Quarles, harkening back to financial crisis, notes need to balance certainty, flexibility

The role of cross-border financing in global financial stability, and the importance of expectations among all parties, was underscored in remarks Thursday by the Federal Reserve Board’s top supervision official during Thursday’s workshop of the Financial Stability Board, which he also chairs, at the Federal Reserve Bank of Philadelphia.

Randal Quarles, the Fed Board’s vice chair for supervision/FSB chair described the aim of Thursday’s workshop (on “pre-positioning, ring-fencing, and market fragmentation”) as examining whether, since the financial crisis, the right balance has been achieved among “certainty, the kinds of economic opportunity that cross-border finance promotes, and the flexibility to manage through a future disruption.”

Quarles, in his prepared remarks, didn’t delve into specific supervisory or regulatory activities under way to address that balance but said the Fed itself is currently considering similar concerns. But he said the “moral” of the financial crisis is that “expectations matter” in the regulation of cross-border finance.

“When capital and liquidity requirements are imposed only at the level of the consolidated institution, they create a good deal of flexibility, but they cannot reassure host supervisors that sufficient resources will truly be available in a time of need,” Quarles said. “Opaque, vague, and uncertain requirements for pre-positioning and reporting, and lack of clarity on when they may be imposed, make compliance difficult, costly, and potentially disruptive. Pre-positioning, at levels that go beyond what may be needed in a given jurisdiction in stress, can also create rigidity and limit growth opportunities. The consequence of getting the balance between these considerations wrong is a less integrated and less resilient global financial system.”

Quarles said there are “clear advantages” to setting liquidity and capital pre-positioning requirements through regulation, and he said supervision is important not just in terms of its focus on a single institution but for “generating and sharing better information on how stress may manifest … in each jurisdiction where it operates.”

He added that more information sharing by home-to-host supervisors “may help convince host supervisors that they need fewer pre-positioned resources in their jurisdiction.”

“Government of Union: Achieving Certainty in Cross-Border Finance” – speech by Federal Reserve Board Vice Chair for Supervision and Chair of the Financial Stability Board Randal K. Quarles at Financial Stability Board Workshop on Pre-Positioning, Ring-Fencing, and Market Fragmentation (Sept. 26, 2019, in Philadelphia)