1st wave of pandemic financial crisis begins to ebb – but more action may yet be required, top Fed supervisor to tell panel

A first wave of acute financial stress to the nation’s economy as a result of the coronavirus crisis has begun to ebb, according to the Federal Reserve’s top supervisory official in testimony to be delivered Tuesday – but the storm is not over, the leader added, noting the central bank may be required to do more.

In a prepared statement delivered Monday for testimony before the Senate Banking Committee, Federal Reserve Board Vice Chair for Supervision Randal Quarles said the banking system has shown resilience over the two months that the coronavirus crisis has assailed the economy.

“Banking organizations have used their capital buffers to support a sharp increase in lending, especially through the standing credit lines of their customers,” Quarles’ statement said. “Deposits have increased faster still, a sign of confidence in bank safety. Central banks and supervisors have worked collaboratively through the Financial Stability Board and other fora to coordinate their response,” he added.

All of those efforts, Quarles said, have led the “first wave” of financial stress to ebb.

However, the Fed’s top supervisor said, the crisis (which he characterized as a storm) continues. “Banking organizations must continue to work constructively with borrowers, offering them the flexibility to weather a hardship they could not expect and did not create,” he said. “Banks must still manage the challenges of operating during a public health emergency. And ultimately, banking organizations can only be as robust as the economies they serve.”

Quarles said that as the public response to health concerns continues, “the strength of the U.S. financial sector will reflect and depend on the strength of the U.S. economy. That strength, in turn, will depend on the calibration and effectiveness of our public health response.”

The Fed’s top supervisor asserted that the agency wants to play a responsible and effective role in dealing with the crisis. However, he indicated that more may be yet to come from the central bank.

“The tools we have are ones no country should ever hope to need; the hour of their use is one no country should ever hope to face. More may be required of us before the current crisis ends. We can only pledge to do what this moment demands,” he said.

In other comments, Quarles compared the coronavirus crisis financial impact to the Great Recession of more than 10 years ago. He said, then, U.S. banking organizations faced a different crisis, in which their structural weaknesses catalyzed and compounded the ongoing stress.

“Twelve years of work—by Congress, financial institutions, and the regulatory agencies—went toward ensuring that this dynamic would not occur again. Reforms, and other measures taken by the industry, raised the quantity and quality of bank capital, so banks could withstand a severe downturn and continue lending,” he said. “They established higher levels of liquidity, so banks could meet customer and counterparty demands. They required improvements in risk management, so banks could avoid unexpected losses lurking in their books. They improved operational resiliency, so banks could keep their doors open and their lights on after a shock. As a result, banks entered this crisis in a position of strength.”

Quarles noted that over the past two months, the Fed has taken more than 30 supervisory and regulatory actions to ensure financial institutions could use this strength to support consumers, households, and businesses

Federal Reserve Vice Chair for Supervision Randal K. Quarles: Supervision and Regulation Report (testimony before Senate Banking Committee, May 12)

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