Nellie Liang, President Joe Biden’s pick to serve as the Treasury’s undersecretary for domestic finance, isn’t waiting to be formally nominated before beginning the task of strengthening Wall Street oversight.
Already working as an adviser to Secretary Janet Yellen, Liang, 63, has become the point person for cross-agency discussions on financial regulation and stability, according to more than half a dozen people familiar with the matter.
That’s an area where Democrats are keen to tighten rules after four years of deregulation under President Donald Trump.
Liang has been involved in discussions over last March’s panic in the $21 trillion Treasuries market, the people said. She also participated in a closely watched meeting Feb. 4 with regulators about GameStop Corp.’s social media-driven stock surges, according to two of the people.
She’s working below the radar because her formal nomination to serve in one of the department’s senior-most posts has been stuck in a government-vetting backlog and the timing of an official announcement is uncertain, according to people familiar with the matter.
Liang declined to comment for this article, as did a Treasury spokesperson.
Liang’s ability to begin pursuing a regulatory agenda is unlikely to be hindered if her confirmation takes months to happen. The Treasury hasn’t had a confirmed undersecretary for domestic finance since 2014. During that time, senior advisers have filled the job on a de facto basis.
Liang spent almost her entire career as an economist at the Federal Reserve, where she became the founding director of the central bank’s division of financial stability in 2010 and was a top official during Yellen’s tenure as chair. Since leaving the Fed in 2017, Liang has been a critic of some of its deregulatory steps, especially those that came while the central bank was also lowering interest rates.
Her views may make some on Wall Street and on Capitol Hill uneasy. Indeed, Republicans already blocked Liang once after Trump, in a surprise move, nominated her in 2018 for a spot on the Fed’s Board of Governors.
At the time, Republicans believed she had played a key role as a Fed staffer in a post-crisis wave of rulemaking that went too far. She never got a confirmation hearing and eventually withdrew.
“I’m sure the banks would prefer someone much more sympathetic to them, but given the menu of options in a Democratic administration, I suspect they’d be happy to have her,” said David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, where Liang was a senior fellow after departing the Fed.
Based on unpublished comments she made in an October interview with Bloomberg, and her past articles and papers, Liang is no progressive idealogue. Her approach to regulation reflects her time at the Fed, where policy shifts happen slowly after exhaustive research.
She readily acknowledges that more aggressive government intervention in financial markets can restrict the flow of credit to the economy. But that is sometimes the very point, especially when historically low interest rates encourage risk taking.
“There’s a cost to constraining credit now, versus having debt that constrains a recovery,” Liang said in the October 2020 interview. “Different policy makers are going to come down on one side or the other. The idea is to have that conversation.”
That two-handed approach makes Liang a typical central bank product, but in other ways she doesn’t fit the Fed mold.
Born in Chicago to Chinese immigrants, she earned her bachelor’s degree in economics from the University of Notre Dame and her Ph.D. from the University of Maryland. Those may not be the kind of ultra-elite institutions common in Fed officials’ resumes, but Liang gradually rose through the ranks.
Following the 2008 crisis, Liang played a key role in designing and implementing the first “stress tests,” a sort of war-gaming exercise for big banks that helped restore confidence following the sector’s near collapse. They’ve been repeated annually ever since.
Liang’s view on the hot topic of leverage limits for megabanks like JPMorgan Chase & Co. and Citigroup Inc. may set up a clash with the industry. She has argued that letting banks game what they include among their assets will “undermine the primary value” of the existing rules.
She’s also been critical of the Fed’s moves to blunt the edges of the annual bank stress tests. More generally, she contended in a July 2019 essay that bank capital levels need to be held at least as high as they’ve been.
In the market for Treasuries — which was rocked by a COVID-19-induced investor panic a year ago that saw liquidity disappear, prompting massive Fed intervention — Liang has signaled her eagerness for reform.
In a December paper, she and co-author Pat Parkinson from the Bank Policy Institute — whose members include some of the largest U.S. banks — proposed “serious consideration be given to a mandate for wider use of central clearing.” That could reduce counterparty exposure, and thus the risk of a run, by limiting the market’s current heavy reliance on dealer balance sheets and their ability to handle stressful market events.
More broadly, Liang will likely lead an effort to rejuvenate the Financial Stability Oversight Council, or FSOC. It’s chaired by the treasury secretary and includes the heads of eight regulatory agencies. Congress intended for it to increase coordination and attack broad systemic risks. But its powers, already weak, withered under Trump.
“I would be surprised if she didn’t have a lot of influence over the FSOC agenda,” said Peter Fisher, who held the undersecretary job during George W. Bush’s administration and now teaches at Dartmouth College’s Tuck School of Business. “In fact, it would be a ridiculous waste of time not to defer to Nellie’s knowledge in this area.”
In October 2019, Liang criticized the Treasury’s decision that year to make it harder for the panel to brand, or “designate,” non-bank financial firms as systemically important, a label that triggers tougher oversight.
There’s also a question over whether FSOC should be able to compel individual regulatory agencies — like the Securities and Exchange Commission or Federal Housing Finance Agency — to act on a perceived systemic threat. It currently can only request a move from an agency.
“In that sense, FSOC is not a very functional organization,” Liang said in the October interview. “Some agency heads don’t really care. They don’t see their own agency as having a financial stability mandate.”
The question for FSOC, she said, is, “Should it be just a talk shop or a supra-authority?
Story by Christopher Condon, Saleha Mohsin and Jesse Hamilton.