Meet the Utah native loosening bank regulation, one detail at a time

(Lexey Swall | The New York Times) The Federal Reserve building in Washington, July 27, 2019. The building is named for Marriner Eccles. Randal Quarles, the Fed's vice chairman for supervision and regulation, is married to a great-niece of Eccles.

Washington • In his first 21 months on the job, Randal K. Quarles, the Federal Reserve’s vice chairman for supervision and regulation, met at least 22 times with partners at his former law firm, Davis Polk & Wardwell, which represents many of the nation’s largest banks.

Those meetings, disclosed in public schedules and other releases, suggest a closeness between America’s most important bank regulator and the industry he watches over. Quarles was a bank lawyer at Davis Polk in the 1980s and ’90s. At the Fed, he has conferred with former colleagues there, including Randall Guynn, a close friend. They at least occasionally came alongside officials of banks they represent, including Goldman Sachs, and trade groups including the Securities Industry and Financial Markets Association.

But the gatherings also suggest Quarles is meticulously completing the job President Donald Trump nominated him to do. He is perhaps the most central player as regulators reassess bank rules put into place quickly, and often bluntly, in response to the 2008 financial crisis. Lawyers at Davis Polk, which has built a reputation as a top financial services practice, know how the rules are working and what the banks find problematic.

That tension underlines a key challenge of financial regulation in 2019. Most current and former regulators agree that post-crisis rules could be improved. Banks’ input can help policymakers determine which adjustments will enable more lending without encouraging excessive risk-taking. But catering to their interests too intently risks reigniting vulnerabilities in a financial system with a record of sinking the entire U.S. economy.

Critics warn that Quarles, 62 and a Utah native, is obliging Wall Street and ushering in weaker rules that will leave the banking sector more exposed. Supporters say he is exactly the right person to try to strike a balance, keeping safeguards in place while responding to legitimate concerns.

Quarles’ outlook is “very traditional, limited government, light touch — but not too light,” said Tony Fratto, a partner at Hamilton Place Strategies, who has worked closely with Quarles in the past and whose firm also advises finance clients. “He’s looking for those practical solutions that are durable.”

Quarles says he is aiming for efficiency.

“One of the objectives of the system should be an efficient system,” he said. “I think we’ve moved not too quickly, but quite quickly, in adjusting — again, with an eye toward efficiency — some aspects of post-crisis regulation.”

Quarles, who said in a 2015 television interview that government should approach regulation like a referee, not a player, came into the job promising to “refine” post-crisis rules. Banking organizations released glowing statements when he was chosen.

But Elizabeth Warren, the Democratic senator from Massachusetts, derided the nominee during his Senate confirmation. “His motto seems to be: Whatever the big banks want, give it to ’em,” said Warren, now a presidential primary candidate.

Other Democrats in Washington breathed a sigh of relief, at least privately. Quarles was expected to ease the rules without setting fire to the regulatory house.

He has largely lived up to that. Big banks often groan that he has moved too slowly, one senior industry official said. Even his harshest critics admit that he’s careful.

(The New York Times) Some say Randal Quarles, the Federal Reserve's vice chairman for supervision and regulation, is giving big banks a gift, little by little. Others call it needed fine-tuning. He pledges allegiance to efficiency.

Still, Quarles and his fellow regulators have made significant changes — often over the objections of Lael Brainard, an Obama-appointed Fed governor who now regularly votes against her colleagues on regulatory matters.

The Fed is giving big banks more insight into how it conducts annual stress tests, checkups that ensure firms have enough capital to weather a downturn. It largely eliminated an option that allowed bank supervisors to flag weaknesses in capital planning processes during stress testing.

Quarles has gotten plenty of feedback throughout the process, averaging about 100 formal meetings a month with banks, lawmakers, government colleagues and others. He has talked with Davis Polk more often than other law firms, but executives from Goldman Sachs and JPMorgan have also met with him about 20 times each.

“I have a pretty open door,” he said. “I think that’s part of the responsibility of a Fed governor. The Fed as an institution has to be open to receiving input.”

Quarles’ unofficial predecessor, Daniel K. Tarullo, had no meetings in which Davis Polk was the principal or organizer, according to his official calendars. Tarullo, an Obama-era governor, did meet regularly with Goldman Sachs officials, and often with other banks.

