Rule ‘tailoring’ is not regulator abandonment of responsibility for stable system, Quarles tells group

Federal Reserve Board Vice Chairman Randal Quarles tells Utah bankers his view of regulatory ‘tailoring’ and international efforts

“Tailoring” of financial regulation may be a common theme in both legislative and regulatory actions, the Federal Reserve’s top supervisory official said Tuesday, but that does not mean regulators are abandoning their responsibility to promote a stable financial system.

In remarks to the Utah Bankers Association in Sun Valley, Idaho, Federal Reserve Board Vice Chairman for Supervision Randal Quarles said changes the Federal Reserve is making to financial regulation domestically, including tailoring of rules, will help level the playing field for banks and help ensure they are able to continue to compete and serve their customers.

He also noted that the recently enacted Economic Growth, Regulatory Relief and Consumer Protection Act (S.2155, signed into law by President Donald Trump late last month) also includes provisions for tailoring to help improve the Fed’s regulation and supervision of financial institutions.

“As the Fed continues to evaluate the effectiveness and efficiency of regulations, I expect tailoring will be a guiding principle,” Quarles said.

However, the central bank’s top supervisory official also indicated – in the context of coordination with financial regulators across the globe (through the Financial Stability Board, FSB) – that tailoring of regulation is not a trade-off for financial stability, at home or internationally.

“Tailoring does not mean abandoning our responsibility to promote a stable financial system, but embracing it, assisted by FSB efforts to ensure that reforms are having the intended effects and supported by the global standards that the FSB and other international standard-setting bodies are able to establish and promote,” Quarles told the audience of bankers.

(The FSB, he noted, was created by the U.S. and a group of other major economies in the wake of the Great Recession to coordinate efforts to stabilize the global financial system, adopt reforms, and share information.)

He told the group “appropriately reducing the regulatory burden for community banks is possible when we can get an accurate picture of the risks and vulnerabilities in the broader financial system, which Utah’s banks are part of and depend on.” He indicated that U.S. involvement with a group such as the FSB helps to do that.

Quarles pointed to the Fed’s creation of its “Better Exams Tailored to Risk” (BETR) program as a supervisory improvement through tailoring intended to help reduce regulatory burden on banks.

BETR uses financial metrics to differentiate the level of risk between banks before examinations, he said. It also assists examiners in tailoring examination procedures to “minimize the regulatory burden for firms that engage in low-risk activities, while subjecting higher-risk activities to more testing and review.”

In other comments, Quarles said that the Federal Reserve is developing a revised approach to determining “control” under the Bank Holding Company Act that could help banks raise capital and facilitate nonbank investments.

The federal banking regulatory agencies (the Federal Reserve, Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC)) plan address the issue in a proposed rule that would implement section 616(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) by December 2018, according to the Unified Regulatory Agenda.

Section 616(d) requires that bank holding companies, savings and loan holding companies, and other companies that directly or indirectly control an insured depository institution serve as a “source of strength” for the insured depository institution.

America’s Vital Interest in Global Efforts to Promote Financial Stability