UPDATED: Stress testing transparency rules soon to be final; changes for CRA should be to ‘re-invigorate,’ Quarles tells committee

(In the under-2-minute video, Rep. Maxine Waters (D-Calif. and ranking member of the House Financial Services Committee) contrasts deregulation efforts by the Federal Reserve in the wake of the financial crisis, while banks continue to post record profits.)

Regulations increasing visibility into supervisory stress testing programs will soon be made final by the Federal Reserve, the agency’s top supervisor told a House committee Wednesday.

He also said that any changes to anti-redlining laws shouldn’t weaken them, but “re-invigorate” the intent of the law adopted more than 40 years ago, and that his agency will join with other federal banking lawmakers in addressing the regulations.

In prepared testimony, Federal Reserve Vice Chairman for Supervision Randal Quarles told the House Financial Services Committee that enhanced disclosures of the Fed’s stress testing program will include “more granular descriptions about our models, more information about the design of our scenarios, and more detail about the outcomes we project, including a range of loss rates for loans held by firms subject to the Comprehensive Capital Analysis and Review.”

That program (known as CCAR) requires large banks to submit their proposed capital action plans (including changes to dividends, stock buybacks and more) to regulators for review. The regulators then assess whether the bank is able to maintain minimum regulatory capital ratios with a proposed capital plan under both adverse and severely adverse macroeconomic scenarios.

Quarles told the committee that the disclosures will provide a more complete picture of the stress testing process while mitigating “the risk of convergence on a single model.”

In other comments in his prepared remarks, Quarles said:

  • The Fed is working with its counterparts at the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corp. (FDIC) on a community bank leverage ratio proposal. The agencies expect that the proposal “would meaningfully reduce the compliance burden for community banking organizations, while preserving overall levels of capital at small banks and our ability to take prompt action when problems arise.”
  • Recent clarifications by the Fed that supervisory guidance is a tool to enhance transparency of supervisory expectations, but never the basis of an enforcement action. “Guidance is not legally enforceable, and Federal Reserve examiners will not treat it that way,” his prepared comments state.

During questions and responses with members of the committee, the Fed regulatory supervisor discounted any divergence in rulemaking among the federal banking regulators in reforming regulations implementing the anti-redlining Community Reinvestment Act (CRA). He said he “fully expects” the Fed, the OCC and the FDIC to put together a joint proposal. (The OCC currently has an advance notice of proposed rulemaking out on CRA regulations, issued in early September; the comment period closes Monday).

Quarles also said the Fed is not interested in weakening CRA regulations. In response to comments from Rep. Al Green (D-Texas), Quarles indicated he did not think regulators should diminish regulations, but re-invigorate them.

“My view is that banks do comply with the CRA and they have a good record of compliance,” Quarles said. “But, it has become a little formulaic. Both our supervisors and the banks themselves know that if they do X,Y and Z (the banks) will pass. And X,Y and Z has become just a little unimaginative. I think you can have more effect in really supporting the low- and moderate-income portions of the communities that banks serve by taking this opportunity to re-invigorate CRA.”

He added that he viewed the effort by the OCC (and the participation by his and the other banking agencies) as a way “to make the CRA achieve some of the objectives that were identified in 1977 in a way that is continuing to be relevant in the 21stcentury. Not to weaken (CRA) at all.”

In other comments, the Fed regulator said there is a pretty good chance there will be some reforms on regulations implementing the Bank Secrecy Act and anti-money laundering laws (BSA/AML). He said, in response to a question by Rep. Patrick McHenry (R-N.C.) about the potential for changes to AML/BSA enforcement using new technologies, and whether banks should encourage partnerships with tech firms, that “we certainly are not trying to be a disincentive to banks” entering those partnerships;” but wants to make sure banks understand the risks of partnering with a third party.

Prepared remarks: Supervision and Regulation Reportby Vice Chairman for Supervision Randal K. Quarles