‘Path of recovery’ from pandemic crisis ‘highly uncertain,’ Fed’s top supervisor says

The economic and financial “path of recovery” from the impact of the coronavirus crisis remains highly uncertain, the Federal Reserve’s top supervisor said Tuesday – but he also noted that banks continue to be in a strong financial position.

In remarks via remote video to a Washington group, Federal Reserve Board Vice Chair for Supervision Randal Quarles noted that the coronavirus crisis (which he refers to as the “COVID event,” naming the disease that results from the novel coronavirus infection) “is not behind us yet.” He said many households and businesses remain under pressure, and he pointed to a forecast by the International Monetary Fund (IMF) which projects the global economy to contract by 4.9% in 2020. He called that result “a much worse outcome than during the 2007–08 financial crisis.”

“While some indicators suggest a rebound in activity, the path of recovery remains highly uncertain,” he said.

However, he reiterated some recent past comments by him and other Fed Board members that banks entered the current crisis in a much stronger position than they did the global financial crisis.

“They are much better capitalized and more liquid than back in 2008,” he told the Exchequer Club, a Washington, D.C.-based group of representatives of financial institutions, trade associations and other regulators. “This is a direct outcome of the G20 regulatory reforms adopted in the aftermath of that crisis and measures taken by the banking industry, which have improved the resilience of the core of the financial system,” he said. “This has allowed the banking system to absorb rather than amplify the current macroeconomic shock. It has also enabled banks to play a central role in measures to support the flow of credit to the economy. A number of stress tests carried out recently in FSB (Financial Stability Board) jurisdictions have confirmed that banks are able to continue lending even in the face of this extreme shock.”

But Quarles told the group challenges are ahead, including financial performance. “The corporate sector entered the crisis with high levels of debt and has necessarily borrowed more during the event,” he said. “And many households are facing bleak employment prospects. The next phase will inevitably involve an increase in non-performing loans and provisions as demand falls and some borrowers fail.”

In other comments during questions and answers from the group, Quarles indicated:

  • The Federal Reserve intends to release some frequently asked questions (FAQs) on stress testing in “a couple of weeks.”
  • Future stress testing may be a combination of stress tests and sensitivity analysis.
  • There are no immediate plans for the Fed to issue its own rewrite of anti-redlining rules implementing the Community Reinvestment Act (CRA).

Comments by Federal Reserve Board Vice Chair for Supervision and Chair of the Financial Stability Board Randal K. Quarles

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