Federal Reserve Majority Needs the Right Chair

Jerome Powell could still block Biden's appointees from bold action on climate risk

By Yevgeny Shrago

Anyone who fears a financial—or climate—crisis rejoiced on Monday when Randal Quarles announced he would be stepping down from his seat on the Federal Reserve Board of Governors at the end of the year. With Quarles’ deregulatory tenure as Vice-Chair for Supervision already over and his resignation paving the way for Biden-aligned nominees to hold a majority of Board seats, the stakes of reappointing Jerome Powell as Fed Chair seem lower. 

But as the experience of another financial regulator shows, a Biden-aligned majority with a chair in the minority is a recipe for inaction on the Biden administration’s climate-related financial risk priorities. A Powell-chaired Fed won’t do any further deregulating, but it’s unlikely to close the ever-growing gap between the US and the rest of the world on protecting the economy from climate-driven financial shocks.

The climate impediment at the FDIC

Federal Deposit Insurance Corporation Chair (FDIC) Jelena McWilliams, a Trump appointee, shows just how thoroughly a hostile Chair can slow down an agency’s work, even in the minority. The FDIC is led by a five person Board of Directors. McWilliams is the sole Trump appointee on the Board, with one seat vacant.

With two Biden appointees and an Obama holdover, the FDIC should be moving forward on implementing President Biden’s climate risk agenda. At a minimum, it could be keeping pace with the Office of the Comptroller of the Currency’s (OCC) announcement that it will start overseeing how banks handle threats from climate-driven physical harms, along with managing the clean energy transition. There’s an urgent need for the FDIC to act. Due to the geographic concentration of their business, the smaller banks under the FDIC’s oversight often have the most severe exposure to a single natural disaster or to volatility in the fossil fuel market.

But, despite McWilliams’ absurd insistence that decades-old procedures on managing natural disaster risk are applicable in a rapidly warming world, the FDIC has done nothing. Its examiners are not looking into how banks are actually managing their risks from a mortgage portfolio backed by coastal real estate or a loan book backed by an oil patch community. The agency has not even suggested additional action is forthcoming.

Indeed, McWilliams’ main contribution as Chair on climate-related risk has been to embarrass the Biden administration and Secretary of the Treasury Janet Yellen. Last month, she abstained from voting for the Financial Stability Oversight Council’s (FSOC) light on substance climate-related financial risk report, denying them the consensus they so clearly craved. Her reason: that a report mostly recommending further study and disclosure of climate-related financial risk did not reflect a sufficiently “nuanced analysis” as to the kind of risk that climate change represents.

Biden has a chance to move the Fed forward

All the tools that McWilliams has used to block the FDIC from acting on climate are available to Powell at the Fed. As Chair, Powell is the only Fed official with authority over the Board’s staff and sets the Board agendas. For the Fed to follow the OCC’s lead in issuing climate guidance, it will need to allocate staff time to drafting the guidance and direct examiners to implement it. Powell, as Chair, controls the staff allocations needed to make that happen. There’s little reason to think he will direct the staff to do more than the study and analysis he has implemented so far. If the Democratic majority wants to take any significant regulatory action to curb climate risk, they will need to have a Board vote. A new Vice Chair of Supervision can make a recommendation of what to do, but it’s up to Powell to decide whether the proposal makes it onto the agenda for a vote and when. 

And just like McWilliams, Powell has a seat on the FSOC. Here, his discretion is total: the other Board members have no voice unless he gives it to them. To Powell’s credit, he did vote for the FSOC’s climate-related risk report. But he also voted for all the steps that the Trump-era FSOC took to roll back oversight of risky nonbank financial companies, like insurers and asset managers. Since the ultimate authority to oversee those firms rests with the Fed, removing Powell is critical to getting the FSOC back on track for bringing these “shadow banks” into the light. The alternative is watching major insurers load up on climate-related risk and then recreate AIG’s 2008 mortgage-fueled meltdown.

A Biden-aligned majority and a new Vice Chair for Supervision both will mean baby steps toward the climate action we need from the Fed. But the U.S. is lagging the world and needs to make massive strides in the next few years to catch up. Powell has shown a strong inclination toward incremental action on climate-related risk, not using the full scope of his legal authority. If he’s reappointed Chair, he’ll be able to delay and divert progress, wasting time that the financial system and the planet don’t have. President Biden should take his own agenda seriously and appoint a new Federal Reserve Chair.