U.S. GOVERNMENT PUBLISHING OFFICE

31–420 PDF WASHINGTON : 2018

SEMI-ANNUAL TESTIMONY ON THE FEDERAL 

RESERVE’S SUPERVISION AND REGULATION 

OF THE FINANCIAL SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

APRIL 17, 2018 

Printed for the use of the Committee on Financial Services 

Serial No. 115–86 

( 

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HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MACARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

SHANNON MCGAHN, Staff Director 

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C O N T E N T S 

Page 

Hearing held on: 

April 17, 2018 ................................................................................................... 1 

Appendix: 

April 17, 2018 ................................................................................................... 55 

WITNESSES 

TUESDAY, APRIL 17, 2018 

Quarles, Hon. Randal, Vice Chairman for Supervision, Board of Governors 

of the Federal Reserve System ............................................................................ 5 

APPENDIX 

Prepared statements: 

Quarles, Hon. Randal ....................................................................................... 56 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

Letter to the Federal Reserve .......................................................................... 70 

Quarles, Hon. Randal: 

Written responses to questions for the record submitted by Representative Beatty ..................................................................................................... 72 

Written responses to questions for the record submitted by Representative Budd ....................................................................................................... 76 

Written responses to questions for the record submitted by Representative Delaney ................................................................................................... 81 

Written responses to questions for the record submitted by Representative Hultgren ................................................................................................. 83 

Written responses to questions for the record submitted by Representative Luetkemeyer .......................................................................................... 87 

Written responses to questions for the record submitted by Representative Rothfus ................................................................................................... 91 

Written responses to questions for the record submitted by Representative Tipton ..................................................................................................... 93 

Written responses to questions for the record submitted by Representative Velazquez ............................................................................................... 95 

Written responses to questions for the record submitted by Representative Waters .................................................................................................... 96 

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SEMI-ANNUAL TESTIMONY ON THE FEDERAL 

RESERVE’S SUPERVISION AND REGULATION 

OF THE FINANCIAL SYSTEM 

Tuesday, April 17, 2018 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 10:05 a.m., in room 

2128, Rayburn House Office Building, Hon. Jeb Hensarling [chairman of the committee] presiding. 

Present: Representatives Hensarling, McHenry, Royce, Lucas, 

Posey, Luetkemeyer, Huizenga, Duffy, Stivers, Hultgren, Ross, 

Pittenger, Wagner, Barr, Rothfus, Tipton, Williams, Poliquin, Love, 

Hill, Emmer, Zeldin, Trott, Loudermilk, Mooney, MacArthur, Davidson, Budd, Kustoff, Tenney, Hollingsworth, Waters, Maloney, 

Velazquez, Sherman, Lynch, Scott, Green, Cleaver, Moore, Ellison, 

Himes, Foster, Kildee, Delaney, Sinema, Beatty, Heck, Vargas, 

Crist, and Kihuen. 

Chairman HENSARLING. Committee will come to order. Without 

objection, the Chair is authorized to declare a recess of the committee at any time, and all members will have 5 legislative days 

in which to submit extraneous materials to the Chair for inclusion 

in the record. 

This hearing is for the purpose of receiving the Semi-annual Testimony on the Federal Reserve’s Supervision and Regulation of the 

Financial System. I now yield myself 3 minutes for an opening 

statement. 

Today, we are very, very pleased—I am very pleased to welcome 

the Honorable Randy Quarles, Vice Chairman for supervision for 

the Fed. We have been waiting, Mr. Quarles, 8 years for your arrival. We would like to know what took you so long. 

I think what we know is, under Dodd-Frank, the statute says the 

President shall—‘‘shall’’ appoint a Vice President of Supervision, 

not ‘‘may.’’ And yet President Obama refused to. 

We all know that Governor Tarullo de facto filled the position, 

but he did it without oversight and without checks and balances. 

Fortunately, President Trump has a very different view of the statute, Constitution, and his respect of Congress. 

We all know that, today, Governor Quarles is appearing on Tax 

Day. We also know that, thanks to the President and Republican 

Congress, we now have a 3 percent growth tax code. 

We know that 90 percent of all Americans are now receiving better take-home pay because of this act. And people are seeing pay 

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increases, 401(k) increases, and job expansion all over the Nation. 

That is the good news. 

We may have a 3 percent tax policy in America, but we do not 

yet have a 3 percent of capital markets and banking policy in 

America. And we need one; 3 percent growth makes a huge difference in the lives of our countrymen. 

Since the time that I have been on the face of the planet, a little 

over half of the years have seen 3 percent growth, and a little less 

than half the years have seen less than 3 percent growth. 

Chairman HENSARLING. In those years that have seen 3 percent 

growth, four-fifths of all the jobs that were created in my lifetime 

were created in 3 percent growth years. Poverty fell by almost 

three-quarters and real median household income grew by approximately $20,000. 

In the years since I was born where the economy grew less than 

3 percent, only one-fifth of the jobs were created, the poverty rate 

rose by over a third, and household income fell by over $10,000. 

For the average family in America, 3 percent growth is the line 

of demarcation which determines whether all their work and sacrifice for the year will actually translate into getting ahead. So it 

is important that we get it right. 

And we all know that Dodd-Frank, regardless of what it may 

have done for financial stability, is perhaps the most complex, costly, confusing regulatory onslaught onto our capital markets that we 

have seen. Many market participants, in fact, believe that it has 

cut 0.5 percent to 1 percent of GDP. 

