Fed’s Quarles doubles down on tailoring and no Countercyclical Capital Buffer

Jet Flight, Mail Bags, and Banking Regulation
Vice Chair for Supervision Randal K. Quarles
June 3, 2021

One of my goals as Vice Chair for Supervision has been to make our regulatory framework as simple, transparent, and efficient as possible. In particular, we must always ask whether the cost of regulation—whether in reduced economic growth or in increased frictions in the financial system—is outweighed by the benefits of the regulation. If we have a choice between two methods of equal effectiveness in achieving a goal, we should choose the one that is less burdensome for the system.

By grouping foreign banks together, this portfolio reassignment enhances the ability of supervisors to take into account, in a comprehensive fashion, of the structural features and specific risks associated with the cross-border character of foreign banking operations in the United States. It is obviously incorrect to say that this is “weaker” supervision: these banks are subject to the same capital and liquidity requirements that they were before and the supervisors in our LFBO portfolio are expert public servants. Indeed, this approach may be more effective in identifying risks unique to foreign banks. For example, the Archegos exposures in foreign banks outside the United States that resulted in recent losses outside the United States—losses that could not have been picked up by LISCC supervision—might have benefited from a supervisory structure that was more focused on foreign-bank-specific risks.

The Federal Reserve should only turn on the CCyB in times of significant irrational exuberance; for example, in the face of a self-reinforcing cycle of borrowing and asset prices of the kind we saw in 2004–06. Yet, in my view, our through-the-cycle capital levels—that is, our fixed capital requirements—in the United States have been set so high, that our CCyB is effectively already “on.” As a result, existing capital requirements for banks in the United States were already at a high enough level to maintain financial stability.

The full speech is available at https://www.federalreserve.gov/newsevents/speech/quarles20210603a.htm

Editor’s Note: this speech could be seen as a rebuttal to US Senator Elizabeth Warren’s recent request that Quarles role as head of supervision not be renewed when his term expires in five months. For more, see https://finadium.com/was-it-fair-for-sen-elizabeth-warren-to-call-for-firing-of-fed-vice-chair-for-supervision-quarles-over-archegos-losses-premium/

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