Fed's Quarles lays out new vision for Financial Stability Board

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Federal Reserve Vice Chairman for Supervision Randal Quarles said the Financial Stability Board should explain the rationale behind its financial benchmarks while also establishing new ones to combat emerging threats.

In a speech delivered Sunday in Hong Kong, Quarles, who assumed the chairmanship of the FSB in November, said much has changed since his predecessor at the helm of the international body, Bank of England Gov. Mark Carney, first took the reins seven years ago.

“The body of post-crisis regulation that has resulted, though it involved the energy and efforts of a kaleidoscopically varied host of standard setters, regulators, and central banks … was nonetheless accomplished under the aegis and at the instigation of the FSB,” Quarles said. “It was a tour de force of orchestration, and it has unquestionably made the financial system safer and more resilient.”

The job of crafting the fine contours of the post-crisis Basel III accords was a painstaking one, Quarles said, but that job is largely complete. Instead, he said, the task before the FSB is to ensure its continued relevance by being open, diligent and critical of its own work.

One example of how the board can be more open and transparent, Quarles said, was by creating more meaningful ways for the board to gather insight from nonmember jurisdictions. The FSB has had something called regional consultative groups, or RCGs, in place since the board was retooled from its predecessor, the Financial Stability Forum, in 2011. Those groups are meant to include both G-20 member states and other countries in specific regions to identify risks and financial stability priorities.

“These RCGs are great in concept, but they have struggled in practice,” Quarles said. “I am committed to improving our mechanisms for reaching out to countries outside the FSB for genuine learning about the effects of FSB actions.”

Quarles added that the FSB would publish its work plan publicly for the first time, and that public consultation windows for FSB work products would be at least 60 days going forward.

The FSB also ought to rededicate itself to identifying potential sources of systemic risk and regulatory solutions to those challenges, Quarles said. Some post-crisis changes such as higher capital and liquidity requirements are broadly efficacious in promoting financial stability, he said, but now that many of those low-hanging improvements are enacted, the board will rededicate itself toward managing emerging risks.

“The FSB needs to put more of our resources into identifying new vulnerabilities in a financial sector that continues to evolve and to studying the effects of the many reforms that have been enacted,” Quarles said. “As a result, the FSB has decided to undertake a review of its framework for assessing vulnerabilities to ensure that we are at the cutting edge of financial stability vulnerability assessment.”

Quarles concluded that it was important that the board be willing to evaluate is own work with an open mind, questioning whether its earlier recommendations had their desired effects, whether they had any undesired effects and whether any substantive revisions might yield results more in line with the rule’s stated goals.

“This rigor is critical for the quality and credibility of the evaluation work,” he said. “In any system as complex and consequential as the body of post-crisis financial regulations, there will always be aspects — and sometimes material aspects — that can be improved on the basis of experience and analysis. A credible review process that is both rigorous and dispassionate will find a few.”

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