supervision recommends a regulatory action with which you disagree, such as undoing a rule that Vice Chair Quarles brought forth and that you voted in favor of it, what does it mean to defer under such circumstances? I just want to understand your thinking here.
Chair Powell: I do not think I used the term ‘‘defer.’’ You mentioned that was a press report.
Senator Warren: Yeah.
Chair Powell: You know, we are a commission structure. The person is not the Comptroller of the Currency where they are the sole voice. Every Vice Chair for Supervision and those who held the job before there was a formal job, they have to convince the other members of the Board and that is how it works, and that is how I would expect it to work going forward.
Senator Warren: And I appreciate that. But your specific language was that you would respect that authority, which is I believe why many, many in the press interpreted that as defer. That is why I am trying to understand what respect that authority—those were your words—means.
Chair Powell: You know, I would say a couple things. First, respect the authority to bring these proposals. I also think a person who arrives, nominated by the President, confirmed by this body, with particular views, I would say that that person is entitled to a degree of deference, but I would not overstate that. The person still will have to convince the members of the Board to vote for whatever that person is proposing.
Senator Warren: OK. And then, if I can, just one more example. If the person in this role proposed new capital requirements to incorporate banks’ exposure to climate risks, would you vote for that?
Chair Powell: Would I vote for that? I would have to see what you are really specifically talking about.
2023 Powell Statements
After the bank failures last spring, Chair Powell at a press conference in May 2023 again faced questions about how he viewed his role and that of the Vice Chair for Supervision:
GREG ROBB. […] Greg Robb from MarketWatch. I just wondered if you’ve done any reflection on, on your own actions during this crisis and leading up to it over the last—since you’ve been Fed Chairman, I think I’ve heard you say a couple of times that you deferred to the Vice Chair for Supervision. Do you think that was the right way to go about this?
CHAIR POWELL. So, on, on the Vice Chair for Supervision, you know, the place to start is, is the statutory role, which is quite unusual. The Vice Chair, it says, shall deploy policy recommendations—“develop policy recommendations for the Board regarding supervision and regulation of depository institution . . . companies . . . , and shall oversee the supervision and regulation of such firms.” So this is Congress establishing a four-year term for someone else on the Board—not, not the Chair—as Vice Chair for Supervision who really gets to set the agenda for supervision and regulation for the Board of Governors. Congress wanted that person to be—to have political accountability for developing that agenda.
So the way it works—the way it has worked in practice for me is, I’ve had a good working relationship. I give my, my counsel, my input privately, and that’s—I offer that. And I have good conversations, and I try to contribute constructively. I respect the authority that Congress has deferred on that person, including working with, with Vice Chair Barr and, and his predecessor. And I think that’s the way it’s supposed to work, and that’s appropriate. I, I believe that’s what the law requires.
And, you know—but, but it isn’t—I wouldn’t say it’s a matter of complete deference. It’s more, I have a—I have a role in, in presenting my views and discussing—having an intelligent discussion about what’s going on and why. And, you know, that’s, that’s my input. But, ultimately, that person does get to set the agenda and gets to take things to the Board of Governors and really, in supervision, has sole authority over supervision.
A week or so before this exchange, Chair Powell in the press release accompanying Vice Chair for Supervision Barr’s report on SVB said, “I agree with and support his recommendations to address our rules and supervisory practices, and I am confident they will lead to a stronger and more resilient banking system.”
Thursday’s Exchange With Senator Warren
This brings us to 2024 and Senator Warren’s questions for Chair Powell on Thursday.6
Senator Warren: So, I just want to be clear. You haven't backed down from any of your comments from a year ago, have you Chair Powell? “Right lessons” and, “don't let this happen again,” supporting Vice Chair Barr’s recommendations, which includes stronger capital standards.
Chair Powell: No.
Senator Warren: You still stand by all that?
Chair Powell: Yes.
Senator Warren: […] Chair Powell, I'm having trouble reconciling the statements you made last year, which you say you hold on to, statements you made when the headlines were all about three giant bank failures. And now your reported efforts to quietly weaken the rules that would strengthen capital standards for giant banks and prevent more bank failures.
