On April 17, 2018, the Federal Reserve Bank (Fed) Vice Chairman for Supervision, Randal Quarles gave his semi-annual testimony to the House of Representatives Committee on Financial Services. This was the first time that Quarles has appeared before the House and Senate since he took office in October.1 He began by stating that the overall position of the banking system is strong, and that the Federal Reserve continues to monitor ongoing risks that pose potential threats to financial firms of all sizes. The build out of the regulatory and supervisory framework since the financial crisis has resulted in a more resilient financial system, that said, the body of regulation is broad in scope and complicated in detail, and it is inevitable that there will be ways to improve the framework.2 As the Vice Chair for Supervision, Quarles plays an important role in the Trump administration’s pledge to accelerate economic growth by easing post-financial crisis regulations, and in his testimony sought to highlight some of the ways the Fed is seeking to improve the effectiveness of the post-crisis framework through increased efficiency, transparency and simplicity.3

 What this means4

1. Efficiency

Quarles emphasized measures that the Fed has taken to increase efficiency and so improve the effectiveness of the regulatory and supervisory environment. These include the recalibration of the Enhanced Supplementary Leverage Ratio (eSLR) applicable to Globally Systemically Important Banks (GSIBs), a rule reducing the burden associated with the qualitative aspects of the Comprehensive Capital Analysis and Review (CCAR) requirements for firms that pose less systemic risk, and tailoring liquidity requirements for large non-G-SIBs differently than those required for their GSIB peers. The requirements for submission of Living Wills can also be made less burdensome for firms with less significant systemic footprints, so submitting once every two years as opposed to annually.

Community and Regional Bank supervision has been made less complex and burdensome for institutions with assets between $10 and $50 billion, both in regulatory reporting and applications processes.

2. Transparency

“Transparency is central to the Federal Reserve’s mission,”5 said Quarles, and cited the Fed’s efforts to increase transparency by releasing its enhanced stress testing transparency package for public comment, in response to feedback from financial firms that there should be more visibility into the supervisory models that are often used to determine capital requirements.

3. Simplicity

Quarles testified that “The third principle that should guide an assessment of our current framework, simplicity, is about promoting public understanding and compliance by the industry with regulation. Confusion and compliance burden that results from overly complex regulation does not advance the goal of a safe financial system.”6 The Fed is working in several different ways to simplify the complex post-crisis regulatory framework, most recently with the proposed stress capital buffer rulemaking, which would result in a simpler capital framework, while maintaining its risk sensitivity. The proposed changes would generally maintain or increase the minimum risk-based capital required for GSIBs, and generally, decrease that requirement for non-GSIBs. Regulatory and data reporting has also been simplified and reduced for smaller financial institutions.

Regarding the Volker Rule, which has often been cited as an example of a complex regulation that does not work well, Quarles testified that the Fed is working with other regulatory agencies to reduce the burden of compliance particularly for institutions that do not have large trading operations or engage in proprietary trading.

In his testimony, Vice Chair Quarles also emphasized the Fed’s engagement with international regulatory bodies in promoting global financial stability and more level playing field for Fed supervised institutions. “As the supervisor of both U.S. banks operating overseas and foreign banks operating in the United States, we continue to maintain effective working relationships with our foreign supervisory counterparts, including through our participation in the Financial Stability Board (FSB) and the Basel Committee on Banking Supervision (BCBS),”7 said Quarles.

Conclusion

Vice Chair Quarles, who is a former Wall Street lawyer and U.S. Treasury official struck a measured tone in his testimony, reiterating that regulations adopted since the financial crisis represent a substantial strengthening of the Fed’s regulatory framework, and have helped maintain the financial system’s vital role in supporting the economy.8 But improvements to the regulatory framework are ongoing, and Quarles stated, “… it is critical that we continue to monitor for emerging risks affecting the financial system. This calls for better analysis and more agility by supervisors in identifying emerging risks, as well as vigilance against complacency.”9

References

  1. “Fed’s bank regulator Quarles to pitch Congress about easing post-financial crisis regulations,” CNBC, April 17, 2018. Access at: https://www.cnbc.com/2018/04/17/randal-quarles-the-feds-bank-regulator-to-pitch-congress-on-stress-test-liquidity-changes.html
  2. “Semiannual Supervision and Regulation Testimony,” Board of Governors of the Federal Reserve System, April 17, 2018. Access at:  https://www.federalreserve.gov/newsevents/testimony/quarles20180417a.htm
  3. “Semiannual Supervision and Regulation Testimony,” Board of Governors of the Federal Reserve System, April 17, 2018. Access at: https://www.cnbc.com/2018/04/17/randal-quarles-the-feds-bank-regulator-to-pitch-congress-on-stress-test-liquidity-changes.html.   “Fed’s bank regulator Quarles to pitch Congress about easing post-financial crisis regulations,” CNBC, April 17, 2018. Access at: https://www.cnbc.com/2018/04/17/randal-quarles-the-feds-bank-regulator-to-pitch-congress-on-stress-test-liquidity-changes.html
  4. “Semiannual Supervision and Regulation Testimony,” Board of Governors of the Federal Reserve System, April 17, 2018. Access at: https://www.federalreserve.gov/newsevents/testimony/quarles20180417a.htm.
  5. Ibid
  6. Ibid
  7. Ibid
  8. “Semiannual Supervision Supervision and Regulation Testimony,” Board of Governors of the Federal Reserve System, April 17, 2018. Access at: https://www.federalreserve.gov/newsevents/testimony/quarles20180417a.htm. “Fed’s bank regulator Quarles to pitch Congress about easing post-financial crisis regulations,” CNBC, April 17, 2018. Access at: https://www.cnbc.com/2018/04/17/randal-quarles-the-feds-bank-regulator-to-pitch-congress-on-stress-test-liquidity-changes.html
  9. “Semiannual Supervision and Regulation Testimony,” Board of Governors of the Federal Reserve System, April 17, 2018. Access at: https://www.federalreserve.gov/newsevents/testimony/quarles20180417a.htm.

Newsletter Author: Venetia Woo, Mairi Bryan

Newsletter Contact Person: Venetia Woo

Visit www.accenture.com/RegulatoryCompliance for latest insights on regulatory remediation and compliance transformation.

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Venetia Woo

Principal Director - North American Regulatory Strategy Lead, Accenture Financial Services, Finance & Risk Practice

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