Hsu Exit Interview; Fed's Bowman Thrust into the Spotlight; Banks See Opportunity in Stress Test Win
Capitol Account: Free Weekly Edition
As Washington (and Capitol Account) returned to business after the holidays, there was no dearth of news. The week started off with a bang: Michael Barr, the Fed’s top bank overseer, announced he would step down early as vice chair for supervision. Still, he’s staying on as a governor, a move that will box in the Trump administration as it picks a successor. We also took a look at the central bank official who many see as heir apparent. She has the support of the industry and key Republican lawmakers, but it’s not a done deal — and the situation may get complicated.
Meanwhile, the Biden agency heads are polishing their resumes and burnishing their legacies. We covered two, the CFTC’s Rostin Behnam and the FTC’s Lina Khan, on their farewell speaking tours. The head of the OCC sat down with us for an exit interview where he touched on everything from Basel to bailouts to the bank lobby.
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Friday Q and A: For the past three and a half years, Michael Hsu didn’t get a lot of the things he wanted. He was never formally nominated to be Comptroller of the Currency, serving with the “acting” title since May 2021. Nor did he and his fellow Biden bank regulators complete some of their most high-profile initiatives, from the Basel endgame to long-term debt and liquidity rules.
Yet Hsu, a longtime bank supervisor and former top Fed staffer, threw himself into what he describes as a dream job: running an agency full of examiners. The OCC chief was at the table as officials managed through a regional banking crisis and a crypto crash. He leveraged the bully pulpit to start conversations and float big policy ideas. Even though many of those have not come to fruition, Hsu – like any good regulator – maintains he’s after long-term progress rather than fleeting, short-term wins.
We debriefed Hsu this week, ahead of his likely departure once Donald Trump enters the White House. Read on for his characteristically big-picture takes on how the next administration can bring home Basel, whether the U.S. has really solved “too big to fail” and the crucial FDIC policy that’s not getting enough attention. What follows is our (lightly edited and condensed) conversation.
Capitol Account: You’ve worked closely with Fed Vice Chair for Supervision Barr. What do you make of his announcement that he will step down from the post?
Michael Hsu: I really respect Michael Barr's decision…He's been an excellent collaboration partner. I think to do these jobs, to be effective in financial regulation, you have to be a good collaboration partner. Beyond that, I don't actually have much more to say.
CA: There was a question about whether he could be fired by the president before his vice chair term ended. That’s not an issue with your post, however, partly because you were never confirmed by the Senate. Was it a problem having the word `acting’ attached to your name?
MH: When Secretary [Janet] Yellen offered the job to me, I asked her, ‘Am I keeping the seat warm or am I doing the job?’ Because these are two different things – and I was perfectly happy doing one or the other. I just wanted clarity as to which it was. And she was very clear to me. She [said], `You have to do the job.’
CA: How did you take that directive?
MH: To do the job means you have to be able to articulate what are the priorities that the agency would organize around. You've got, at the OCC, 3,500 people that need to ensure the safety, soundness and fairness of the federal banking system. There has to be direction.
CA: What was your plan when you started?
MH: I really oriented things around safeguarding trust in banking. All of banking runs around trust, and we're in a particular environment these days where there's just a lot of things going on. And especially in 2021: guarding against complacency. That was one of my top priorities, which proved to be pretty prescient. [In] 2022 [there was a] crypto crash, [and then the] 2023 banking turmoil. Guarding against complacency really oriented and centered our examination activities, our responses to banks, etc. That served the American people well, [and] I would have done that differently if the instruction was, keep the seat warm for the next guy or gal.
CA: It sounds like not having the permanent role didn’t bother you too much.
MH: Well, I mean, of course I would prefer it to have been confirmed. But I focus on the things I can control.
CA: You were known for using speeches to float pretty bold ideas, even some that likely aren't going to come to fruition anytime soon. Why?
MH: Sometimes when you've got a really thorny problem, you’ve got to work it out…I think it's good practice to use the leadership position to kind of highlight what problems need to be solved – and to engage, not just internally, but also externally.
CA: Any examples?
MH: Take things like capital or liquidity or operational resilience – the devil is in the details. Broad brush strokes, everyone can agree [on] a general direction of travel, but the details really, really matter. Speeches are a good vehicle to put ideas out there, invite that engagement. And that builds trust. Because no one likes to just have a solution jammed down their throat – even if the solution is good.