So, let me just give you a chance to clarify the record here. Are you committed to finalizing the strongest version of the Basel III capital rules this year?
Chair Powell: Let me first say that we have taken and are taking many more steps to deal with the problems that reveal themselves with Silicon Valley Bank, and that's around supervision and strong liquidity.
Senator Warren: I appreciate that, but I am just asking about the Basel III rules, the ones you have been required for years now to put in place, and you have dragged your feet on.
Chair Powell: The Basel III rules are not the thing that is directly related to Silicon Valley Bank. As you point out, they are a longer run thing, and I would just say that we put them out for comment, we got the comments, anybody is free to go read the comments, my view is it will be appropriate to make material and broad changes to that before we finalize it.
Senator Warren: Material and broad changes to strengthen the rules?
Chair Powell: Material and broad changes, and we’re talking about what that will mean in the end. I did not say that we would withdraw the rule. I said - there’s a concept of reproposal - and I said we hadn’t made a decision on that, but if that turns out to be appropriate in the view of the Board of Governors, then that is something we would look at doing.
Senator Warren: So everything you said a year ago about supporting the Vice Chair who is responsible for writing these rules?
Chair Powell: You and I had a long colloquy.
Senator Warren: Yes, we did.
Chair Powell: If you read it again, it’s on your website.
Senator Warren: And I have.
Chair Powell: You will see I am doing exactly what I said I would do in that colloquy.
Senator Warren: No, you said you would support Vice Chair Barr to get us strong rules and now he is putting out rules that you are talking about reproposing.
Chair Powell: That was about Silicon Valley Bank. The Vice Chair for Supervision has every right to bring proposals to the Board, and that has happened. But as I made clear in our colloquy, [I’m] not the Comptroller of the Currency. When I do monetary policy, I have one vote, there are eleven other voters. And that’s the way it works. It’s not different for the Vice Chair for Supervision.
****
I doubt anyone cares very much what the author of this blog thinks, and even if they do sometimes care, in this particular case my biases may be disqualifying,7 but based on the above it seems to me that Chair Powell has the better of the argument:
Chair Powell has said that the Vice Chair for Supervision sets the regulatory agenda, and at least based on what is in the public domain it is tough to argue this has not been true during Vice Chair for Supervision Barr’s tenure so far. 8 If Chair Powell is actually blocking the Vice Chair for Supervision from moving forward with a final Basel Endgame rule, then the case that Chair Powell has walked back his prior comments would become much stronger, but the evidence for that - at this stage - seems pretty close to nil. Especially given that Vice Chair for Supervision Barr himself said a few months ago that he found the public comments “super helpful” and that the Board was considering changes in response.
I believe the above history also shows that Chair Powell has been consistent in stating, during the tenures of each of Vice Chair for Supervision Quarles and Vice Chair for Supervision Barr, that while the Vice Chair for Supervision sets the agenda, decisions about regulatory policy recommendations the Vice Chair for Supervision brings to the Board are made by the full Board, with each Governor having a vote. It does not seem wrong to me for the Chair, as other governors have, to state publicly what he believes needs to be done to win his vote.
Though maybe a slightly closer question, I also do not see it as inconsistent with prior statements for Chair Powell to distinguish between Vice Chair for Supervision Barr’s recommendations in his report on SVB and the Basel III changes more generally. Even if one agrees with every word of Vice Chair for Supervision Barr’s report, it is difficult to read the report as saying much of anything about whether the ILM should be fixed or floored or allowed to float, about the appropriate risk weight for certain mortgages, about the right p-factor in the context of securitization exposures, or about tens of other granular aspects of the Basel Endgame proposal that have been the focus of commenters.
