When the Federal Reserve voted in 2011 on a draft of a sweeping new rule preventing banks from making certain speculative investments, Sarah Bloom Raskin was the lone dissenter among senior colleagues at the US central bank.
The so-called Volcker rule, she concluded, was not stringent enough as it stood, its guardrails “insufficient” and open to “significant abuse”.
In expressing her opposition, Raskin, then a Fed governor, helped to secure much tougher terms and distinguished herself as a leading voice on regulatory matters.
If confirmed as vice-chair for supervision, Raskin is expected to again take a bold approach on a range of thorny issues, from patching up weak spots in the post-financial crisis regulatory apparatus to steering the Fed to more seriously consider climate-related financial risks.
“The fact that she did that tells you what a remarkable person she is,” said Andrew Levin, who worked alongside Raskin during his two-decade stint at the Fed, of her objection. “She didn’t just give in and go along. She had enough confidence in her own expertise that she was willing to dissent — and that is not always an easy thing to do.”
President Joe Biden’s decision to nominate Raskin, a 60-year-old Democrat who teaches at Duke University, fills a vacancy left by Randal Quarles, whose four-year term ended in October. In announcing his decision, he also tapped Lisa Cook, a professor of economics and international relations at Michigan State University, and Philip Jefferson, a professor of economics at Davidson College, to fill the two remaining vacancies on the Fed’s board of governors.
Appointed by then-president Donald Trump in 2017, Quarles’ departure had long been expected following Biden’s victory in the 2020 presidential election, leading to frustration among many financial regulation experts that it had taken so long to announce a replacement.
Having been through the vetting process before and encountered multiple Senate confirmation hearings, Raskin, who previously served as the deputy secretary of the US Treasury during the Obama administration, is unlikely to face insurmountable opposition in Congress, ensuring a smooth transition into the role.
“Her intimate knowledge of the [regulatory] toolset will strengthen her ability to be effective from day one,” said Kathryn Judge, a professor at Columbia University with expertise in financial regulation. “In light of the delay associated with this appointment, it is all that much more important that you have someone who can start planning an agenda even before the confirmation process, so they are really ready to go and bring about change in the areas that are needed.”
Raskin is expected to take a more hardline approach than her predecessor when it comes to regulatory matters and to look for ways to strengthen the rules that govern the largest and most important financial institutions.
“It is a really tough job. You face hard issues and at the same time the political pressure from both sides is enormous,” said Betsy Duke, a former Fed governor who worked alongside Raskin. “Sarah is someone who can stand up to political pressure.”
During his tenure, Quarles, a Republican who once worked as a top Treasury official under George W Bush, led a number of initiatives to weaken some of the regulations Raskin was responsible for helping to put into effect during her first stint at the Fed.
In addition to revising the Volcker rule and lightening the trading restrictions it imposed on the biggest banks, Quarles also spearheaded a scaling back of certain capital requirements and altered how these financial institutions are stress-tested to gauge their ability to weather crises, among other efforts to “tailor” regulation.
The modifications had near-unanimous support among top officials at the Fed aside from Lael Brainard, Biden’s pick for vice-chair, who dissented on many of them.
“Seeds of financial crises are sown decades in advance,” said Jeremy Kress, a former lawyer in the banking regulation and policy group at the Fed. “We are not going to know the real costs of the Fed’s deregulation for years to come, [and] it is far too early to definitively declare success based on how the banking system performed during Covid.”
Raskin’s appointment, he said, is critical, given how “influential” she was in helping to implement the initial set of rules stemming from the passage of the Dodd-Frank Act in 2010.
“She knows not only what needs to be done to get back to the Dodd-Frank baseline, but she is also aware of some of the initial weaknesses of the rules and how to strengthen them,” said Kress, who is now a professor at the University of Michigan.
Amending the stress test parameters should be one of Raskin’s top priorities, many regulatory experts and progressive Democrats say. Under Quarles, the tests became more transparent and the Fed was no longer able to publicly fail banks based on qualitative assessments of their underlying strength. The adjustments made it easier for the tests to be gamed, critics said.
Republican lawmakers appear most wary about Raskin’s past advocacy for the financial regulators to more proactively address climate change issues.
She has backed greater scrutiny on the types of companies the Fed seeks to support with its emergency measures and has called for larger banks with exposure to oil and gas companies and other fossil fuel-intensive industries to hold more capital.
Pat Toomey, the Republican senator from Pennsylvania, has taken specific issue with what he says are her policies to “choke off credit” to fossil-fuel intensive companies, something he warned in a statement on Thursday would “not only threaten both the Fed’s independence and effectiveness but would also weaken economic growth”.
Brainard was pressed during her confirmation hearing on Thursday about her views on potential regulatory curbs on banks lending to oil and gas companies. She said it was not the Fed’s job to dictate lending, but expressed support for the central bank ensuring associated climate risks are monitored and managed.
Glenn Hubbard, dean emeritus of Columbia Business School and former chair of the US Council of Economic Advisers during George W Bush’s presidency, said that approach “struck the right balance” and warned about the Fed getting into the “credit allocation business”.
Moving the Fed in this direction could require substantial wrangling. Powell has appeared circumspect about whether the central bank should weigh in on climate change issues.
He has said, however, that he would “accept” the vice-chair for supervision setting the agenda.
Raskin will also be responsible for sketching out the Fed’s regulatory stance on digital assets such as stablecoins and participating in discussions about how a digital dollar issued by the central bank could work.
Those issues may not yet take centre stage so long as the central bank is grappling with extremely high and potentially persistent inflation.
The Fed late last year embraced a much more aggressive approach to scaling back its accommodation. Multiple interest rate increases are now expected next year, with the Fed also beginning to shrink the size of its balance sheet.
“Raskin and her colleagues are going to be in a situation where there are questions about how the financial system remains healthy and strong in a situation where the Fed has to move pretty quickly to change monetary policy,” said Levin, noting episodes of Treasury market illiquidity and other “plumbing” issues that have surfaced in the past.
“This is going to be a very challenging year for the Fed,” he added. “There will be rough waters ahead.”
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