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April 19, 2018

The FED Governor Lael Brainard spoke, at the Global Finance Forum in Washington, D.C., about safeguarding financial resilience through the current economic cycle. He outlined the strong current conditions of the financial sector, along with the ongoing work to ensure that the buffers of the financial system continue to sustain resilience over the cycle. He also discussed the few yet-to-be implemented key elements of the regulatory framework.

With respect to the ongoing regulatory work, he mentioned that the FED is close to finalizing the net stable funding ratio (NSFR). By most estimates, the large complex banking institutions are in a position to meet the expected requirements, with little adjustment. He added that the Dodd-Frank Act limits on large counterparty exposures need to be finalized. These limits will reduce the chances that outsized exposures, particularly between large financial institutions, could spread financial distress and undermine financial stability. Moreover, these large exposure limits will effectively update the traditional bank lending limits. He also supported efforts to improve the efficacy of the Volcker rule while preserving its underlying goal of prohibiting banking firms from engaging in speculative activities for which federal deposit insurance and other safeguards were never intended. "The interagency regulation implementing the Volcker rule is not the most effective way of achieving its very laudable and important goal. We are exploring ways to streamline and simplify the regulation to reduce costs without weakening the key objectives. We should be able to provide firms and supervisors with greater clarity about what constitutes permissible market-making. We should also identify ways to further tailor the Volcker compliance regime to focus on firms with large trading operations and reduce the compliance burden for small banking entities with limited trading operations, " said Mr. Quarles.

He said he supports moving forward with minimum haircuts for securities financing transactions (SFTs) on a market-wide basis to counter the growth of volatile funding structures outside the banking sector. International agreement on a regulatory framework for minimum SFT haircuts was reached by financial regulators in 2015, and it is important to follow through on this work plan. Regulatory minimum haircuts calibrated to be appropriate through the cycle could help ensure that repo, securities lending, and securities margin lending and related markets do not become a source of instability in periods of financial stress through fire sales and run-type behavior. He also highlighted that he favors better tailoring the regulatory framework for smaller banking firms, with the aim of decreasing regulatory burden. Although FED has taken some important steps to reduce burden on smaller banking organizations—such as streamlining the Call Report for small, less complex community banks, increasing appraisal thresholds for Commercial Real Estate loans, and reducing the frequency of exams in certain circumstances—more work should be done in this area.

With respect to the use of countercyclical capital buffer (CCyB) buffers, he highlighted that, in the United States, CCyB has not yet been activated, although other jurisdictions have developed some experience with the use of countercyclical buffers. This is because the condition set out in September 2016 for raising the CCyB above its minimum value of zero is that financial system vulnerabilities are meaningfully above normal. He concludes: "While we should carefully consider how to make our regulations more effective and better tailored, we must take great care to ensure that we do not inadvertently contribute to pro-cyclicality that would exacerbate financial conditions that are, on some dimensions, somewhat stretched. Although I believe it is too early today to reassess the calibration of existing capital and liquidity buffers because they have yet to be tested through a full economic cycle, I look forward to efforts that are planned in future years in the international standard-setting bodies to assess the framework quantitatively."


Related Link: Speech

Keywords: Americas, US, Banking, Proportionality, Large Exposures, Volcker Rule, Financial Stability, FED

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