I suppose there are a few counterarguments:
First, you might argue that though Chair Powell has described his interactions with the Vice Chair for Supervision consistently across the Vice Chair for Supervision Quarles and Vice Chair for Supervision Barr eras, in practice he was more deferential to Mr. Quarles than he has been to Mr. Barr. This claim is tough to evaluate. It is true that, at least as I can recall, Chair Powell never made a public statement like this saying he expected material changes to a proposal brought forward by Vice Chair for Supervision Quarles before it could become final.9 But it’s also true that the Basel Endgame rules, to the delight of DC-area TV stations selling ad space during football games, have garnered an unusual degree of attention and comment, so it makes sense that Chair Powell himself would be more frequently asked to comment on them. We also do not know the sort of conversations Chair Powell had with either of his Vice Chairs for Supervision behind the scenes.
More subtly, you might argue that there is a distinction between Chair Powell saying, as he had done several times previously, that proposals brought forward by the Vice Chair for Supervision need to win the support of the Board, with everyone getting one vote, and Chair Powell saying that the proposal has to achieve not merely a bare majority but something closer to consensus-level support.10 I wonder, though, if this is a distinction without much of a difference. If it is okay for Chair Powell to say, “to earn my vote, [X number of things] need to change,” is it really meaningfully different for Chair Powell to specify support from a broader set of Governors as one of those things? And even if you do believe this is a difference, I’m not sure the change in position can be pinpointed to this week: Chair Powell’s comments before the House and Senate panels were not miles away from what he has been saying about the proposal for months now.11
Of course, saying that Chair Powell’s search for consensus is consistent with his past remarks is not necessarily the same thing as saying that he is correct on the merits that consensus on regulatory matters is something to be prized. Particularly if Chair Powell’s desire for consensus on Basel Endgame is not even about the capital rules, necessarily, but rather about the implications that a lack of consensus on regulatory policy could mean for the FOMC’s ability to make contentious monetary policy decisions.12
Finally, you might accuse Chair Powell of drawing too sharp a distinction between what the Board is doing in response to SVB (e.g., supervisory changes, a yet-to-be-determined set of proposals on liquidity) and the Basel Endgame proposal. Vice Chairman for Supervision Barr’s SVB report does say in its cover letter that SVB’s failure “emphasized why strong bank capital matters” and that the Board should “evaluate how to improve our capital requirements in light of lessons learned from SVB.” So I suppose in some sense endorsing the recommendations in the Vice Chair for Supervision Barr report on SVB does mean that Chair Powell endorsed changes to the capital rules.
But even accepting that premise, what does it mean here? The one capital-related change described with specificity in Vice Chair for Supervision Barr’s cover letter — “we should require a broader set of firms to take into account unrealized gains or losses on available-for-sale securities” — is an aspect of the Basel Endgame proposal very unlikely to change,13 and I doubt this is what Chair Powell has in mind when he describes broad changes to the proposal.
You could also argue about what it means to have “strong bank capital.” Reuters reported this week that earlier drafts of the Basel Endgame proposal “envisaged a single-digit capital increase. But some officials, particularly at the FDIC, pushed for bigger capital hikes, especially after Silicon Valley Bank collapsed.”
Say the final rule winds up closer to that single-digit range. That could reasonably be viewed as both a material change to the proposal and a rule that nonetheless has made bank capital stronger, for some definition of stronger.
Climate Scenario Analysis
This post is already far too long, but just briefly there was another exchange during the Senate hearing that reminded me of something possibly interesting.
In response to questions from Senator Cramer,14 Chair Powell discussed the “two and only two things”15 the Board has done with respect to climate risk.
One of them was to do illustrative stress scenarios — scenarios, not stress scenarios — scenarios, climate scenarios. So that, you know, banks are already doing this. The large banks that were subject to this, they’re already doing it because they are doing business internationally and they don’t have any choice.
What Chair Powell is getting at here is that the Board in 2023 required the six non-custody bank U.S. G-SIBs to participate in a pilot climate scenario analysis exercise.
The Board made clear that individual firm results were not going to be released, but also said that it expected to “disclose aggregated information about how large banking organizations are incorporating climate-related financial risks into their existing risk-management frameworks.”
These insights gained from the scenario analysis exercise were, the Board anticipated, going to be published “around the end of 2023.”