That is why, Governor Quarles, we very much welcome your call 

for efficiency, transparency, and simplicity in regulation, because 

we also know that, in a post-Dodd-Frank world, the Fed is now our 

uber-financial regulator. And I particularly appreciate your call for 

efficiency to make sure that ‘‘the cost of regulation in reduced economic growth or increased frictions in the financial system is outweighed by the benefits of the regulation,’’ to quote you. I look forward to hearing more in your testimony. 

The Chair now yields 4 minutes to the Ranking Member for an 

opening statement. 

Ms. WATERS. Thank you, Mr. Chairman, and welcome, Vice 

Chairman Quarles. I look forward to hearing Vice Chairman 

Quarles’ testimony today on the Federal Reserve Bank’s supervision and enforcement activities. 

I want to point out that the position of Vice Chairman for Supervision was created following the financial crisis as part of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act as 

one of several steps to address the Fed’s insufficient supervision 

and enforcement leading into the crisis. 

Vice Chairman Quarles is, in fact, the first person to officially 

hold this important role that is critical in keeping our financial system safe and sound. 

I was encouraged when the Fed took action under then-Chair 

Janet Yellen and initiated a strong enforcement action against 

Wells Fargo for its egregious consumer abuses and capped the 

bank’s growth until it cleans up its act. 

Of particular significance is the fact that this enforcement action 

is not just a fine, but it comes attached with real consequences for 

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Wells Fargo, which is a repeat offender with a terrible track record 

of harming consumers, including by opening up millions of fraudulent accounts without their customers’ consent. 

I hope to see that they continue to strongly use its enforcement 

tools. We need our independent regulators to be vigilant in carrying out their statutory duties and make robust use of their authorities to crack down on bad actors. 

Sadly, that independence is under attack. Just last week, Office 

of Management and Budget Director Mick Mulvaney, who was unlawfully appointed by President Trump to serve as acting director 

of the Consumer Financial Protection Bureau, testified before this 

committee. 

Mr. Mulvaney’s illegal appointment—there have been zero enforcement actions by the Consumer Bureau since his appointment, 

and he has taken a series of actions to weaken the agency’s ability 

to carry out this important mission and benefit the predatory actors that the agency is designed to police. 

Indeed, the Trump Administration and my colleagues across the 

aisle are working to move our system of banking regulation in exactly the wrong direction in their efforts to dismantle the crucial 

reforms that Democrats put in place in Dodd-Frank. 

These efforts at deregulation come at a time of record bank profits for banks of all sizes. But, even though the banks are making 

money hand over fist, this President and Republicans in Congress 

are pushing hard to help out the Nation’s largest banks. 

Nearly every week, Republicans push through harmful legislation that undermines Dodd-Frank. I am also very concerned by the 

recent proposal from the Fed that would lower the capital buffer 

at the eight largest banks by a combined $112 billion. 

Under this proposal, Wells Fargo, for example, would be allowed 

to hold 20 billion less in capital than the current standard for a 

well-capitalized bank of its size. 

I look forward to discussing these and other important issues 

with Vice Chairman Quarles here today. And thank you. I yield 

back the balance of my time. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, the Chairman of the Financial Institutions and Consumer Credit Subcommittee, for 1 minute. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. Vice Chairman 

Quarles, welcome. 

As we all know, the Federal Reserve Board was without a designated Vice Chair for Supervision for almost a decade. With your 

appointment, that position has finally been filled, and we are 

pleased to have you here today, Mr. Quarles. Welcome. 

Since your initial confirmation in October, you have made many 

statements outlining your agenda and your intentions. I wholeheartedly agree that it is time to step back and do a comprehensive 

examination of the previous Administration’s regulatory regime. 

Looking forward, there is an immense amount of work to be 

done. As we assess the Federal Reserve’s role, we must ensure a 

more practical approach to supervision, one that extends from the 

top, all the way down to each and every field examiner. 

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We also need to ensure the Federal Reserve adequately and appropriately tailors its supervisory approach on an institution-by-institution basis and puts more thought into the manner in which it 

regulates and examines. 

I am confident you will make the critical changes needed to benefit our economy and improve the stability and productivity of our 

financial system. I look forward to your testimony today. 

With that, Mr. Chairman, I yield back. Welcome. 

Chairman HENSARLING. The gentleman yields back. 

The Chair now recognizes the gentleman from Michigan, Mr. Kildee, the Vice Ranking Member, for 1 minute. 

Mr. KILDEE. Thank you, Mr. Chairman and Madam Ranking 

Member. And, Mr. Quarles, welcome. We appreciate your testimony 

today. 

I have been an advocate for pushing our Federal Government, at 

every level, to focus more attention on the struggles that America’s 

older industrial cities, old cities and towns face, many of them that 

continue to be left behind even during periods of economic growth. 

The regional banks have done some interesting work in this 

space, particularly the Cleveland and Boston banks recently, but 

the Philly and Minneapolis banks have also focused some attention 

on this. 

What I am interested in hearing from you are any thoughts you 

have about how the supervisory authority of the Fed—the levers 

that come with that authority can be used not just for the purposes 

of streamlining the regulatory process, but those levers could be 

used in ways to increase the efficiency, the efficacy of the Community Reinvestment Act, access to credit—essentially trying to use 

the tools you have to ensure that there is equity in the way the 

financial system works, particularly in those places with high unemployment, high levels of poverty, like my hometown of Flint, 

Michigan. 