CA: How do you reflect on the OCC’s accomplishments during your tenure?
MH: I made safeguarding trust the North Star for all that we were doing…I feel good about what we've done…Guarding against complacency. Elevating fairness. Between our [Community Reinvestment Act] work, overdrafts, financial inclusion, financial health, I took some of the internal forces at the agency who really wanted to promote fairness and just unleashed those. [Also] adapting to digitalization…We have that [request for information] on bank-fintech arrangements, which really lays the groundwork for saying, `How do we solve this?’ And what's really great about it, the banks and the fintechs together, the comments on that have been really, really valuable.
CA: Still, in terms of getting some of the big final rules done, aren’t the banking agencies leaving a lot on the table?
MH: Even though we were not able to necessarily finish things up with a bow…we were able to move the ball forward in a really productive, sustainable direction. I'm most interested in long-term, durable wins. I've been in government for 20 years, over 20 years doing this stuff. There's nothing more frustrating than this kind of fleeting, pendulum-swing of announcements…There's a saying: Faster alone, farther together. I say it to my staff all the time, which is frustrating, because sometimes we have to slow down…But if you just do it alone, you can get the quick win, but then the next guy is just going to undo the quick win.
CA: What are your thoughts about dealing with the bank lobby? It has seemed pretty recalcitrant and hasn’t hesitated to sue to overturn a number of regulations.
MH: There are some times where a unified voice that can come up with a coherent set of arguments and responses to what we're doing can be quite helpful, actually. There are other times where it's just – it's not a tool, it's a weapon. I think it's important to stay on the side of tools, because that's how we get to better outcomes. One thing I'll say here is that there is more daylight between some of the trade group members than is let on by the responses of the trade groups…I bring that up because it can feel, I think, to a reporter or to the public, like the entire banking industry is lined up against all the regulators on everything. That's not necessarily the case…(Friday)
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Next Up? Michelle Bowman had been serving as Kansas Banking Commissioner for a little under a year when she got a call from Washington about being nominated to the Federal Reserve Board. Her response, which she recounted recently: “You do know who you are talking to, right? Did you mean to call me?”
Now, six years after her 2018 confirmation, Bowman is seen as the heir-apparent for yet another heady promotion – to perhaps the most powerful bank regulatory job in America. This being D.C., however, nothing is set in stone.
Indeed even as Bowman has been pushed into the spotlight, few can say for certain what will happen in the wake of Barr’s surprise decision to give up his vice chair for supervision job next month. The appointment has become part of a complicated dance between the mercurial President-elect Trump, who wants to make his mark on the central bank, and an institution that zealously guards its independence. Add in a strong push by Republicans (and the banking industry) to rein in the Fed staff’s regulatory power and the situation becomes even more complicated. All in all, it amounts to a pretty unsettling time at a place that prefers to keep as far away from politics, and controversy, as it can.
Barr’s decision to step down was made largely to head off a legal fight if Trump tried to fire him – as many suspected he would do. But the gambit also boxed in the incoming administration because Barr is only giving up the vice chair post while staying on as a governor indefinitely. That means a vacancy on the Fed board won’t open until January 2026, limiting the Trump camp’s options to install a new supervision chief.
Trump on Tuesday said he wants to “nominate somebody soon” for the role. Enter Bowman, who could take over quickly. She’s the senior Republican at the Fed, and was appointed by Trump the last time he was in the White House. More importantly, she has the support of both the banking industry and key Republican lawmakers. Less clear, however, is whether she has the pull within the Mar-a-Lago crowd to outstrip other potential candidates.
Bowman, 53, hails from a family that started Kansas-based Farmers and Drovers Bank in the 1880s. She worked at the community lender before becoming a state regulator. Her knowledge of “basic banking” has especially endeared her to executives. Conservatives also see a lot to like in her policy ideas. During Barr’s tenure, Bowman has often played the loyal opposition, blasting his Basel capital plan and regularly reminding audiences about the thousands of pages of complex rule text that the Fed has published. She’s definitely on the same page, policy-wise, with the incoming administration.
