The Fed’s Lael Brainard stands alone
WASHINGTON — When Federal Reserve Gov. Lael Brainard voted against a proposal in April 2018 to modify a key capital measure for the largest banks, her dissent was a milestone. It was the first time a member of the Fed's board had recorded a "no" vote on regulatory policy in over six years.
It was not her last dissent, either. In the past year, Brainard has opposed six measures adopted by the board. One governor cannot block matters before the central bank, but dissents are noteworthy at an agency known for consensus. From 2006 to 2010, all but four of the 861 votes by the board of governors were unanimous, according to data obtained by Politico in 2013 through a Freedom of Information Act request.
The "no" votes cast by Brainard, who was appointed to the board by President Barack Obama in 2014, suggest a protest against recent regulatory relief polices from those who helped write the post-crisis rules.
Brainard's dissents have also boosted her own profile. They come at a time when the Trump administration signals interest in having a stronger hand over the Fed and in nominating anti-establishment candidates for open Fed board seats.
“One might ask why we care what Brainard thinks. She’s the 1 in a losing 4-1 vote,” said Ian Katz, an analyst at Capital Alpha Partners, in an April 8 research note. “The bluntest answer is that if a Democrat wins next year’s presidential election, Brainard would likely be a candidate for Fed chair or Treasury secretary.”
Her vote last year to oppose easing the "supplementary leverage ratio" — one of the strongest tools regulators use to measure the largest banks' capital adequacy — was followed by her dissenting from an October vote on providing relief for domestic banks with between $100 billion and $250 billion of assets. In March, Brainard opposed both the board's decision not to deploy a countercyclical capital buffer and a vote to limit the use of the "qualitative objection" in stress tests. In April, she also opposed proposals to ease standards for foreign banks and large-bank resolution plans.
Her votes largely parallel dissents by Martin Gruenberg, an Obama-appointed member of the Federal Deposit Insurance Corp.'s board. A former FDIC chairman, Gruenberg has opposed several of the initiatives approved under current Chairman Jelena McWilliams.
In statements at Fed board meetings, Brainard has argued that recent proposals go farther than the statutory mandate set by last year's reg relief law, and weaken tools that have been beneficial since the crisis. She said the proposals unveiled in October to modify supervisory standards for large banks "weaken the buffers that are core to the resilience of our system." (No one at the Fed commented for this article.)
"In short, I see little benefit to the institutions or the system from the proposed reduction in core resilience that could justify the increased risk to financial stability and the taxpayer," she said at the October meeting.
The dissents by Brainard, who had senior leadership roles at the Treasury Department from 2009 to 2013, point to an unease with the current reg relief trajectory, said Michael Barr, a law professor at the University of Michigan and a former Treasury official in the Obama administration.
“When you see unanimous votes, it reinforces that the whole board is behind it, that the lack of dissent makes it harder for the public to see potential problems even if the board as a whole is wrong,” Barr said. “Having a dissent helps call into question the course that the board is on and I think helps the public and Congress and maybe future boards make different choices.”
Brainard’s ‘no’ votes have also served to bring attention to regulatory tools that have previously flown under the radar, said Sheila Bair, former chair of the FDIC.
For instance, Brainard has championed the use of the countercyclical capital buffer, a rule that allows the Fed to require certain banks to hold additional capital while economic conditions are robust to counteract the elevated potential for riskier lending activities. She voted against the board’s decision not to deploy the buffer in March, which caused “a lot more people” to pay attention to the final vote, Bair said.
“All regulatory agencies try to have a consensus, and I think that’s particularly true at the Fed, so the fact that she’s willing to cast a ‘no’ vote is significant,” Bair said.
Others said dissents on regulatory proposals force board members in the majority to defend and sometimes rethink their views, which can bring balance to the rulemaking process.
“The value of the dissent [is] it sharpens the thinking of those who are in the majority,” said Thomas Hoenig, former vice chairman of the FDIC and former president of the Federal Reserve Bank of Kansas City. Hoenig was known for frequently dissenting from both FDIC and Fed decisions. “It raises questions that they need to think about and should think about, and better refine and focus it on a position.”
Thomas Vartanian, a former senior regulatory official, agreed that "a diversity of views ... is a net positive for producing a better end user policy at the end of the process.”
“Frankly, I always thought that when there is ... unanimity, it doesn't always reflect reality in some cases, because people don't always agree, so I think there's nothing unhealthy about that process,” said Vartanian, a professor at George Mason University’s Antonin Scalia School of Law and the executive director of the Financial Regulation and Technology Institute.
Even Randal Quarles, the Fed's vice chairman of supervision who has led the development of many of the Fed's recent reforms, has cited instances where more than one governor has disagreed with a certain approach, and that disagreement has sharpened the resulting proposal.
“With respect to dissents on the board, I view that as a healthy process actually,” he said recently in remarks at George Mason University’s law school. “The fact that decisions would not be made unanimously, as long as that process is there, I think that actually enhances the legitimacy of the decision as opposed to undermines it, and that’s certainly how we approach these issues.”
Brainard’s dissents appear carefully thought-out and are often accompanied by lengthy statements to back up her reasoning for voting against proposals, giving her votes more legitimacy, said Dennis Kelleher, the president and CEO of Better Markets.
“Nobody harbors any ill will for substantive, principle-based dissents, and I think most people actually appreciate it as a healthy part of the process that makes both the deliberative process and the outcome usually better, even if everybody would much rather have agreement,” he said.
Brainard has actually voted in favor of some Fed proposals rather than uniformly opposing deregulatory measures. Perhaps most notably, she voted with the rest of the board to put forward a proposal to tailor requirements for the Volcker Rule.
While President Trump has signaled an intent to nominate political allies to the Fed, Brainard’s presence has reassured some for whom the financial crisis still weighs heavily.
“Given her experience helping fight the financial fires of 2008 and seeing the enormous damage that the crisis caused the financial system, she’s correctly trying to put in place and keep in place strong reforms that reduce risk in the financial system,” Barr said.
Brainard’s willingness to dissent could also provide solace to other board members who disagree with the majority, Bair said.
“The fact that she has the courage to publicly state these positions also gives some others some comfort that they won’t be alone if they take the same position, so I think that’s helpful too,” she said.
Hoenig said regulators have a duty to call out proposals that they believe could have an adverse effect, regardless of whether anyone else agrees with them.
“You also have to be prepared to dissent alone, which requires in terms of what you believe as a policymaker to do the right policy,” he said. “And in those cases, you vote your conscience and you go from there.”