Why Stan Fischer’s next job matters for global financial stability

The US Federal Reserve is getting a new face: Stan Fischer will likely become the body’s new vice chairman. All eyes are on where he stands on the Fed’s increasingly regulatory role.

Last month, US President Obama nominated Stan Fischer for the vice chairman position at one of the world’s most influential financial regulatory policy bodies: the US Federal Reserve System. In the aftermath of the Great Recession, the 2010 Dodd-Frank act gave the Federal Reserve Board of Governors increased supervisory and regulatory powers over institutions deemed critically important to the stability of the financial system.

Fischer has spent over forty years in leading roles at the World Bank, IMF, Central Bank of Israel, Citigroup, and world-renowned academic institutions. But with the Fed taking on an enhanced regulatory role, Fischer’s new gig would place him squarely at the center of the foremost decision-making body tasked with figuring out how best to address systemic financial risk.

At this point, the group lacks depth on financial regulation, with only Daniel Tarullo charged to handle bank supervision and regulation. And while the new Chair, Janet Yellen, has been partial to increasing oversight, majority rules the seven-member board. So as the vice chair of the governing body, the question remains: where does Stan Fischer stand on regulation?

Much has been made of Fischer’s time at the IMF during the crises of the 1990s, a controversial era when the Fund routinely encouraged the too-soon liberalization of capital flows in developing markets. Further, his proximity to Larry Summers and Robert Rubin – Clinton-era advocates for deregulation – and that administration’s repeal of the Glass-Steagall act has drawn criticism. Just last week, US senators called for a close look into Fischer’s tenure at Citigroup, a period when the bank profited from investments leading to the subprime crisis and eventual global financial meltdown of 2007-2008.

In light of those crises, advocates for increased oversight stress the need for regulators to adopt a macroprudential approach to regulation. Fischer himself admits that the contours of macroprudential regulation remain a work in progress – specific guidelines or exact policies have yet to be fully defined. What is clear, however, is that supervision at the macro level looks beyond the banking sector to transactions across the financial system.

While Fischer has repeatedly expressed support for growing the central banker’s toolbox to ensure stability, including increasing capital requirements for big banks, he has been skeptical about the extent to which macroprudential policy will serve as a cure-all for risk.

In practice, this would mean increasing coordination, both among national regulating agencies and between central banks across countries. It remains to be seen what an increased emphasis on inter-regulatory cooperation would mean, and the extent to which policymakers like Mr. Fischer would be given a mandate to encourage its pursuit sufficiently.

Sometimes characterized as hawkish on monetary matters, Fischer has not been afraid to use the resources made available to him. At the Bank of Israel, he slashed interest rates in early 2008 at the start of the crisis and was one of the first to raise them the next year in anticipation of a quick recovery. But banking supervision is housed independently at the Bank of Israel, and gave Fischer the authority to lean into asset bubbles, including rapidly rising housing prices. Like many central bankers are finding, bursting that kind of bubble at the Fed would pit Fischer against tough political constraints: commercial developers, elected officials, and homebuyers, all of whom benefit from increased liquidity.

Furthermore, effective macro-prudential regulation would bump up against the stimulative efforts of his own employer. Brought on by the Fed’s multiple rounds of quantitative easing, cheap money has raised the prospects of encouraging risky lending throughout the globe.

Still, if it is any indication as to where his thinking is currently, when Fischer left the Bank of Israel in September of last year, he signed on as a distinguished fellow at the Council on Foreign Relations, making global financial regulation the focus of his research. And for what it is worth, recent reports have pegged him at discussions led by Simon Johnson and Andy Haldane – both known for their work calling for stricter regulation.

For regulators struggling to ensure the global system will be able to withstand the stress tests of the future, Mr. Fischer’s nomination is a flashpoint. Industry leaders and policymakers both should take heed when he appears before the US Senate at the end of the month.

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Categories: Finance, North America

Author:Aaron Baird

Before grad school at the LSE, I worked for several years as a policy analyst, political advisor, and writer for a Member of Congress in DC. I'm interested in the political drivers of global economic risk, particularly as they emerge from and influence macros, trade, development initiatives, capital markets, and financial regulation.

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