Part 2: The new leaders for the Fed, Vice Chair for Supervision Sarah Bloom Raskin
More on how Biden's nominees to the Board of Governors, if confirmed, will make history. This post, the second in a three part series, focuses on the Vice Chair for Supervision.
It’s #FedWeek, again.
On Thursday, Senate Banking will hold hearings for Sarah Bloom Raskin for Vice Chair for Supervision and Lisa Cook and Philip Jefferson for Fed Governors.
Jay Powell and Lael Brainard’s earlier hearings for Chair and Vice Chair went very well, and they are both likely to sail through the Senate soon. See my Substack post on why that’s good news.
Today’s post is on the Vice Chair for Supervision. What it is; why Raskin is a great person for the role; and why is her confirmation going to be tough.
What is the Vice Chair for Supervision?
The choice of Vice Chair for Supervision is the most consequential of the Biden nominees. I know, I know. Fed Chair got all the attention. It matters, and yes, the Fed has a very challenging year ahead for monetary policy. (See markets panic attack over Powell’s presser last week. Chill out, please. It’s a marathon, not a sprint, in 2022.)
The next Vice Chair for Supervision will likely shape the path of regulatory, financial stability, and payments policy at the Fed for decades to come. Pay attention!
It’s a relatively new leadership role with a four-year term created with the Dodd-Frank Act. And it was a direct result of what was viewed as lax oversight at the Fed of the financial institutions before the Great Financial Crisis in 2008. See the amended Section 10 of the Federal Reserve Act:
The Vice Chairman for Supervision shall develop policy recommendations for the Board regarding supervision and regulation of depository institution holding companies and other financial firms supervised by the Board, and shall oversee the supervision and regulation of such firms.
[The act of July 21, 2010, designated a new Vice Chairman for Supervision.]
And what does “supervision and regulation” entail? A lot more than monetary policy. Decisions facing the Fed in this area in the coming years will be more important than the federal funds rate path this year. Here is a video on the function:
Dan Tarullo, a Fed Governor in 2010, fulfilled many of the duties but was not nominated or confirmed. Randal Quarles, a Trump nominee, was the first to hold the position, and his appointment expired in October 2021. He pushed for a loosening of some bank regulations—changes that drew ire from Senator Elizabeth Warren. She called out Fed Chair Powell for it, and yes, the buck stops with him as Chair. Even so, Vice Chair for Supervision Quarles was a key contributor.
There’s much to be defined about the role and many new policy challenges facing the Fed. As Kaleb Nygaard and I discussed recently, history will be made.
Ok, so that sets the stage and defines the stakes. It is important to remember that the Board of Governors (not the Federal Open Market Committee) votes on changes to regulation and supervision. The Vice Chair for Supervision does not have the sole authority to make changes. But that person would set the agenda and oversee staff working on proposals. Plus, Chair Powell consistently looks to his colleagues for guidance, especially in their areas of authority. It should be obvious to everyone that Raskin would not be Quarles. The decisions at the Fed would be different too.
What would Sarah Bloom Raskin bring to the role?
Personnel is policy. In addition to shaping the role, Raskin would craft the Fed’s regulatory and supervisory approaches.
Raskin brings experience.
Here is her bio — likely soon to be expanded — at the Fed Reserve History project.
Sarah Bloom Raskin took office as a member of the Board of Governors on October 4, 2010, to fill an unexpired term ending January 31, 2016. She resigned on March 13, 2014.
Raskin received a bachelor’s degree in economics (magna cum laude) from Amherst College and earned a law degree from Harvard Law School.
During her career, Raskin has served both the public and private sectors. Early in her career, she worked at the Federal Reserve Bank of New York and the Joint Economic Committee of the Congress. She was later managing director at the Promontory Financial Group. She also served as the banking counsel for the US Senate Committee on Banking, Housing, and Urban Affairs.
Before her appointment to the Board of Governors, Raskin was the commissioner of financial regulation for the State of Maryland. In this capacity, Raskin and her agency were responsible for regulating an array of interconnected financial institutions, including banks, credit unions, mortgage lenders, mortgage servicers, and trust companies, among others. Under her leadership, the commissioner’s office played an early and multifaceted role in the state’s response to the financial crisis. This included reforming through legislation; regulation; examination and supervision; the foreclosure process; combating foreclosure rescue and loan modification scams; and elevating licensing, lending, and servicing standards.
After serving at the Board of Governors, she was the Deputy Secretary of the Treasury from 2014 to 2016. Currently, she is a Distinguished Professor of the Practice of Law at Duke University.
Could you ask for a more qualified candidate? No, you could not.
Raskin is forward-looking. The Fed must look forward.
During her tenure as a Governor early in the recovery from the Great Recession, Raskin pushed the staff internally to think harder about inequality. She also gave public speeches on it. The seeds of the Fed’s new monetary policy framework, which brought maximum employment on par with stable prices, were planted well before the big unveil in August 2020. Raskin helped plant the seeds.
Risks to the financial system from climate change are real. Central banks worldwide are trying to get ahead of the worsening crisis. The Fed has legal responsibility for safety and soundness as well as financial stability. Climate change is one on the long list of risks. Plus, a wide range of policies exists that the Fed could pursue, with authority from Congress. I wrote about some possibilities here:
Having worked for Raskin on the big questions about inequality, I know she will lead the Fed in thoughtful, probing discussions of climate change.
