‘Improvements’ to oversight program coming, new Fed supervision leader says

Clear improvements to the Federal Reserve’s supervision program are “in the offing” in the near future, even though core regulatory reform in response to the financial crisis produced a stronger and more resilient system and should be preserved, the Fed’s overseer of supervision said Friday

Speaking at the American Bar Association Banking Law Committee Annual Meeting in Washington, D.C., Fed Vice Chairman for Supervision Randal Quarles said the core areas of reform – capital, liquidity, stress testing, and resolution – made great progress in the years following the crisis of 2007-08.

However, Quarles said that – after 10 years of “standing up” the post-crisis regulatory regime – now is the time to step back and assess the reform efforts. “I believe that we have an opportunity to improve the efficiency, transparency, and simplicity of regulation,” he said.

The Fed vice chairman for supervision, the first person to hold that position since it was created in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (and who was sworn into office Nov. 2), said the central bank’s responsibility is now to ensure that reforms are working as intended and that “given the breadth and complexity of this new body of regulation – it is inevitable that we will be able to improve them, especially with the benefit of experience and hindsight.”

Regarding improvements to the central areas of capital, liquidity, stress testing and resolution, Quarles offered several hints of his thinking, but no specifics.

For “tailoring” of regulation, he supported congressional efforts regarding tailoring, whether by raising the current $50 billion statutory threshold for application of enhanced prudential standards or by articulating a so-called factors-based threshold. “Irrespective of where the legislative efforts land, I believe we at the Federal Reserve have the responsibility to ensure that we do further tailoring for the institutions that remain subject to our rules to ensure that regulation matches the risk of the firm,” said.

With regard to liquidity regulation, Quarles said he believes it is time to take “concrete steps” toward calibrating liquidity requirements differently for large, non-G-SIBs than for G-SIBs (global significantly important banks). “And I see prospects for further liquidity tailoring in that the content and frequency of LCR (liquidity coverage ratio) reporting are the same for the range of firms currently subject to the modified LCR as they are for the large non-G-SIBs that are subject to the full LCR.”

The Fed official said the “advanced approaches” thresholds that identify internationally active banks should be revisited. He said the metrics used to identify internationally active firms subject to the thresholds – $250 billion in total assets or $10 billion in on-balance-sheet foreign exposures – which he said were formulated well over a decade ago, “were the result of a defensible but not ineluctable analysis and have not been refined since then. We should explore ways to bring these criteria into better alignment with our objectives.”

Quarles also called for a “meaningful simplification” of the framework of loss absorbency requirements, saying he counted 24 under existing regulation. “While I do not know precisely the socially optimal number of loss absorbency requirements for large banking firms, I am reasonably certain that 24 is too many,” he said.

He said candidates for simplification included elimination of the advanced approaches risk-based capital requirements; one or more ratios in stress testing; and some simplification of the Fed’s total loss-absorbing capacity (TLAC) rule.

“I am not the first Federal Reserve governor to mention some of these possibilities, and we should put them back on the table in the context of a more holistic discussion of streamlining these requirements,” he said. “Let me be clear, however, that while I am advocating a simplification of large bank loss absorbency requirements, I am not advocating an enervation of the regulatory capital regime applicable to large banking firms.”

In other comments, Quarles said:

  • The Fed’s “complex and occasionally opaque” framework for making determinations of control under the Bank Holding Company Act (BHC Act) “is another area that is ripe for re-examination through the lenses of efficiency, transparency, and simplicity.”
  • The Fed’s stress-testing transparency package, an enhanced version of which was released for public comment last month, “can go further.” He said the disclosure the Fed provided “does not go far enough to provide visibility into the supervisory models that often deliver a firm’s binding capital constraint.”

Speech by Vice Chairman Quarles on early observations on improving the effectiveness of post-crisis regulation

 

 

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