So thank you for your appearance here today and I look forward 

to your testimony. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes yet another gentleman from Michigan, 

Mr. Huizenga, the Chairman of the Capital Markets Subcommittee, 

for 1 minute. 

Mr. HUIZENGA. Thank you Mr. Chairman, and happy Tax Day, 

Vice Chair Quarles, I—I would use air quotes, but, for many of us, 

we believe that this is the beginning of a better situation. 

As the former Chair of the Monetary Policy and Trade Subcommittee that had oversight of the Fed, I watched very closely as 

the enactment of Dodd-Frank supercharged the Federal Reserve, 

bestowing on it even more power, influence, and control over the 

financial system, all while remaining shrouded in mystery to the 

American people. That is something we hear consistently, is that 

people don’t understand what the Fed does. 

Specifically, Title 11 of the Dodd-Frank Act created a new position of the Vice Chair of Supervision. And we are very pleased that 

you have taken that position. 

On February 22, in a speech that you gave, you mentioned that 

the Federal Reserve and other regulatory agencies have completed 

the bulk of the work of post-crisis regulation. 

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And I quote, ‘‘as such, now, it is eminently natural and expected 

time to step back and assess those efforts. It is our responsibility 

to ensure that they are working as intended. And, given the 

breadth and complexity of this new body regulation, it is inevitable 

that we will be able to improve them, especially with the benefit 

of experience and hindsight.’’ 

Mr. Quarles, as has been noted, we have been waiting a long 

time, and I appreciate this thoughtful retrospective view is happening as we drive this economy forward. 

I yield back. 

Chairman HENSARLING. Time of the gentleman has expired. 

Indeed, today, we now welcome the testimony of the Honorable 

Randal K. Quarles, the first Vice Chairman for Supervision at the 

Federal Reserve. Pursuant to Section 1108 of the Dodd-Frank Act, 

President Trump nominated Mr. Quarles to serve as Vice Chairman for Supervision. 

He became a member of the Board of Governors of the Federal 

Reserve on October 13 of last year to fill an unexpired term. He 

was sworn in as Vice Chairman for Supervision on October 13, 

2017, for a term of 4 years, through October 13, 2021. 

Prior to his appointment to the board, Mr. Quarles was Founder 

and Managing Director of the Cynosure Group, a Utah-based investment firm. Before founding that group, Mr. Quarles was a partner at the Carlyle Group, a private equity firm based here in 

Washington, D.C. 

Mr. Quarles has previously served in public service, having 

served as Undersecretary of the Treasury for domestic finance, Assistant Secretary of the Treasury for international affairs, policy 

Chair of the Committee on Foreign Investment in the United 

States, and the U.S. Executive Director of the International Monetary Fund. 

Mr. Quarles received an A.B. in philosophy and economics, 

summa cum laude, from Columbia and earned a law degree from 

the Yale Law School. Without objection, the witness’s written statement will be made part of the record. 

The Chair wishes to inform all members that I expect to excuse 

the witness no later than 2 p.m. this afternoon and no intervening 

floor votes are expected at this time. 

Mr. Quarles, you are now recognized to give an oral presentation 

of your testimony. Again, welcome. But you do need to press the 

button for the microphone. 

STATEMENT OF THE HON. RANDAL QUARLES 

Mr. QUARLES. Thank you very much, Chairman Hensarling, 

Ranking Member Waters, other members of the committee. It is a 

pleasure to appear before you today. And I appreciate the opportunity to testify on the Federal Reserve’s regulation and supervision of financial institutions. 

The Federal Reserve, along with the other U.S. banking agencies, 

has made substantial progress in building stronger regulatory and 

supervisory programs since the global financial crisis, especially 

with respect to the largest and the most systemically important 

firms. 

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These improvements have helped to build a more resilient financial system, one that is well-positioned to provide American consumers, businesses, and communities access to the credit they 

need, even under challenging economic conditions. 

At the same time, we are mindful that, just as there is a strong 

public interest in the safety and soundness of the financial system, 

there is a strong public interest in the efficiency of the financial 

system. 

Our financial sector is the critical mechanism for directing the 

flow of savings and investment in our economy in ways that support economic growth. And economic growth, in turn, is the fundamental precondition for the continuing improvement in the living 

standards of all of our citizens that has been one of the outstanding 

achievements of our country. 

As a result, the regulation of that system should support and 

promote the system’s efficiency just as it promotes its safety. And, 

moreover, our achievement of these objectives will be improved 

when we pursue them through processes that are as transparent 

as possible and through measures that are clear and simple, rather 

than needlessly complex. 

In my testimony today, I will review our regulatory and supervisory agenda to improve the effectiveness of the post-crisis framework through these principles of efficiency, transparency, and simplicity. I have also included an update on the condition of the industry and the Federal Reserve’s engagement with foreign regulators in my written testimony. 

So, to begin with efficiency measures, last week, the board and 

the Office of the Comptroller of the Currency (OCC) issued a proposal that would recalibrate the enhanced supplementary leverage 

ratio, or the ESLR, applicable to our global systemically important 

banks, or G-SIBs. 

The proposal would calibrate the ESLR so that it is less likely 

to act as a primary constraint, which can actually encourage excessive risk-taking, while still continuing to serve as a meaningful 

backstop. 

Last year, the board also adopted a rule that eliminated the socalled qualitative objection of the Federal Reserve’s CCAR (Comprehensive Capital Analysis and Review) exercise for mid-size 

firms that pose less systemic risk. As a result, deficiencies in the 

capital planning processes of those firms will be addressed in the 

normal course of supervision. 

