In his first public statements since being sworn in as vice chairman for supervision at the Federal Reserve, Randal Quarles said the agency is examining its approaches to a wide swath of its regulatory and supervisory activities, including stress tests, capital ratios and living wills.
“As I have come into the job, I have perceived quite an openness in the deep state at the Fed to taking a fresh look … at regulations,” Quarles said. “The regulation part will proceed fairly straightforwardly. There’s a lot of work there to be done, and it won’t be entirely to everyone’s satisfaction, but I think that proceeds fairly straightforwardly.”
Quarles' comments were delivered during a question-and-answer panel at the Clearing House Association's annual conference in New York. Among the first items that are likely to emerge from the Fed, Quarles said, is a disclosure of the aggregate performance of certain asset portfolios under the Fed’s stress testing models. That effort was first described by Fed Gov. Jerome Powell — who is now the president’s nominee to serve as chairman beginning next year — in an interview earlier this year.
“In a very short period of time,” Quarles said, the agency will issue a public solicitation for information related to what aspects of the Fed’s internal models and stress testing process ought to be disclosed, and will offer a suggested proposal on what it thinks might be appropriate. But the request for public input, he said, is meant to actually result in meaningful adjustments to the proposal, he said.
“Part of transparency is being open to input,” Quarles said. “If there’s going to be rules, we ought to let people know what they are. My expectation would be that, when you take a fresh look at something that’s this complex, there will be ways that it will be refined.”
The tone Quarles set on stress testing appears less aggressive than some members of Congress would prefer. He made no mention of whether stress tests should continue to be annual exercises, whether qualitative tests should restrict dividend payments, or if the Fed’s models should be subject to notice-and-comment rulemaking processes. He did, however, say that those issues “are very much on the front burner.”
Other leading areas of pressing interest include cybersecurity, the potential disruptions posed by fintech firms and the migration of risk out of the regulated banking sector and into the so-called shadow banking sector, he said.
“History has shown us that, it’s not just a question of where has the risk that we knew moved, but what new risks are developing?” Quarles said. “I think that in the regulated area … we ought to be looking at what the implications of the growth of fintech ... I think we ought to be looking at cyber, obviously.”
With respect to living wills, Quarles said that the idea of having banks undergo some kind of process to ensure there is a plan for resolution "makes a lot of sense," but that he doubted it would remain an annual exercise. It may become an ongoing monitoring process to ensure resolvability, he said.
"That shouldn’t be, and is unlikely to be, a constant annual same-level process," Quarles said. "The living will process should be … to ensure that the structure of a firm enhances its resolvability, and long before I got here, the back of that process has been broken."
Quarles staked out few definitive views on matters in his purview — perhaps a reflection of being on the job less than a month. But he did reiterate a widely held view at the Fed — expressed by former Fred Gov. Daniel Tarullo and current chair Janet Yellen — that the supplementary leverage ratio ought to serve as a backstop rather than as a binding constraint. He also echoed the view that rules, to the extent that it is practical, should be tailored to the size and complexity of the institutions themselves.
He added that supervision — that is, ongoing examination of banks by Fed staff — would be a primary focus of his efforts, and that he hoped to initiate a new approach toward bank supervision over the course of his term as vice chairman.
“I have come into this position thinking that … changing the tenor of supervision will be the biggest part of what it is that I do,” Quarles said. “I think that a significant part of the Fed’s engagement of the firms is through supervision rather than regulation. I think that the regulatory part is probably the easier part.”