WASHINGTON — Federal Reserve Vice Chairman for Supervision Randal Quarles on Friday gave the clearest indication yet of the central bank's intention to recalibrate the regulatory framework for the nation’s largest banks, including revisions to capital and liquidity rules.

Speaking before a conference of the American Bar Association Friday, Quarles said that the agency is reviewing its current regulatory structure for the leverage ratio — a simple ratio that requires banks to hold capital against their assets regardless of their character — and signaled the Fed may further tailor rules to distinguish between "global systemically important banks" and non-GSIBs.

Revising the leverage ratio has been a consistent focus for the industry and the Trump administration. While the original ratio included all assets with an equal risk weight, to produce what proponents say is a purer capital measure, large banks have argued that certain low-risk assets should be taken out of the ratio, and that view was confirmed by a recent Treasury Department report that recommended financial reforms.

Federal Reserve Vice Chairman Randal Quarles
“Leverage ratio recalibration is also among the Federal Reserve’s highest-priority, near-term initiatives,” said Randal Quarles, the Federal Reserve Board's vice chairman for supervision. Bloomberg News

“Leverage ratio recalibration is also among the Federal Reserve’s highest-priority, near-term initiatives,” Quarles said. “We have made considerable progress on that front in the past few months, and I expect that you will see a proposal on this topic relatively soon.”

Quarles added that revising many of the capital and liquidity rules for banks with more than $250 billion in assets, but that have not be designated as G-SIBs, should be aimed at keeping rules in sync with the systemic risk that those firms pose.

“Tailoring is not an objective limited to a subset of the smallest firms,” Quarles said. “The character of our regulation should match the character of the risk at the institution. Accordingly, we should be looking at additional opportunities for more tailoring for larger ... non-GSIBs.”

Quarles specifically pointed out that requirements under the Liquidity Coverage Ratio do not have a gradation between G-SIBs and non-G-SIBs, particularly as it pertains to internal stress testing models. He said similar calibrations might be necessary with the single counterparty credit limits and the living wills process.

“I believe it is time to take concrete steps toward calibrating liquidity requirements differently for large, non-G-SIBs than for G-SIBs,” Quarles said. “And I see prospects for further liquidity tailoring in that the content and frequency of LCR reporting are the same for the range of firms currently subject to the modified LCR as they are for the large non-G-SIBs that are subject to the full LCR. We should also explore opportunities to apply additional tailoring for these firms in other areas, such as single counterparty credit limits and resolution planning requirements.”

Quarles was sworn in as the Fed's first vice chairman for supervision in October. The position was created by the Dodd-Frank but remained unfilled in the Obama administration as its functions were essentially performed by former Fed Gov. Daniel Tarullo, who headed the Fed’s supervisory committee.

Since joining the central bank, Quarles has made a handful of speeches outlining his views — primarily on stress testing and cybercrime — but Friday's remarks were his most expansive about core issues like bank capital and liquidity requirements.

Quarles said he has also directed staff to conduct a “comprehensive review” of regulations related to capital, liquidity, stress testing and resolution planning in order to “consider the effect of those regulatory frameworks on resiliency and resolvability of the financial system” but also “more broadly to evaluate their costs and benefits.”

Quarles also said that the central bank’s regulatory review effectively began before he joined the Fed, and said that there are “areas of low-hanging fruit” that the central bank has already begun implementing. Those include simplifying capital rules for small banks, reducing the burden in resolution planning, revising some requirements in the stress testing program, recalibrating the leverage ratio and streamlining the Volcker Rule prohibition on proprietary trading.

When asked whether there were any deregulatory proposals that he thought go too far, Quarles said he could not think of any. But he noted that his objective is not to roll back regulations as a matter of policy. Rather, he said, now is an appropriate time to review what changes might be necessary to make the vast and complex post-crisis regulatory regime more effective while preserving those essential innovations.

“I view that as the responsible action of any institution such as the Federal Reserve that has completed the first step … as complex and important as the post-crisis financial regulation,” Quarles said. “This was inevitable. Tarullo started it before I got there — I don’t know that we’ve gotten to the same place had he stayed — but the process is one that is simply the direction we were going in.”

Quarles said that the agency does “intend to implement” the proposed Net Stable Funding Ratio, which was proposed during the Obama administration, though the Fed will “take into account and carefully consider … a number of serious, thoughtful comments” on the proposed rule. He had less of a timetable on the Basel Committee’s recently completed standards for a fundamental review of the trading book, which he said had a long implementation date and were still subject to some potential changes at the international level.

He added that he has directed supervisors not to cite or consider a 2013 interagency leveraged lending guidance that was recently declared to be a rule by the Government Accountability Office and is therefore subject to Congressional Review Act consideration. Quarles said that, as a general matter, guidance can be helpful for institutions that want to know what the rules ought to be, but in this case the guidance should not be relied upon as a basis of an enforcement or supervisory action.

“I have made clear that this is not something that is cited in supervisory action or taken into account,” Quarles said. “It is guidance, not a rule.”

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.