And I believe this approach should also be considered for a 

broader range of firms. And, last week, we called for comment on 

that potential expansion. 

On the subject of tailoring, I support Congressional efforts regarding tailoring as offered in both the House and Senate. In addition to this potential legislation, there are further measures I believe we can take to match the content of our regulation to the 

character and risk of the institutions being regulated. 

For example, I believe it is time to take concrete steps toward 

calibrating liquidity coverage ratio requirements differently for 

non-G-SIBs than for G-SIBs. I also think we can improve the efficiency of our requirements regarding living wills. 

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U.S. banking agencies have also taken a number of steps to advance more efficient and effective supervisory programs. For example, the agencies recently increased the threshold for acquiring an 

appraisal on commercial real estate loans from $250,000, to 

$500,000, which doesn’t pose a risk to safety and soundness. 

The Federal Reserve has also instituted various measures to 

clarify and streamline its overall approach to the supervision of 

community and regional banks in particular, which is detailed in 

my written testimony. 

Transparency is essential to the Federal Reserve’s mission in supervision, no less than in monetary policy. Late last year, in the 

first material proposal following my confirmation, the board released for public comment an enhanced stress testing transparency 

package. 

The proposal would provide greater visibility into the supervisory 

models that often determine their binding capital constraints. And 

we are continuing to think about how we can make the stress testing process more transparent without undermining the strength 

and usefulness of the supervisory test. 

Looking ahead, we are also in the process of developing a revised 

framework for determining control under the Bank Holding Company Act. A more transparent framework should, among other 

things, facilitate the raising of capital by community banks, where 

control issues are generally more prevalent. 

Simplicity of regulation promotes public understanding and compliance by the industry with regulation. Just last week, the Federal 

Reserve issued a proposal that would effectively integrate the results of the supervisory stress test into our non-stress capital requirements. For the largest bank holding companies, that would reduce the loss absorbency requirements from 24 to 14. 

We estimate that the proposed changes would generally maintain—in some cases, modestly increase—the minimum risk-based 

capital required for the G-SIBs, although no bank would actually 

be required to raise capital because their existing capitals are well 

above those minimums, and generally modestly decrease the 

amount of risk-based capital required for most non-G-SIBs. 

Our fellow regulators are also working with us to further tailor 

implementation of the Volcker Rule and to reduce burden particularly for firms that do not have large trading operations and don’t 

engage in the sorts of activities that may give rise to proprietary 

trading. 

In conclusion, the reforms we have adopted since the financial 

crisis represent a substantial strengthening of the Federal Reserve’s regulatory framework, should help ensure that the U.S. financial system remains able to fulfill its vital role of supporting the 

economy. We will do everything we can to fulfill the responsibility 

that has been entrusted to us by the Congress and by the American 

people. 

Thank you again for the opportunity to testify before you this 

morning. I am looking forward to answering your questions. 

[The prepared statement of Mr. Quarles can be found on page 56 

of the Appendix.] 

Chairman HENSARLING. Thank you, Chairman Quarles. The 

Chair now yields himself 5 minutes for questions. 

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As you heard in my opening statement, I am very concerned with 

the policies and the implementation of the policies that are necessary to sustain long-term, 3 percent plus economic growth. 

And I am somewhat fearful, sometimes, that one day, I may 

wake up and find out that our financial firms have been turned 

into the equivalent of public utilities, which will not be commensurate with 3 percent economic growth. 

So I have raised this issue before, and that is the whole issue of 

supervision versus corporate governance. A number of institutions 

have come to this committee to say that representatives of the Fed 

have insisted on attending meetings of the board of directors or 

committee meetings of the board of directors. 

So my question is, do you believe that the Fed has the legal authority to demand attendance at board meetings? And, if so, why 

is this a wise policy? 

Mr. QUARLES. I actually can get back to you on the answer of 

what our legal authority is. 

I think the more important question is, is it a wise policy? And 

we ought to be focusing as supervisors on ensuring that boards are 

structured in order to be able to do their jobs and that our supervisory and regulatory requirements of them support their fulfilling 

their roles in the corporate organization. 

We came out, as you know, with a board effectiveness guidance 

proposal last August, when now-Chairman Powell was then responsible for the supervisory and regulatory affairs of the board. And 

the purpose of that guidance was precisely to scale back some of 

the excessive micromanagement and misdirection of board— 

Chairman HENSARLING. So that is its purpose. I must admit, I 

have heard from several who believe that it may have the opposite 

impact in bringing the board more into day-to-day management. So 

I am heartened to hear that you think it will have the opposite effect. 

Let me run a couple of other situations by you. This committee 

has heard that some Fed examiners have made recommendations 

to management that certain board members, if you will, be fired. 

Again, does the Fed have the legal authority to make those recommendations? And, if so, is that wise policy? 

Mr. QUARLES. So, again, on the legal authority, I will get back 

to you with a legal analysis of what our legal authority is. 

Chairman HENSARLING. I would appreciate that. 

Mr. QUARLES. I do think that, at the highest level, it probably 

shouldn’t be something that, at the direct supervisory team level, 

would be engaged. 

At the highest level, if there were serious concerns about the fitness of a director, I think that probably is something that, at the 

highest level of the Fed, we should weigh in on. But those would 

be extremely rare cases, I think. 

Chairman HENSARLING. Something else we have heard that the 

Fed has weighed in on—we had representatives from one large diversified financial services company say their examiners question 

them about their lobbying activities. 

