WASHINGTON — Although too-big-to-fail banking reforms have strengthened the world's financial system since the 2008 crisis, Federal Reserve Vice Chairman for Supervision Randal Quarles said regulators around the globe still have work to do to operationalize their processes for the resolution of distressed banks.
Quarles — who serves as the chairman of the Financial Stability Board, an international body that works to bolster the resiliency of the global financial system — said all FSB members need to consider how to step up their resolution authorities to better prepare for the possibility of bank failures.
“The benefits of reforms cannot be realized unless they are operationalized,” he said in remarks Tuesday to the Exchequer Club. “All FSB jurisdictions need to implement resolution reforms and to improve their resolution capabilities so they are fully prepared to respond to a bank failure or a crisis.”
The FSB is made up of 24 central banks that span the globe, plus the European Central Bank. The Basel, Switzerland-based group is organized as an offshoot of the G-20. It is also organized as a complement to the Basel Committee on Banking Supervision, which is also based in Basel.
Quarles’ remarks follow the FSB’s publication last month of an evaluation of the too-big-to-fail reforms for systemically important banks. That report found that the global banking system is in many respects better equipped to handle shocks and individual banks are less likely to require government bailouts.
“Supervisors and firms are better equipped to deal with problems that occur,” Quarles said. “Supervisory oversight of systemically important banks has learned the lessons of the crisis and has added a macroprudential perspective.”
The FSB report also concluded that post-crisis reforms have added “net benefits” to society, and that reforms like enhanced capital and liquidity standards required by the Basel III regulatory framework have yielded few negative side effects.
Bank resolution planning has also improved around the world, Quarles said, citing the FSB report’s finding that investors now believe failing banks are more likely to be resolved than bailed out.
“Recovery and resolution planning has improved banks’ capabilities to produce timely, accurate and granular information,” Quarles said. “Timely information in a crisis is key to assessing the scale of a problem and to deciding what to do about it. This additional information has already proved helpful to both banks and authorities during the pandemic.”
However, Quarles highlighted the FSB report’s conclusion that noted important shortcomings in the current resolution planning processes that member countries must address.
“The FSB’s evaluation shows that systemically important banks remain very complex, highlighting the importance of resolution planning,” he said. “The evaluation also highlights gaps in the information available to public authorities and to the FSB and standard setters, which reduces their ability to monitor and evaluate the effectiveness of resolution regimes.”
The report also found that resolution authorities could do more to monitor and regulate a bank’s funding sources to ensure continuity and stability.
“The FSB continues its work to ensure that banks, other financial institutions and market infrastructures can be effectively and safely resolved,” Quarles said. “These are issues on which we will need to reflect and work further.”
The FSB analysis, which was conducted before the onset of the coronavirus pandemic, is open for public comment until Sept. 30.
Separately, Quarles discussed the Fed's approach to stress tests this year, a process that was altered due to the economic fallout from COVID-19. The Fed is requiring banks to resubmit their capital plans later this year in light of economic uncertainty around the virus.
But Quarles said the Fed has not yet decided whether banks will be subjected to a “full-blown” stress test or whether it will test banks against sensitivity analyses — a range of hypothetical economic conditions that it deployed during this year's round of Comprehensive Capital Analysis and Review examinations.
“That will depend on the range and reliability of the data that we think that we have as we continue to monitor this and the work that we think that we can do, how quickly is the environment evolving, which obviously makes it harder to conclude that a full-blown stress test is useful," he said.
