WASHINGTON — The Federal Reserve’s top regulator said Monday that he did not view the agency’s review of post-crisis regulations as an exercise in relaxing rules or reducing capital levels, emphatically pushing back against claims that certain proposals could lead to weaker supervision.

“It’s not just semantically that I want to stress this: As we are looking at enhancing the efficiency of regulation, we are not looking to relax regulation,” said Federal Reserve Vice Chairman for Supervision Randal Quarles. “We are not looking to significantly reduce the level of risk-weighted capital in the [banking] system. That has been a strength … a global competitive advantage, relative to the capital levels of non-U.S. competitive institutions.”

Federal Reserve Vice Chairman Randal Quarles
"We are not looking to relax regulation. We are not looking to significantly reduce the level of risk-weighted capital in the [banking] system," said Federal Reserve Vice Chairman for Supervision Randal Quarles. Bloomberg News

Speaking at a conference sponsored by the National Association for Business Economists, Quarles said the aim of current and any forthcoming regulatory proposals is simply to improve the efficiency of post-crisis regulation, not to ease or lower the requirements for their own sake.

“We’re not looking to reduce capital, or really, I don’t view our objective as relaxing regulation,” he said. “We’re looking to achieve regulatory objectives in the most efficient way, and it would be the first time in the history of man since the expulsion from the Garden [of Eden] that a project like this [Dodd-Frank] has been undertaken that could not be improved and made more efficient.”

Quarles added that areas the agency is reviewing, along with other regulators, are the supplementary leverage ratio and Volcker Rule, as well as previously announced changes to the transparency of the Fed’s stress testing models.

“I think there will be calibrations … calibrations to the supplementary leverage ratio, we’ll certainly look at that. The leverage ratio should be a backstop, not a predominant feature,” Quarles said. “I think … there are Volcker Rule recalibrations over the next several months, which, again, is an area where I think we can make regulation much more efficient without in any way undermining its statutory mandate.”

Quarles’ comments came as he delivered remarks on his perspectives on the U.S. economy. In those remarks, he said that investments sparked by last year’s tax bill could improve long-term growth by increasing productivity, undergirding an argument forwarded by the administration that the economy will grow faster than most economists suggest.

Quarles — who was appointed by President Trump and sworn in last October — said that while the prognosis for long-term economic growth is inherently uncertain, there are reasons to believe that the recent bump in the economy since Trump’s inauguration may be more durable than it might otherwise appear.

“The sustainability of the recent upturn in growth will depend importantly on whether some of the factors that have been holding back growth for the past decade diminish, including weak investment and productivity,” he said. “On balance, I am cautious, but I am also optimistic enough to believe that the factors that have been holding back growth need not be permanent and could turn, even fairly rapidly.”

The primary growth impediments, Quarles said, are slow growth in the productivity of the workforce and a lack of capital investment since the financial crisis.

He argued that recent indications that capital investment is on the rise could lead to a secondary effect of increasing worker productivity, thus overcoming some of the other secular trends in workforce productivity and paving the way for a more robust economic growth pattern.

“Slow investment growth — which, as already mentioned, had prevailed until recently — damps the contribution of new capital to worker productivity,” he said. “It could also be that new investment is a necessary step for the spread of new technologies, especially if technology is embodied in capital equipment.”

Quarles said that recent fiscal policies — including last December’s tax bill and the recently passed two-year budget deal — could lead to higher long-run growth than what was prevalent since the crisis.

“After subtracting from growth over much of the period from 2011 onward, the impetus from fiscal policy has turned distinctly positive with the passage of recent tax and budget legislation,” he said. “Fiscal policy is likely to impart considerable momentum to growth over the next couple of years not only by increasing demand, but also by boosting, to some degree, the potential capacity of the economy.”

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