Now, the right to petition your Government for the redress of 

grievances is enshrined in the Constitution. I assume you would 

agree that the Federal Reserve Act of 1913 does not trump the 

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Constitution. Why would it be appropriate supervisory questioning 

to question one’s lobbying activities? 

Mr. QUARLES. I can’t think of any reason. 

Chairman HENSARLING. Is that going to continue under your 

watch? 

Mr. QUARLES. Now that I am aware of it, no. 

Chairman HENSARLING. OK. 

Again, as you know, typically, corporate governance is determined by State laws. There are, frankly, hundreds of years of case 

law. I am somewhat concerned, is the Fed trying to supplant itself 

over State corporate governance law? Where is the line to be drawn 

between supervision and corporate governance? Because it is getting rather murky. 

Mr. QUARLES. So it certainly is our intention, actually, to demurkify that whole area. And that was the intention behind the 

board effectiveness guidance. 

We are receiving comments on that. We have received comments 

on that and are evaluating them. And I will certainly be looking 

at those comments through the lens of ensuring that we are providing a clear framework for—that allows bank directors and bank 

holding company directors— 

Chairman HENSARLING. Well, to borrow your phrase, there appears to be a lot of de-murkification to go. 

My time has expired. The Chair now yields to the Ranking Member. 

Ms. WATERS. Thank you very much. 

Could you tell me why you have recused yourself on all matters 

related to Wells Fargo? 

Mr. QUARLES. Thank you. Well, as you know, I do not have a 

legal conflict with respect to Wells Fargo. I completely cleared that 

legal conflict. 

In reflecting on some of the issues that were facing the board, 

I thought that it was appropriate to go beyond the mere requirements of the law and avoid even any appearance of an issue. 

As some of the members of the committee know, my wife’s family 

had a historical connection with a bank that was acquired by Wells 

Fargo. It was many years ago now. 

So even though it was not required by the law and I do not have 

a conflict, I thought that it was appropriate for me to go above and 

beyond and avoid even the question. 

Ms. WATERS. The Center for Investigative Reporting published 

several articles after a year-long investigation of 31 million records 

publicly available under the Home Mortgage Disclosure Act—that 

is, HMDA—to identify lending disparities. 

Using Philadelphia as a case study, the reporters wrote, I quote, 

Lending patterns in Philadelphia today resemble redlining maps 

drawn across the country by Government officials in the 1930’s, 

when lending discrimination was legal, quote, unquote. 

The report noted that, despite this evidence of discriminatory 

lending, 99 percent of banks were deemed satisfactory or outstanding based on inspections administered under the Community 

Reinvestment Act, a 40-year-old law designed to reverse rampant 

redlining. 

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Would you agree that the CRA (Community Reinvestment Act) 

test is not vigorous enough if nearly all banks get good grades on 

the CRA exams, and yet discriminatory lending practices remain 

pervasive in 2018? 

Put another way, if 10 banks lend to one side of a city and no 

banks lend to the other side of the city, how can regulators change 

this dynamic and implement CRA to ensure banks which are 

backed by all of that city’s residents as taxpayers fully serve the 

convenience and needs of entire city’s residents? 

Mr. QUARLES. In reflecting on the current state of the Community Reinvestment Act and ways to improve its application, I think 

that is an important focus for the regulatory agencies currently. 

As you know, the Treasury Department recently put out a report 

for ways to improve and invigorate the application of CRA. I think 

that that is something that we should be strongly engaged in. 

Ms. WATERS. So do you support the Treasury’s recommendations? 

Mr. QUARLES. As I have reviewed them, yes, I think that it lays 

out a good framework for consideration. There are a lot of details 

that will remain to be decided by the regulatory agencies. But I 

think that it is a good map. 

Ms. WATERS. Do you have any concerns at all about the satisfactory reports of these banks—99 percent, I suppose, satisfactory ratings, even though we have redlining? What do you think about 

that? What would you do about that? 

Mr. QUARLES. Well, I think one of the issues that I, at least, have 

seen with respect to CRA is that, over the years, it has become a 

little formulaic and ossified. 

And the ways in which both banks themselves and community 

development institutions themselves would like to—the activity 

that they would like to see happen really isn’t the path of least resistance under practices that have developed under the CRA. 

I think moving CRA off autopilot, which is one of the principal 

benefits, I think, of the Treasury review and of the efforts that are 

being undertaken by the banking regulators currently, is something that we should be doing and that would help address some 

of the issues that you have raised. 

Ms. WATERS. So when you say you would move them off autopilot, have you determined that they simply get these satisfactory 

ratings without requirements that would make them better and 

more effective? Or are you saying that they are just ignored—the 

requirements now? What are you saying? 

Mr. QUARLES. No, I am saying that the banks have developed 

ways of complying with the law out of genuine desire to comply. 

The examiners have developed expectations about what they know 

will be viewed by the community as passing. 

Community development institutions have developed, again, 

practices and expectations. And all of that could be, really, broadened to have greater effect, as opposed to moving down the path 

of least resistance. 

It is not as though the law is being ignored. It is just we have 

gotten comfortable in how it can be applied, and we really ought 

to think about ways to apply it more effectively. 

Ms. WATERS. Thank you. I yield back. 

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11 

Chairman HENSARLING. Time of the gentlelady has expired. The 

Chair now recognizes the gentleman from Missouri, Mr. 

