Senators pepper Fed regulator with questions, views on pending rules, proposals

Questions on changes to rules implementing anti-redlining laws in lending, the risk of leveraged loans to the financial system, progress on call reports, and a recently proposed rule to ease enhanced prudential standards and tailor capital and liquidity rules to large banks’ risk profiles were among those posed by senators Thursday to the Federal Reserve’s top supervisory regulator.

In a hearing before the Senate Banking Committee (presenting the “Semiannual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System”), Federal Reserve Board Vice Chairman for Supervision Randal Quarles fielded a wide range of questions about current Fed supervisory actions, and those upcoming. (Quarles appeared before the House Financial Services Committee Wednesday to present the same testimony.)

Among those upcoming actions: Proposed changes to anti-redlining rules to implement the Community Reinvestment Act (CRA). The regulator of national banks, the Office of Comptroller of the Currency (OCC), in early September issued an advance notice of proposed rulemaking seeking comment on changes to the rules; those comments are due on Monday.

Quarles said all three of the federal banking agencies – the Fed, the OCC and the Federal Desposit Insurance Corp. (FDIC) – had “extensive discussions” before the OCC proceeded with its ANPR. He said he expects that, after more outreach, the regulators will release a joint NPR, not another ANPR, as the next step.

He told Sen. Doug Jones (D-Ala.) that the Fed is conducting a “very athletic outreach process” to CRA reform (which, on Wednesday, he said would be an effort to “reinvigorate” the rules).

The Fed’s top regulatory supervisor also told the committee that it should expect a proposal on the leverage ratio proposal for highly capitalized banks “very soon … in real time, not Fed time.” (The FDIC on Wednesday announced it would hold a board meeting next Tuesday to discuss its own version of such a proposal.)

(In the less than 2-minute video, Sen. Elizabeth Warren (D-Mass.) asks Federal Reserve Board Vice Chairman for Supervision Randal Quarles about risks posed by leveraged loans (in some cases known as “collateralized loan obligations,” or CLOs).

In other comments, Quarles:

  • Responded to questions from Sen. Elizabeth Warren (D-Mass.) about risks posed by leveraged loans (in some cases known as “collateralized loan obligations,” or CLOs), noting that the focus should be on systemic risks and not just the volume of loans being made. “What’s crucial is do we understand how these structures are evolving,” he said. Quarles would not agree that guidance about the loans (issued by the Fed in 2014) was enforceable. He said doing so was inappropriate. But he did say the Fed is “athletically looking at” leveraged lending supervision and is “monitoring compliance” over leveraged lending in line with safety and soundness.
  • Told Sen. John Kennedy (R-La.) that the Fed would go back and look at its proposal to develop short-form call reports for financial firms of $5 billion or less. Quarles noted that the intention of the Fed’s proposal on the call reports is to lessen the time and cost burdens on institutions, but also to give the Fed the same level of information that it needs for supervision. But Kennedy claimed the Fed’s proposal would save only 1.18 hours per quarter of time for banks. “You’re not doing anything; I’d like you to give it another lick,” he said, referring to the Fed’s proposal (which he also termed “all hat and no cattle”).
  • Disagreed with Sen. Robert Menendez (D-N.J.) that the Fed’s recent proposal to ease enhanced prudential standards and tailor capital and liquidity rules for large banks puts taxpayers at risk of future bailouts. “The effect of our proposed liquidity changes would be a reduction in overall liquidity of between 2% and 2.5%,” he said. “Since the crisis, we’ve added $3 trillion in liquidity; that’s multiples of liquidity that existed before the crisis.” He said the proposed changes to tailor the burden of complying with regulation according to the riskiness of firms are “quite appropriate.” “We aren’t affecting in any material way the liquidity resources of the system,” he said.

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