Her opposition, however, hasn’t played well inside the Fed where Bowman has few allies. Sources say she is often at loggerheads with staff and does not have an easy relationship with Powell, whom she has clashed with over monetary policy. (Bowman voted “no” on a rate cut in September, the first dissent by a governor since 2005). When Powell and Barr sought to revise the controversial Basel proposal this fall, Bowman didn’t seem prepared to go along – and made critical remarks the day the vice chair announced the changes.
Bowman aired some perceived slights during a November appearance in Mississippi, part of a busy travel schedule to local banking confabs across the country in recent years. “After Randy Quarles left the board,” she recalled, referring to Barr’s predecessor, “there came a time where I was no longer – I no longer had access to information” about bank supervision. Instead, she had to ask former state regulatory colleagues about Fed-regulated firms: “That is not the way that the Federal Reserve is supposed to operate.”
Bowman also told the Mississippi crowd a yarn about tensions with Fed staff. Once, she brought on “a phenomenal woman” from the division of supervision and regulation to serve as an adviser. When the appointment expired, however, the unit’s brass wouldn’t hire the aide back, instead forcing her to compete for a new job – and eventually leave the Fed. “That tells you the value that our organization places on advising policy makers in our role in drafting regulation,” Bowman lamented. “I think that’s really a sad testament.”…(Thursday)
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Reversing Course: For years, under both Democratic and Republican administrations, the Fed has resisted calls to lift the veil of secrecy surrounding its annual stress tests of the largest lenders. That posture suddenly, and surprisingly, took a U-turn when the central bank announced two days before Christmas that it would overhaul the exams and provide more details about the mathematical models underpinning them.
The move wasn’t quite enough to appease the industry, which promptly responded by filing a long-in-the-works legal challenge to the “opaque” testing process. But executives were quick to describe the case as a defensive maneuver rather than an all-out war, a way to ensure the Fed keeps its word. Behind the scenes, banks are buoyed by what they see as a clear path to victory – and already thinking through ways to drag other shrouded aspects of supervision into public view.
The story behind the Fed’s reversal shows how the combination of long-game lobbying, a willingness to litigate and the increasingly conservative federal judiciary has boosted Wall Street’s ability to shape its Washington oversight. Big banks, which were a nationwide pariah when the stress tests were first imposed in the wake of the 2008 financial crisis, are no longer on their heels. Instead, it's their regulators who are looking to duck and cover.
The industry’s influence is likely to grow as Trump’s agency chiefs begin to take office in the coming months. It didn’t take a change in power at the Fed, however, for the new view on stress testing to emerge.
The shift was laid out on Dec. 23 under a laughably convoluted headline: “Due to evolving legal landscape & changes in the framework of administrative law, Federal Reserve Board will soon seek public comment on significant changes to improve transparency of bank stress tests & reduce volatility of resulting capital requirements.” An updated regime could, the Fed said, include opportunities for public (read: industry) input on the testing scenarios and, more importantly, on the Fed’s confidential models.
Big banks have been demanding more information on the models for years, especially after the Fed began tying the test results directly to how it determines the “stress capital buffer,” a key component of capital requirements. But officials always refused to offer all the details, contending that it would be tantamount to allowing cheating on the tests. It’s been a position maintained during the tenures of several Fed regulatory czars including Daniel Tarullo, Quarles and Barr. Here’s an explanation in a statement from 2019, when the Trump-appointed Quarles was vice chair for supervision:
“One implication of releasing all details of the models is that firms could conceivably use them to make modifications to their businesses that change the results of the stress test without actually changing the risks they face.”
What changed that position? The Fed’s announcement last month suggests it is reconsidering under duress, with not only banks’ “resiliency” in mind, but also its own.
“The framework of administrative law has changed significantly in recent years,” the release notes. “The board analyzed the current stress test in view of the evolving legal landscape and determined to modify the test in important respects to improve its resiliency.”
Tarullo, in a CNBC interview after the announcement, put it more bluntly (and in English). “They mean greater hostility in the federal judiciary toward regulation, and I think that is what is pushing them to indicate they are going to make substantial changes,” he said of the Fed.
The move was also a bit of a pre-emptive strike, since officials were well aware they would likely be sued by the banking industry to disclose the models – and that the case would probably be coming soon…(Tuesday)
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