Luetkemeyer, Chairman of our Financial Institutions Subcommittee. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

Mr. Quarles, over the years, a large amount of agency guidance, 

handbooks and circulars have been issued. Almost none of it has 

ever been withdrawn or rescinded. 

Almost none of it went through notice and comment rulemaking 

or was submitted to Congress, pursuant to the Congressional Review Act. Should banks and examiners be treating this guidance as 

binding rules? 

Mr. QUARLES. No. I do think that there is a role for guidance. 

I think that it is clear that, in some instances, the practices of the 

banking regulators have blurred the role between guidance and 

rules. 

If something is to be a binding rule, both our obligation of democratic accountability, as well as our desire to see that rule be as 

effective as possible and therefore receive as much comment as possible, would require us to go through a transparent rulemaking 

process. That is good for both of those reasons. 

Guidance does have a role. The banks, in fact, want to know, 

once a rule has been made, if there are—where there are questions 

of interpretation. But we need to make sure that that guidance 

really is just guidance and doesn’t supplant the rulemaking process. 

Mr. LUETKEMEYER. Well, I appreciate that. 

I think, we hear consistently and frequently from banks that, 

these rules are sometimes being enforced as something more than 

just—guidance is being enforced as a rule, versus whatever. 

The other day, we had Chairman Powell here. He made a comment that guidance is guidance and rules are rules. So I look forward to some progress on this. So thank you for your comment. 

The DOJ (Department of Justice) has issued a memorandum prohibiting the department from issuing guidance documents that effectively bind the public without undergoing the notice and comment process. 

It goes on to prohibit DOJ from using guidance to require regulated parties to take any action beyond what is required by the 

terms of the applicable statute or lawful regulation. Would you 

support the Fed issuing a guidance policy along the lines of what 

DOJ just put out? 

Mr. QUARLES. We are considering—we have communicated that 

message that guidance is guidance and rules are rules to our examiners and throughout the supervisory system. We are considering 

the right way to further formalize that. I think that is a salutary 

process, yes. 

Mr. LUETKEMEYER. One of the—I have got a couple more questions here, but I want to make sure I get to this one with regards 

to cost-benefit analysis. 

Although Executive branch agencies are subject to mandatory 

cost-benefit analysis requirements, independent agencies, such as 

the Federal Reserve, are not. There is no statute that generally imnshattuck on FSR297 with DISTILLER

12 

poses on the Fed a requirement to perform regulatory impact analysis or cost-benefit analysis. 

However, during a January 19th speech at the American Bar Association Banking Law Committee Annual Meeting, which is a 

mouthful, Vice Chairman, you indicated additional efforts to implement cost-benefit analysis. And I won’t go into your comment, 

but—because it is quite lengthy, but it is—also is very instructive. 

Furthermore, it has been reported that the Federal Reserve has 

created a new department named the Policy Effectiveness and Assessment Committee, charged with conducting cost-benefit analysis 

on regulations. 

No. 1, would you like to elaborate on these comments? And, No. 

2, can you explain the creation of this new department, and is it 

being used? 

Mr. QUARLES. As you have indicated, the thrust of my comments—and as I indicated in my opening remarks to the testimony—we have a very strong public interest in ensuring that our 

financial system and our regulation of the financial system are efficient, as well as that they are promoting safety and soundness. 

And that necessarily involves an assessment of the costs versus 

the benefits of regulation, both the direct costs of compliance that 

are imposed on institutions, as well as the larger question of the 

effectiveness of the regulation in achieving an objective, versus the 

broader costs that are created by that regulation. 

We are looking at that at the Fed. We have stood up a group of 

economists that are examining the body of post-crisis regulation 

through those lenses to determine exactly how we measure the effectiveness of the key areas of capital and liquidity and resolution 

effectiveness. 

And I will be looking—that—that is a complicated and lengthy 

process, and I am looking forward to the results of their work. 

Mr. LUETKEMEYER. Well, as you know, with Dodd-Frank, we 

have a lot of community banks and credit unions going out of business because of the cost of compliance. And I would hope—this is 

a really important question I would just ask you with regards to 

cost-benefit analysis. 

While a rule may be well-intentioned, if it is going to drive businesses out of business so there is a limit—access to credit, or raises 

cost for that credit or ability to do financial services work, it really 

harms the consumer, and we have to really think about that. 

Thank you very much. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Mrs. 

Maloney, Ranking Member of the Capital Markets Subcommittee. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Governor Quarles, as you know, the Senate’s banking bill, sponsored by Senator Crapo, includes a provision that would allow custody banks to exclude reserves that they hold at the central bank 

from the supplemental leverage ratio, or SLR. 

And then, just last week, the Fed and the OCC proposed an 

amendment to the SLR that is intended to address the same custody bank issue that Section 402 does. So in your view, do the 

Fed’s proposed changes to the SLR make Section 402 of the Crapo 

bill unnecessary? 

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13 

Mr. QUARLES. No, I wouldn’t say that they make that unnecessary. Both our objective and the objective of that provision, as you 

know, are to adjust the ESLR so that it is not a primary binding 

measure, because, when you have a leverage ratio that is creating 

the incentives for decisions at the margin, because that leverage 

ratio isn’t risk-sensitive, that means that your decisions at the 

margin will not be risk-sensitive. You will have an incentive to basically take on more risk. 

So I think it is important to calibrate that down. There are two 

ways to do it. The Crapo bill has proposed one way. Our regulatory 

proposal, it would accomplish it in a different fashion. 

Mrs. MALONEY. So you see them coexisting? You see them coexisting? 

