How an Obama Fed appointee is scuttling Wall Street’s bid to ease rules

June 14, 2019

By Pete Schroeder

WASHINGTON (Reuters) – As a U.S. Federal Reserve governor, Lael Brainard gets only one vote on proposals that come before the central bank’s board. Over the past year, she has used it to combat the Trump administration’s efforts to ease rules for Wall Street.

Brainard has broken ranks six times with other governors, voting against measures that she says would unnecessarily weaken regulations put in place after the 2007-2009 financial crisis. She told Yahoo Finance last week that she was concerned “we may be whittling away at that core resilience of our financial system.”

A review of her votes and speeches, and interviews with eight people familiar with the workings of the Fed show that even though Brainard has been the lone dissenting voice, she has wielded outsized influence due to the Fed’s long-held practice of arriving at decisions by consensus.

Her resistance is moderating and sometimes slowing the Fed’s deregulatory agenda, six regulatory sources and bank lobbyists said.

“She’s stood her ground,” said Sheila Bair, who led the Federal Deposit Insurance Corp during the financial crisis.

The Fed’s deliberative approach has prompted public complaints from several Congressional Republicans that the central bank has been dragging its feet. Three Wall Street lobbyists told Reuters they worry the window for major changes will close soon as Washington gears up for the 2020 presidential election.

Brainard, 57, has sat on the Fed board since 2014 when President Barack Obama nominated her for the post through 2026. A moderate Democrat, she was once accused by progressives of being too friendly to corporate interests.

Her emergence as the moderating voice on bank deregulation underscores how far the pendulum has swung under President Donald Trump. Her actions have global implications: The Fed leads an international group of regulators that oversee global financial stability, and its moves are closely watched by other central banks.

    The White House declined to comment.


Last year, Congress rewrote the 2010 Dodd-Frank law, the signature post-crisis banking regulation that left the industry with tens of billions of dollars in compliance costs and lost profits. It directed regulators to ease rules for small lenders.

Much of the Fed’s agenda comes from that law and is overseen by Governor Randal Quarles, a former private equity investor appointed by Trump in October 2017.  

    While Brainard agrees with Quarles that some regulation such as the Volcker Rule banning proprietary trading are cumbersome or arbitrary, she fears the Fed is going too far in relaxing rules for the big Wall Street lenders.

    In particular, she has opposed efforts by Quarles to use the Fed’s discretion to extend capital and liquidity relief to the larger banks, according to two sources and a review of her public statements.

    Quarles’ position is supported by Fed chair Jay Powell as well as some academics and banking experts.

    “Dodd-Frank never should have been passed in the form that it was. It was largely unnecessary, it was overly cumbersome,” said Thomas Vartanian, a law professor at George Mason University who was interviewed for the job that Quarles got.


    Brainard’s voting record shows she has pushed back against moves to relax rules on capital, liquidity, bank living wills and annual health checks for big banks.

In April 2018, when the Fed board proposed easing a rule restricting bank leverage, Brainard dissented. The proposed change would free up capital for the largest U.S. banks but could also weaken their balance sheets. It is still under discussion 14 months later.

Before that the last time a Fed governor had voted against a regulatory change was in 2011.

In October, the board also proposed relaxing some capital and liquidity requirements for domestic banks with $250 billion to $700 billion in assets. Brainard voted no. That proposal is still being reviewed by Fed staff.

    She is also nudging the Fed to finish pending post-crisis tasks, including a rule limiting global banks’ credit exposure to any single counterparty.

    Several Wall Street lobby groups said the rule did not take into account other regulations designed to mitigate the risk of counterparty exposure. First proposed in 2016, the rule had fallen down the Fed’s agenda but Brainard pushed the board to finalize it last June, two lobbyists said.


    Major Fed decisions are put to a majority board vote. Some are put to a preliminary vote, opened to public feedback, and then finalized by a second vote.

The threat of dissent from a governor can drive changes and potentially delay a final vote for months or longer, three regulatory sources said. Final rules that encounter dissent are also more vulnerable to legal challenges.

Brainard also chairs the Fed’s financial stability committee and sits on its supervision and regulation committee. That gives her a seat at the table as rule changes are crafted before being presented to the Fed board for a vote. 

While governors often have differing views, the Fed staff strive to reach compromises before a vote, said Nellie Liang who led the Fed’s Division of Financial Stability until 2016.

    This tradition has continued under Powell. He told reporters in March, when asked about Brainard’s votes, that it was “very healthy” to have different views, but added: “We’ll always be trying to reach consensus.”

Brainard’s dissents are boosting Democratic pressure on Powell, a Republican, to hit pause on deregulation.

    Democratic Representative Katie Porter, a member of the House Financial Services Committee, wrote to Powell in March raising concerns over Fed proposals to change capital rules. She cited Brainard’s dissent.

    “Not all of us have forgotten what happened 10 years ago,” she told Reuters. 

(Reporting by Pete Schroeder; additional reporting by Howard Schneider; editing by Michelle Price, Neal Templin and Paritosh Bansal)

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