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January 19, 2018

Randal K. Quarles, the FED Vice Chairman for Supervision, spoke at the American Bar Association Banking Law Committee Annual Meeting. He talked about evaluating and improving the post-crisis regulatory regime and outlined the emerging focus areas. He discussed the efficiency, transparency, and simplicity of regulation; common ground areas of improvement; and emerging areas of review of regulations.

Mr. Quarles stated that there is an opportunity to improve the efficiency, transparency, and simplicity of regulations. By efficiency, he meant the degree to which the net cost of regulation is outweighed by the benefits of the regulation. He explained that transparency is an objective that ought to particularly resonate with this audience. There are valuable, practical benefits to transparency around rule making; even good ideas can improve as a result of exposure to a variety of perspectives. He added that simplicity of regulation is a principle that promotes public understanding of regulation, promotes meaningful compliance (by the industry) with regulation, and reduces unexpected negative synergies among regulations. Next, he discussed the common ground areas of improving the cost-benefit balance of post-crisis regulation. He stated that the proposed changes to the capital rules for smaller firms is a positive step toward meaningful burden relief for smaller banks. He also emphasized his belief in the benefits of continued improvements in the resolution planning process, in light of the substantial progress made by firms over the past few years; this progress includes a permanent extension of submission cycles from annual to once every two years and reduced burden for banking firms with less significant systemic footprints. He also mentioned the leverage ratio re-calibration and the proposal to streamline the Volcker rule.

While mentioning the ongoing comprehensive regulatory review in the core areas of reform—namely capital, stress testing, liquidity, and resolution—he said that “The objective is to consider the effect of those regulatory frameworks on resiliency and resolvability of the financial system, on credit availability and economic growth, and more broadly to evaluate their costs and benefits.” Mr. Quarles mentioned that he has formed views on a few areas that warrant more focus. These areas include the issue of tailoring supervision and regulation to the size, systemic footprint, risk profile, and business model of banking firms. It also includes advanced approaches thresholds that identify internationally active banks. These thresholds are significant not only for identifying which banking firms are subject to the advanced approaches risk-based capital requirements, but also for identifying which firms are subject to various other Basel Committee standards, such as the supplementary leverage ratio, the countercyclical capital buffer, and the liquidity coverage ratio. The third area is the simplification of the framework of loss-absorbency requirements. He concluded “... that these remarks give you a sense of our approach to analyzing and improving post-crisis regulation. As I mentioned earlier, the areas of core reform—capital, liquidity, stress testing, and resolution—have produced a stronger and more resilient system and should be preserved. We have made great progress, but there is further work to do....”


Related Link: Speech

Keywords: Americas, US, Banking, Stress Testing, Loss Absorbency, Proportionality, Resolution Planning, Basel III, FED

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