Mr. QUARLES. Yes. If that provision in the Senate bill were to become law, I think we would then have to consider how to calibrate 

our proposal to take account of the fact that certain banks would 

have had the denominator of the ESLR changed for them. That 

would be appropriate, if that does become law. 

Mrs. MALONEY. And, as you know, the Fed proposed a package 

of changes designed to increase the transparency of the Fed’s stress 

test last December. Personally, I believe that the Fed’s proposal is 

more than adequate to address transparency issues. 

You have stated that you believe that these disclosures should, 

quote, go further, and that the proposed changes don’t go far 

enough to provide visibility into the stress test models. So my question is, what additional disclosures do you think should be made 

about the stress test models? 

Mr. QUARLES. So we have received a lot of comments, as you 

might expect, on that proposal, and we are in the process of carefully examining those comments. So I don’t want to, at this point, 

say exactly where we would land. 

I think it is clear from the thrust and the strength of the arguments in those comments that there are areas where we will be 

able to provide more transparency without undermining the effectiveness of— 

Mrs. MALONEY. But which areas? Do you know which areas? 

Mr. QUARLES. I think one example that we do want to consider 

and where we had called for comment is with respect to the scenario design itself, as opposed to simply the models of that are 

used in the stress test. 

You know, I think that we would actually benefit, and the credibility of the scenarios would benefit, from some period—not an excessively long period—but for some appropriate period of input 

from the public on those scenarios, each year. 

Mrs. MALONEY. Thank you. 

I want to ask about the Financial Stability Board, or FSB, which 

is an international body of all the major financial regulators, including the Fed, to monitor—where they monitor the global financial stability. Do you believe it is in the country’s interest to participate in the FSB? 

Mr. QUARLES. I actually do, yes. I think it is actually—we have 

a strong national interest with respect to— 

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14 

Mrs. MALONEY. What about—my time is almost up—what about 

the—is it important for the U.S. banking regulators to participate 

in the Basel Committee on Banking Supervision? 

Mr. QUARLES. Yes. To ensure a level playing field for our banks, 

we need to be able to influence those decisions and not— 

Mrs. MALONEY. And so do you believe that it would harm the 

American banking system if they pulled out of Basel and the FSB? 

Mr. QUARLES. I think that the processes of those institutions can 

be improved. I think that we can improve their transparency. Even 

they have acknowledged that. But I do think that we should remain engaged in them, yes. 

Mrs. MALONEY. Thank you, my time has expired. 

Chairman HENSARLING. The gentlelady yields back. 

The Chair now recognizes the gentleman from Michigan, Mr. 

Huizenga, Chairman of our Capital Markets Subcommittee. 

Mr. HUIZENGA. Thank you, Mr. Chairman. 

And I want to—Mr. Quarles, I want to revisit the issue that you 

had talked about with the Chairman, in his questioning, and 

that—you twice said that you would need to, quote, get back to you 

on the legalities of the Fed involvement at the board level. 

And it seems to me that this is a crucial question to—to what 

the boundaries of intrusion into the day-to-day management of a 

company that the Fed has as a regulator. 

Somewhat to that—to that point, I would like to, Mr. Chairman, 

submit for the record a joint letter that myself and Chairman Barr 

and Chairman Duffy have sent you. I haven’t expected that—since 

it was dated Friday, you probably haven’t seen it as of yet, unless 

you were in the office on the weekend, so— 

Chairman HENSARLING. Without objection. 

Mr. HUIZENGA. The—and what it is, is specifically the supervisory expectations for board directors. It was docket number OP1570 on guidance. We write you with some concern that potential 

to further empower the Federal Reserve to manage—to address the 

regulatory overreach in the boardroom has placed undue burdens 

on bank boards. 

I don’t want to read the whole letter here, but, although the proposed guidance purports to distinguish between the role of the 

board, one of oversight and guidance, and the role of management, 

day-to-day functions, it continues to inappropriately blur these 

lines by creating numerous new requirements that a board, quote, 

‘‘ensure, establish, approve, set, develop or detail’’—all of those 

were in closed quotes—items that simply do not reflect boards’ 

oversight of and guidance to management. 

As such, these terms would impose new legal and managerial requirements on a board that would have the board direct a bank 

holding company’s daily business decisions. 

I think this really gets to what both the Chairman and a number 

of us have said is, if you have a financial institution that is not in 

trouble, that hasn’t tripped any of these legal wires. Really, what 

is the legal standing for the Federal Reserve and its regulators to 

come in and be involved with board decisions, much less discussions with committees of that? 

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15 

So, again, as I said, we must establish those legal boundaries of 

intrusion by the Fed. So I look forward to your response to this letter. 

I do want to— 

Mr. QUARLES. And I actually have seen the letter, Congressman. 

Mr. HUIZENGA. Well, I commend you for that. So glad to hear 

that. 

I do also want to move on, real quickly, to Volcker. And, on page 

10 of your testimony, you address it briefly. And I think you acknowledge what many of us are concerned about, is that it is very 

complex and it has not been working well. 

And, as you say, while the fundamental premise of the rule is 

simple, the implementing regulation is exceedingly complex. And 

you talk about the fellow regulators working to further tailor implementation of that. Could you tell us exactly who you are working with as those fellow regulators and what they are doing? 

Mr. QUARLES. Yes. There is engagement from the top of the five 

Volcker agencies, down. That is the CFTC (Commodity Futures 

Trading Commission), the SEC (U.S. Securities and Exchange 

Commission), the FDIC (Federal Deposit Insurance Corporation), 

the OCC, and the Fed. 