Raskin is pragmatic and steady.
No matter how often you hear it, Sarah Bloom Raskin is not a radical. None of the nominees are. Good. Raskin is a realist and will marshall the many resources at the Fed. The Division of Supervision and Regulation is the largest at the Board, and the Division of Financial Stability is the most innovative. In addition, Raskin will consult with other regulators in the United States and abroad. Experience matters here too. Financial systems are global, and they are complex, and they are easily startled. Oversight is critical. Competent oversight is essential.
This hearing on March 12, 2020, is the one that Raskin will be asked about extensively. Listen to it yourself. Does this sound like a radical? No, it does not.
Here is the conclusion to her prepared remarks:
Transitioning to a low-carbon economy is necessary if we want to create a sustainable climate. But transitioning carries its own dangers, especially if the transition is abrupt and poorly managed and executed. Across the world, central banks and regulators increasingly are recognizing the risks that the transition poses for the financial system.[41] But, unfortunately, the Federal Reserve is not taking these risks seriously. Among the developed world’s monetary authorities, the Federal Reserve is one of the few that have not joined the Network for Greening the Financial System. The Network’s members read like a who’s who of major monetary authorities: the Bank of England, the Bank of Canada, the Bank of Japan, the Swiss National Bank, the European Central Bank, and dozens of others.[42] The Federal Reserve’s conspicuous absence from such an important Network is extraordinary, irresponsible, and almost unbelievable.
Minimizing both physical risks and transition risks is well within the Federal Reserve’s mandate[43]; the Federal Reserve should use its oversight authority to ensure a prudent transition to a low-carbon economy, a transition that does not destabilize the financial system.
And because we are already aware of transition risks, we can foresee the dangers, plan for the future, and take the proper steps to mitigate the risks and promote financial stability. Indeed, if we want to encourage a market reaction to climate change and climate policies that avoids financial instability, we need to foster the development of climate-related financial risk management technology, including the systemic collection, analysis, and transparency of reliable information. If investors could get essential reliable information about the carbon intensity of investments and how firms are adapting to a warmer world, they would be able to assess risks to firms’ business models accurately and express their view in the market. They could compare different investments based on their long term viability in a warming world and in a decarbonizing economy. Capital could then become priced to correspond with known climate risks and the evolving reliance and use of fossil fuels. Informed decisions allow us to mitigate the financial impact of climate risks and fashion timely remedies ahead of a crisis. That would ensure more meaningful pricing for investors, encourage sustainable forms of energy production, and smooth our transition to a lower-carbon economy.
Sarah Bloom Raskin is not radical. She’s awake at the wheel. She will lead. Good!
What to watch at Raskin’s confirmation hearing?
Raskin’s confirmation comes down to one man: Senator Joe Manchin. And it’s all about climate change and how efforts to fight it might harm oil and gas companies.
Here we go again.
I am cautiously optimistic. Manchin does not sit on Senate Banking, but Republicans there and some Democrats (like Senator Jon Tester) will ask Raskin extensively about her views on the Fed using its regulatory and emergency lending powers to fight climate change. She will give solid, sensible answers. See above.
Even so, Raskin will either get fifty votes with Manchin and Vice President Kamala Harris breaking the tie, or she won’t get Manchin’s vote and won’t get the job.
Raskin’s answers at the hearing and in private meetings with Senators will be decisive. Anything is possible. Fed candidates have crashed and burned in hearings. Marvin Goodfriend’s was puzzling, and Judy Shelton’s was epic. It could happen with Raskin, but I very much doubt it. She’s highly competent and has been Senate confirmed before. Raskin is top-notch, but climate change is a lightning rod.
Wrapping Up
President Biden had an abundance of riches from which to choose his Fed nominations. I am pleased (and relieved) that he took full advantage of it.
Sarah Bloom Raskin would be a highly effective Vice Chair for Supervision. She would lead the Fed as it grapples with some fraught and highly technical challenges in financial markets and the banking system, such as risks from climate change, digital currencies, faster payments, fintech, financial stability, consumer protections, etc.
That’s a tall order, and success depends on sound leadership. No one is better prepared and better suited to serve this role than Sarah Bloom Raskin.
Personal Note in Closing …
I am concerned about what could be a combative tone at Thursday’s confirmation hearing. Raskin, Cook, and Jefferson are decent people, the kind who are public servants no matter where they work and who is watching. You can disagree with their views and you may certainly disagree with my opinions on them. But please treat each of them with respect. We need people who give a damn at the Fed. We need people who are real people. Sarah, Lisa, and Philip are. Show them the respect they deserve. The respect we all deserve.
Finally, I wrote recently about how much Sarah and her husband, Representative Jamie Raskin’s, sharing of their family’s tragedy meant to me. No, it should not decide whether she serves again at the Fed. But it does show how she serves others.
Please consider financially supporting my Substack with a paid subscription. You will help me to write regularly about economic policy. You will also receive some paid-only posts.
The views here are my own and do not represent Jain Family Institute or my colleagues.