[Read more: Amid Trump pressure, Fed chairman stresses need for independence in Utah speech]

Neither Guynn nor Davis Polk responded to multiple requests for comment.

A Fed spokesman said that Quarles “meets with a wide range of parties, the great majority of which are not financial institutions but academics, students, public interest groups, and government officials. To understand the risks they may pose, he also meets with financial institutions and their representatives, which has been a universal practice throughout the government.”

The spokesman added that Quarles ”has no professional or financial relationship with Davis Polk and last worked there roughly 20 years ago.”

Quarles began his career with a prestigious law job at the firm’s New York office in the 1980s. He left briefly in 1991 to join President George Bush’s Treasury, his first position under Jerome H. Powell, now the Fed chair.

“I like to joke that I started out my public career as special assistant to Jay Powell for banking policy, and after 30 years of unremitting toil, I am once again Jay Powell’s special assistant for banking policy,” Quarles said.

When he returned to Davis Polk to work on some of the biggest bank mergers of the 1990s — including one that created JPMorgan Chase — he noticed that regulation sometimes drove banks toward consolidation or complex structures. He took away a central message: “There are ways that we could get the same objective, in ways that are much less costly. So why shouldn’t we?”

Quarles has shifted between the public and private sector. He took on senior roles at the International Monetary Fund and later at President George W. Bush’s Treasury in the 2000s before joining the Carlyle Group, a private equity fund, in 2007. He returned to Utah in 2014 to start the Cynosure Group, which invests wealth for families, including that of his own extended family.

He is married to Hope Eccles, the great-niece of Marriner Eccles, who led the Fed from 1934-48. He personally is worth more than $32 million, based on his government financial disclosures.

Quarles came back to Washington in 2017 to join the Fed, but still lives in Salt Lake City, where his wife runs a luxury hotel, on weekends. He resides at the Willard Hotel in Washington during the week

Quarles has moved steadily to address some of the banking industry’s biggest concerns. Alongside his fellow regulators, he fleshed out and enacted a series of changes called for in a 2018 deregulatory law, often incorporating industry input.

In October 2018, he gathered with Guynn, representatives of the SIFMA trade group and officials from banks including Bank of America and Goldman Sachs in the Fed’s boardroom, together with a small crowd of central bank employees.

The 11 bank representatives expressed concern about a proposed adjustment to the Volcker Rule that would have scrutinized assets based on how they were classified for accounting purposes. The provision drew resistance from other industry commentators, and was cut from the final version that regulators, including the Fed, approved this year.

The change drew a dissent from Brainard.

Some of Quarles’ actual or proposed tweaks have raised eyebrows at regional Fed banks, which do not have a vote on regulation. Tarullo, the original architect of post-crisis big bank supervision, has warned against “a kind of low-intensity deregulation, consisting of an accumulation of non-headline-grabbing changes and an opaque relaxation of supervisory rigor.”

Quarles pushes back on such censure.

“The argument that this is a drip-by-drip erosion: the quantification of that, they can’t really demonstrate any quantifiable reduction in the overall resiliency of the industry,” he said.

The next set of changes may be even more difficult to measure: Quarles is intent on improving transparency in the Fed’s supervision of banks.

Supervisors have little public accountability and wide discretion, which Quarles finds potentially problematic. At a Georgetown University event in September, he urged lawyers to look into whether banks are treated fairly.

But clearer boundaries for supervisors could make it harder for them to penalize banks that do something they deem unwise but not unlawful. Finance adapts quickly and regulations do not, so some experts think it is important to preserve bank overseers’ flexibility.

“This could be the most meaningful change that he makes,” said Jeremy Kress, a former Fed lawyer who now teaches at the University of Michigan.

Quarles sees his adjustments as carefully considered. He wants to be a sort of modern-day version of his relative, a Fed chairman who famously took on President Harry Truman and helped to shape the institution.

Eccles’ job was to think “about how the system ought to operate, and then to pursue those conclusions in the face of some pretty significant opposition,” Quarles said. “He was a banker, but he didn’t view himself as representing the views of the banks.”