Dems' grilling of Fed's Quarles a preview of what could come

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WASHINGTON — On the verge of controlling the Financial Services Committee for the first time since 2010, House Democrats on Wednesday made clear their concerns about proposed changes to the Federal Reserve Board's post-crisis supervision program.

During his semiannual appearance before the panel, Fed Vice Chairman for Supervision Randal Quarles faced a battery of questions from members soon to hold the House majority who argued the agency’s proposal to modify supervisory standards for banks with more than $100 billion of assets would destabilize the financial system.

Rep. Maxine Waters, D-Calif., the ranking member poised to chair the committee after last week's midterm elections, asked Quarles to account for proposed changes that she said “ignore the lessons of the last crisis and would make our financial system less safe.”

Quarles said those types of assessments were "off the mark" and stressed that the Fed and other regulatory agencies have attempted to ensure that the modifications do not reduce overall capital or liquidity in the financial system. Capital levels are “about right,” he said.

“It has been a principle of ours as we focus on recalibrating … that we not reduce the resiliency, including the capital resiliency and liquidity resiliency, of the system," he said. "And I think we have done that.”

Rep. Carolyn Maloney, D-N.Y., also criticized the Fed’s Oct. 31 proposal, specifically the proposed steps to eliminate the Liquidity Coverage Ratio and still-unfinished Net Stable Funding Ratio for banks with more than $250 billion in assets. The proposal refers to those institutions as "Category III" banks.

“I’m concerned about this,” Maloney said. “If a system is working, why do we want to deregulate? What evidence do you have that Category III banks are holding too much liquidity? How did you conclude that a regulation that hasn’t even been implemented was already too burdensome for the banks in Category III?”

Quarles said that the Fed’s goal has not been to reduce liquidity. Rather, he said, the aim is to reduce compliance burdens on smaller institutions while keeping protections for larger institutions in place. The changes would only reduce the overall levels of liquid assets in the financial system by a relatively small amount, he said, and in exchange would reduce costs for regional banks considerably.

“We have, in thinking about our tailoring proposals for banks of any size ... as a first principle said that we don’t want to affect the resiliency of the system, including overall liquidity,” Quarles said. “The quantitative consequence of our proposals … would be between 2 and 2.5% of the overall liquidity in the system. This is a small reduction.”

Several Democrats also expressed concern about an ongoing review by the Fed, Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. of the Community Reinvestment Act, a 1977 law that requires banks to extend services and loans to low- and moderate-income households in communities they serve. The OCC recently issued an "advance notice of proposed rulemaking" asking for public comment on CRA reforms, but the three agencies are expected to issue a joint proposal.

Rep. Gregory Meeks, D-N.Y., asked whether the Fed believed it to be important that any final revision to the CRA implementing rules preserve a qualitative examination for banks, thus ensuring that the CRA examination process does not become a rote exercise.

“Are you concerned with a CRA proposal that is overly prescriptive and limits examiner discretion when it comes to assessing the innovativeness and responsiveness of CRA lending?” Meeks said.

Quarles said that making the CRA less dynamic would not be the purpose of any future proposal, though a future proposal could hopefully provide more certainty for regulated banks. As the rules are currently written, he said, the CRA process is somewhat stagnant, and he hopes that revising the administrative rules could channel more lending to parts of the country that could use it most.

“I do think that we need to think carefully about how to ensure we have uniform treatment as well as to ensure that we have a real reinvigoration of the CRA,” Quarles said. “My concern with the current administration of the CRA is … it has become a little ossified and formulaic, and communities themselves will benefit if we can be more creative about that.”

The concerns voiced by committee Democrats could serve as something of a preview for what Quarles and other bank regulators can come to expect next year when the balance of power shifts in the House and agency principals will testify before new leadership of the committee. (The Senate will remain in Republican control.)

Whether Democrats' tone can influence how regulatory policy takes shape is unclear, but Waters and other lawmakers soon to have more control will likely maintain a tough stance with the agencies, including in the public comment portions of rulemakings.

The hearing Wednesday also marked the last occasion when a Fed official will appear before the committee under outgoing Chairman Jeb Hensarling, R-Texas. Hensarling will retire at the end of the current term.

He struck a conciliatory note to start the hearing, saying that although he had not always been able to forge bipartisan consensus on the committee, he respects the outcome of the elections earlier this month and will “do everything … to ensure there will be an efficient and peaceful transfer of power."

While noting that Waters has not yet been tapped by the Democrats to chair the committee next year, Hensarling nonetheless offered her his preliminary congratulations.

“I would like to acknowledge the ranking member’s longtime participation, her leadership on this committee, her leadership of the other party, and should that be the will of her caucus, I certainly would congratulate her on her accomplishment,” Hensarling said.

Waters said she and Hensarling had a better working relationship than was generally understood — even by other members of her caucus.

“We did not always agree on everything, but I’m always amused that the press can’t seem to get our relationship right,” Waters said. “Sometimes our members can’t get it right. Let me just say this: Let’s keep them confused. I like it that way. As a matter of fact, the more confused they are, the better I have an opportunity to have some wins.”

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