Fed vice chair, in capacity as leader of international regulators group, outlines key issues for financial stability in 2019

Fintech, nonbank financial intermediation, and evaluation of “too-big-to-fail” reforms are all on the list of “must dos” for the international body of regulators responsible for financial stability in countries across the globe, the Federal Reserve’s vice chairman for supervision said Thursday.

In a speech to the Joint Conference of the European Central Bank and the Journal of Money, Credit, and Banking, held in Frankfurt, Germany, Fed Vice Chairman for Supervision Randal Quarles said the rise of large technology firms in the financial sector and decentralized financial technologies, the growing importance of the nonbank financial sector, and “our burgeoning efforts to look at how well we have addressed too big to fail” – which he called “the signature issue of the recent financial crisis” – were key questions.

Quarles was speaking in his capacity as chairman of the Financial Stability Board (FSB), a group of national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts.

“During my time as chair of the FSB, I hope to make progress not only on the areas I have outlined but on a range of forward-looking issues and continue to demonstrate the value of the FSB,” Quarles said.

Specifically, Quarles highlighted the following:

  • Fintech: The potential entry of large, established technology companies into financial services and the ability of technology to decentralize financial transactions raise a number of issues, some of which may touch on financial stability. “Technological innovation offers the promise of a substantially more efficient financial system. But new systems, processes, and types of businesses will bring with them novel fragilities. We continue to be responsible for ensuring that the financial system be sufficiently resilient that businesses and households worldwide need not fear the collapse of the system that serves their needs,” he said.
  • Nonbank Financial Intermediation: “Nonbank financing often features high leverage, maturity and liquidity mismatches, opaque structures, and concentrated holdings of risky assets,” he said. “Nonbank financing can also lead to lower lending standards, bidding up the price of risky assets and sending an encouraging signal to credit underwriters. All of these channels played a role in the recent global financial crisis. More recently, new forms of interconnectedness between nonbank financial firms and the banking system have emerged that could, in some scenarios, act as channels for domestic and cross-border amplification of risks.”
  • Evaluation of Too-Big-To-Fail Reforms: “Standing over a decade on from the start of the financial crisis, we must ask ourselves, how effective have we been at reducing the problem of too big to fail? Have we achieved our objective to reduce or eliminate the problem? Have we introduced new unintended risks to the financial system or costs to other financial market participants?” Quarles said that, to start answering those questions, the FSB is launching an evaluation of the effects of the too-big-to-fail reforms adopted in the wake of the financial crisis.

Quarles comments: The Financial Stability Board in 2019