Federal Reserve Vice Chairman Stanley Fischer has been tapped to head a new financial stability panel at the U.S. central bank, an influential perch he could use to try to broaden and enhance the Fed's powers to ward off a future financial crisis.
The renowned economist and former head of the Bank of Israel, who took office in June as the Fed's No. 2, has said he sees shortfalls in U.S. financial safeguards. The new post gives him an opportunity to address them.
Based on his public statements, and on interviews with current and former Fed officials and others familiar with his thinking, Fischer is expected to seek to streamline the decision-making process of the main U.S. financial regulation body. He is also expected to look to sharpen the Fed's market intervention tools, with the shadow banking sector among the areas in his cross-hairs.
"We need always be aware that the next crisis - and there will be one - will not be identical to the last one, and that we need to be vigilant in both trying to foresee it and seeking to prevent it," Fischer said in July.
Any tough steps he pushes to further rein in the U.S. financial sector, which has come under heightened regulatory scrutiny since the 2007-2009 financial crisis, are likely to be met with fierce industry opposition. Top Republicans in the House of Representatives, who are trying to curb the Fed's authority, may also stand in his way.
Fischer's first two speeches as a Fed governor, which dug into the financial stability issue, underscore the importance he places on an aggressive regulatory response when market stability is put at risk.
A central bank can cool financial markets by raising interest rates, but borrowing costs are a blunt tool that top Fed officials think should be used only as a last resort.
Instead, U.S. central bankers prefer so-called macroprudential tools, such as bank capital requirements and limits on leverage, and they have taken a number of steps in recent years to buttress the financial sector's resiliency.
How much further Fischer would like the Fed to go is not clear, but his actions at the Bank of Israel, where he oversaw aggressive lending restrictions to curb a real estate bubble, show he is not afraid to take aggressive action at times.
"He will be able to both develop and deploy the tools that are needed" to make the financial system stronger, said Sidharth Tiwari, an IMF director who worked with Fischer in the 1990s.
In his work on the new panel, Fischer, who has said he does not currently see any U.S. asset bubbles forming, will be joined by Fed Governors Lael Brainard and Daniel Tarullo, the Fed said. Tarullo also heads a separate committee on banking regulation.
In his July speech, Fischer noted the main U.S. financial regulatory body - the Financial Stability Oversight Council - does not have power to impose policy changes on the regulatory agencies that are its members, unlike in Britain, where the Bank of England has that authority.
"It may well be that adding a financial stability mandate to the overall mandates of all financial regulatory bodies, and perhaps other changes that would give more authority to a reformed FSOC, would contribute to increasing financial and economic stability," he said.
Reforming the fractured U.S. regulatory system put in place by Congress would be a high hurdle. But a former Fed official, who declined to be named, said it was possible Fischer could use his powers of persuasion to cajole other regulators to make changes when financial stability was at stake.
"There are things you could do, there are questions you can ask" that can lead to changes, he said, suggesting the Fed can prompt studies of certain financial pockets that then lead to policy changes. "That's the blueprint for doing a systemic kind of thing."
(Reporting by Michael Flaherty and Howard Schneider in Washington; Additional reporting by Jonathan Spicer in New York and Moriah Costa in Washington; Editing by Tim Ahmann and Chizu Nomiyama)