Thanks for reading! Thoughts on this post are welcome at bankregblog@gmail.com16
See for example this Bloomberg article on Wednesday:
“Powell promised the Senate when he was reconfirmed to the Fed that the vice chair of supervision has the lead on regulatory issues, which is the law, after all,” said Carter Dougherty, a spokesperson at Americans for Financial Reform, a Washington-based coalition of consumer and investor advocates.
Similarly, Dennis Kelleher of Better Markets argued on X that Chair Powell had previously made statements “giving everyone comfort that he wouldn't block regulation/frustrate the VCS, which he is now doing.”
Earlier in 2017 there was a push from Republicans in the opposite direction, urging then-Chair Yellen not to do anything on supervision and regulation until a Vice Chair for Supervision was in place.
This is on PDF page 59.
The reversal was not on only one side of the aisle. Republicans also now have markedly different views on the proper role of the Vice Chair for Supervision. Compare the letter mentioned in footnote 2 above to some of the bills introduced by House GOP members during this Congress that would alter or eliminate the Vice Chair for Supervision role.
This starts on PDF page 29.
I felt, and still feel, that appointing Chair Powell for a second term was the right move.
Incidentally, I also felt, and still feel, that Vice Chair for Supervision Barr was a fine choice for his role as well.
In addition to the various proposals and final rules that Vice Chair for Supervision Barr has brought to the Board (e.g., Basel Endgame, long-term debt, resolution planning guidance that if adopted as proposed would undo some changes made during the Quarles era, Community Reinvestment Act changes), evidence of agenda setting can also be seen in the proposals that have not made it out for public comment.
For instance, in March 2021, the Board while Powell was Chair and Quarles was Vice Chair for Supervision said in a press release that it would “soon be inviting public comment on several potential SLR modifications.” That never happened, and it has hardly been mentioned in Board communications since. The most in-depth public treatment the SLR has received under Vice Chair for Supervision Barr is a few paragraphs in a speech last summer in which he explained why he had concluded that changes to the SLR are unnecessary.
The May 2023 statement from Chair Powell that “I give my, my counsel, my input privately,” is toughest to reconcile here, but I think fairly read in context Chair Powell was talking about his broad input on the regulatory and supervisory agenda as a general matter, rather than saying he never comments publicly on regulatory matters, which obviously was not true then and is not true now.
Note also that Chair Powell and Vice Chair for Supervision Quarles did disagree publicly on at least one matter, although not one technically within Quarles’s portfolio. Chair Powell supported the development of FedNow, while Vice Chair for Supervision Quarles dissented.
I am borrowing here from an argument that Peter Conti-Brown made on X.
For example, at a November 2023 press conference:
VICTORIA GUIDA. Hi. Victoria Guida with Politico. I wanted to ask about the Basel III Endgame capital proposal. You’ve gotten a lot of “pushback” from people on different aspects of the proposal, and you yourself expressed some reservations. And I’m just curious: Could you accept finalizing that proposal without significant changes?
CHAIR POWELL. So, that proposal is out for comment. And we expect a lot of comment. We won’t get those comments until the end of, well, into next year. You know, we’ve extended the deadline. And we’ll take them seriously. We’ll read them. I’ll say what, what I do expect is that we will—we will come to a—we’re a consensus-driven organization. We’ll come to a package that has broad support on the Board.
VICTORIA GUIDA. So is broad support mean more support than the proposal had?
CHAIR POWELL. It means broad support.
Even commenters who otherwise criticized the proposal at length generally did not challenge the elimination of the AOCI opt-out for firms with $100 billion or more in total assets, although they did ask for a longer transition period.
This starts at around the 1:20:45 mark using the same link as in footnote 6.
The second thing was climate risk management guidance, as Chair Powell went on to explain after the block quote in the text here.
This is an ironic (hypocritical?) footnote to close with given that the last item above poked at the Board for not doing something in a timely manner, but I have a received a few thoughtful emails recently to which I have not yet responded. I apologize for that and will do so soon.