FRB Vice Chair Randal Quarles Highlights Efforts to Promote Efficiency

Federal Reserve Board ("FRB") Vice Chair for Supervision Randal K. Quarles highlighted efforts to promote efficiency as well as safety in the financial system after the "Great Financial Crisis." While he applauded measures taken to "improve the safety of the banking system: new capital and liquidity rules, new stress testing requirements, [and] a new resolution framework," he argued that in "implementing these safety requirements, we did not pay as close attention to efficiency."

In a speech before the Prudential Regulation Conference, Mr. Quarles underscored the following efforts to improve efficiency:

  • Tailoring Regulation. Mr. Quarles pointed to the FRB's (i) revised tailoring framework, which depends on a wider variety of indicators to determine a firm's risk profile and apply regulatory requirements accordingly, (ii) adoption of the community bank leverage ratio to assess capital adequacy and (iii) adoption of the stress capital buffer requirement, which is firm-specific.

  • Foreign Banks. Mr. Quarles noted the FRB's adjustment of the Large Institution Supervision Coordinating Committee portfolio's scope to include all U.S. global systemically important banks and certain foreign banks, which enables supervisors to better and more holistically account for the structural features and unique risks associated with the cross-border aspects of foreign banking operations within the United States. Mr. Quarles also remarked that (i) the FRB's adjustment might be more effective in discerning foreign bank-specific risks, and (ii) the foreign banks outside of the United States that were involved in the Archegos market event might have "benefited from a supervisory structure that was more focused on foreign-bank-specific risks."

  • The Countercyclical Capital Buffer ("CCyB"). Mr. Quarles underscored that the FRB's decision to impose temporary changes to capital requirements and not to release a CCyB enabled the U.S. banking system to perform better than other jurisdictions that did release a CCyB during the COVID-19 pandemic.

  • The Volcker Rule. Mr. Quarles noted that the FRB's recent Volcker rule amendments, including its clarification of the "covered funds" definition, have substantially simplified the rule's compliance obligations, giving banks greater opportunities to invest in the communities that need it.

Mr. Quarles said the regulatory framework promulgated by prudential regulators following the 2008 financial crisis enabled the banking system to remain strong and resilient in response to COVID-19. He noted, however, that "the run on prime money funds and commercial paper were particularly concerning, as they resembled the runs faced during the financial crisis, despite subsequent reforms to those markets." He argued that "the shortcomings we saw among non-banks continues to be a focus of both domestic policymakers and the international community, particularly under my chairmanship of the Financial Stability Board. We cannot afford to allow the same things to happen again."

Mr. Quarles also reported that the capital distribution restrictions imposed on large banks during the third quarter of 2020 will likely end following the third quarter of 2021 if those banks perform adequately on the upcoming stress test.

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