Quarles gets earful (again) on Fed's reg relief efforts

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WASHINGTON — As has been the theme with the Federal Reserve's recalibration of post-crisis supervision, Democrats on the Senate Banking Committee warned the central bank's top regulatory official not to weaken prudential requirements, while Republicans called for more regulatory relief.

In his second straight day of congressional testimony, Fed Vice Chairman for Supervision Randal Quarles was put on the defensive about a pending proposal to differentiate rules for banks with between $100 billion and $250 billion of assets from the largest institutions.

The proposal is meant to implement the reg relief law enacted in the spring that was spearheaded by Senate Banking Committee Chairman Mike Crapo. At the hearing Thursday, the Idaho Republican praised the Fed's pending proposal but said the regulators still have work to do in refining the post-crisis regulatory regime.

“Despite this positive step, the agencies have left a number of items unaddressed, including: the treatment of foreign banking organizations; additional details on stress testing, including the Fed’s Comprehensive Capital Analysis and Review, or CCAR; and resolution planning,” Crapo said.

Quarles said regulators are moving toward releasing a proposal for a community bank leverage ratio, and shortly thereafter will propose other steps, including tailoring for foreign banking organizations.

"I view the tailoring for foreign banking organizations as a somewhat separate question from implementation of" the reg relief law, Quarles said.

But Democrats on the committee said, with bank profits having been on the rise since the post-crisis rules were written, they were concerned that the Fed’s proposal goes beyond what members intended when writing the reg relief bill, known as S 2155. In addition to easing requirements for banks between $100 and $250 billion, the Fed proposal also would ease some standards for certain banks above $250 billion.

“The Fed’s proposed rule loosens protections for banks with more than $250 billion in assets — not small community banks — we’re talking about the nation’s biggest financial institutions,” said Sen. Sherrod Brown, D-Ohio, the committee’s ranking member.

“Combined, these firms hold $1.5 trillion in assets. The Fed’s proposal also promises more goodies for the big banks, with rollbacks for large foreign banks expected in the next few months. This is despite the fact that the Fed’s own progress report said that foreign banks continue to violate anti-money-laundering laws and skirt Dodd-Frank requirements.”

Brown also described previous statements by Quarles about making stress tests more transparent as "giving banks the teacher’s edition of the textbook.” In his opening statement, Quarles said transparency "provides firms clarity on the letter and spirit of their obligations ... [and] provides supervisors with exposure to a diversity of perspectives."

In response to Brown, Quarles said the central bank has "tried to strike a balance" on transparency of the stress test process. More transparency can "improve the quality of our models," Quarles said, but "if we were completely transparent … we could end up making the system more fragile rather than less."

Both Republicans and Democrats on the committee took issue with other aspects of the banking agencies' regulatory refinements.

Sen. John Kennedy, R-La., criticized a recent proposal by the agencies implementing a provision of the reg relief law to reduce paperwork requirements for banks with under $5 billion in assets with a short-form call report. The cost savings for banks from the proposal will be negligible, Kennedy said.

“You promulgated a rule. It’s going to save a grand total, the average bank, a grand total of 1.18 hours a quarter,” Kennedy said. “The stuff that you’re cutting out is the stuff that most small banks always put ‘zero’ on. You’re not doing anything. I’d like you to hit another lick and let’s try to be serious about it.”

Quarles was pressed by Democrats about the growth in leveraged lending as well as regulators’ work to update the the Community Reinvestment Act.

Sen. Elizabeth Warren, D-Mass., sparred with Quarles over statements by regulators in the Trump administration indicating that deviations from the agencies' leveraged lending guidance will not result in banks facing enforcement actions.

On leveraged lending, Warren said it was “deeply worrisome” that the Fed is not as focused on the leveraged lending guidance compared to when the guidance was issued in 2013.

“I’m not seeing too much distinction between what you’re doing now and what the Fed was doing pre-2008,” Warren said.

Quarles reiterated the view by the Fed, Federal Deposit Insurance Corp., Office of the Comptroller of the Currency, Consumer Financial Protection Bureau and National Credit Union Administration that supervisory guidance articulates their general philosophy on appropriate practices but is not meant as a benchmark to trigger punishment and fines for a violation.

“We are monitoring compliance with safety and soundness. ... We should not monitor compliance with guidance,” Quarles said.

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