Randal Quarles of FED on Simplifying and Enhancing Financial Rules

Mr. Quarles highlighted that the financial condition of U.S. banks has strengthened since the financial crisis. Banks continue to innovate and keep pace with the developments in fintech. The supervision regarding fintech is therefore focused on ensuring that banks understand and manage these risks and that consumers remain protected. Work on strengthening the cyber resiliency of the financial sector is also underway. FED continues to collaborate with other governmental agencies to address such issues. He also outlined ways in which FED has sought to improve the effectiveness of the post-crisis framework through increased efficiency, transparency, and simplicity. He briefly discussed a few recent measures of the FED that are designed to increase efficiency and thus improve the effectiveness of regulation and supervision, including the enhanced supplementary leverage ratio calibration proposal, the removal of mid-size banking firms from the qualitative objection of the annual supervisory stress tests, and specific examination and supervisory process adjustments. He also added that there are additional tailoring opportunities for large firms that are not global systemically important banks (G-SIBs) to ensure that applicable regulation matches their risk. "I believe there are further measures we can take to match the content of our regulation to the character and risk of the institutions being regulated. Liquidity regulation, for example, does not have a G-SIB versus non-G-SIB gradation. In particular, the full liquidity coverage ratio requirement of enhanced prudential standards apply to large, non-G-SIB banks in the same way that they apply to G-SIBs. I believe it is time to take concrete steps toward calibrating liquidity requirements differently for non-G-SIBs than for G-SIBs."

He added that there is scope for improving the efficiency of regulation with respect to the requirements regarding living wills. With respect to the less complex and burdensome examination approaches in the supervision of regional banking organizations with assets between USD 10 and USD 50 billion, FED has streamlined procedures to reduce the burden associated with assessing compliance with Dodd-Frank Act company-run stress testing requirements and decreased reporting burden by refining the tools for assessing liquidity positions at these banking organizations and eliminating the quarterly FR Y2052(b) liquidity report. Additionally, FED has begun a broad review to identify ways to increase the efficiency of the applications process, which we expect to reduce processing times for certain types of applications. FED also continues to think about how to make the stress testing process more transparent. "I personally believe that our stress testing disclosures can go further, and that we should consider additional measures, such as putting our stress scenarios out for comment. My colleagues and I on the Board will be paying particularly close attention to comments on how we might improve the current proposal." Looking ahead, FED is also in the process of developing a revised framework for determining "control" under the Bank Holding Company Act. This framework would be more transparent, simpler to understand, easier to apply, and would liberalize some existing limitations. A clearer set of standardized rules should facilitate the raising of capital by banks, particularly community banks where control issues are generally more prevalent, and non-controlling investments by banking organizations in non-banking companies.

Mr. Quarles then discussed the efforts toward simplification of the Volcker Rule and highlighted that the FED's simplification efforts have extended to its supervision and regulation of smaller community banks. For example, in its continuing efforts to reduce data reporting and other burdens for small financial institutions, the U.S. banking agencies implemented a new streamlined Call Report form for small financial institutions in 2017. Applicable to financial institutions with less than USD 1 billion in total assets, the streamlined reporting form removed approximately 40% of the nearly 2,400 data items previously included. The agencies have also proposed further streamlining of this Call Report. The cumulative effect would implement burden-reducing revisions to approximately 51% of the data items previously reported by small banks. He concluded that FED has "already taken steps to increase the effectiveness of the framework currently in place by improving its efficiency, transparency, and simplicity. There are other areas where I believe that we can increase the framework's effectiveness, and we will look to do so where we are confident that we still have all appropriate tools needed to maintain the gains in safety and soundness made over the past several years."

Related Link: Testimony of Randal Quarles

Keywords: Americas, US, Banking, Proportionality, Transparency, Dodd Frank Act, FED