Mr. HUIZENGA. All an alphabet soup of regulators, I might add. 

Mr. QUARLES. Yes. 

Mr. HUIZENGA. We have five regulators that are in charge of this. 

Mr. QUARLES. Yes. It is a five-headed hydra. And there are certain collective action issues with that. But I would say that over 

the last few months, we have been working together. The other 

regulators have been working with the Federal Reserve to develop 

a revised Volcker Rule proposal. 

Mr. HUIZENGA. Is the Volcker Rule, as it is written, detrimental 

to capital markets right now? 

Mr. QUARLES. I think that is unarguable. The extent of the effect 

on liquidity is something that economists do argue about. But that 

there is a consequence and simply that there is an excessive burden as a result of the Volcker Rule—great deal of uncertainty, a 

great deal of cost—I think that part is unarguable. 

Mr. HUIZENGA. And do the board or any other regulators tasked 

with implementation—those five others—can you repeal the 

Volcker Rule, given the Volcker Rule is technically under the Bank 

Holding Company Act? 

Mr. QUARLES. We can’t repeal the Volcker Rule, and there are 

certain limits on our ability to make changes that we might otherwise have thought appropriate because of the terms of the statute 

itself. 

But there is a lot that we can do to increase the certainty of application, to reduce the burden of application. And the other agencies are working with us, really, quite well together in order to effect that. 

Mr. HUIZENGA. We will be watching closely. My time has expired. 

I appreciate it. Thank you. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentlelady from New York, Ms. 

Velazquez. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

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Mr. Quarles, news reports indicate that the Fed and the FDIC 

have been participating in discussions with the OCC over potential 

changes to the C.R. But it remains unclear whether the Fed and 

the FDIC will sign on to the OCC’s advance notice of proposed rulemaking. 

What can you tell us about these discussions? Do you agree with 

the direction the OCC is taking? 

Mr. QUARLES. So those discussions—they have had the full engagement of all three of the banking regulators. And, so far, they 

have been—and I have no reason to expect that that would 

change—they have been collaborative among all three of us. 

Ms. VELAZQUEZ. Do you anticipate the Fed signing on to the 

OCC’s ANPR (advanced notice of proposed rulemaking)? 

Mr. QUARLES. So I think that there will be a joint ANPR that 

comes out. Right now, I do expect that to be a joint proposal. 

Ms. VELAZQUEZ. Well, Mr. Quarles, I just would like to say that 

the C.R. is extremely important for LMI communities. While I 

agree that there is a need to look at the CRA, I would be very concerned with any proposal that drives investment away from these 

communities. 

Mr. Quarles, I have a question about Wells Fargo—submitted 

plans. But I hear you. You said that you have recused yourself 

from any matters as it relates to Wells Fargo. 

But my message to you and to Wells Fargo is that we are watching Wells Fargo. And we want to make sure that the concerns— 

or the consumer abuses that Wells Fargo engage in are put to an 

end. 

Mr. QUARLES. Thank you, ma’am. 

Ms. VELAZQUEZ. Regarding the asset cap, I echo the statement 

of the Ranking Member with regard to Wells Fargo as a cap. And 

I will be concerned if it is removed too soon. 

Chairman Quarles, last week, the Fed proposed loosening the 

supplementary leverage ratio for the eight largest U.S. banks. 

While the OCC joined the Fed in the proposal, the FDIC did not. 

And FDIC Chairman Martin Gruenberg specifically cited the reductions in the capital requirements as the reason the FDIC did not 

join the Fed and the OCC. 

And he went on to say that strengthening the leverage capital requirements for the largest, most systematically important banks 

was among the most important post-crisis reforms. What do you 

think of the FDIC’s decision not to join the proposal? And how 

would you respond to Chairman Gruenberg’s statement? 

Mr. QUARLES. I agree that the emphasis on leverage capital ratios after the crisis has been important. And, frankly, that was 

something that I learned from the crisis. I have a higher estimation 

of the role of leverage capital ratios in the overall capital regime, 

given the consequence of the crisis, than I did before. 

I do think, however, that their role is as a backstop and that the 

most effective and efficient capital ratios are those that are risksensitive. 

If we allow the—any of the various leverage ratios that we 

have—but if we allow a leverage capital measure to be the marginally effective capital measure for an institution that drives decisions at the margin, then we are creating a regulatory incentive for 

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that institution to add risk, rather than to reduce risk, and we 

probably shouldn’t do that. 

And so, in evaluating the changes that we proposed to the SLR 

last week I looked at what was a relatively modest capital reduction under that leverage ratio—it was a few hundred million dollars out of the many, many, many billions of dollars of capital in 

the system, against the benefit of changing that incentive, and I 

thought that this was the right time to do it. 

Ms. VELAZQUEZ. Wouldn’t that be a slippery slope? You are going 

to start with a low reduction, and then go on to reduce it more? 

Let me just say this: We took substantial steps to raise capital 

to ensure that the largest banks do not threaten the financial system. And I will tend to agree with Chairman Gruenberg that any 

proposal to lower the capital requirements is a bad idea. 

I yield back. 

Chairman HENSARLING. The gentlelady’s time has expired. With 

that the Chair recognizes the gentleman from Wisconsin, Mr. 

Duffy, the Chairman of the Housing and Insurance Subcommittee. 

Mr. DUFFY. Thank you Mr. Chairman. And, Mr. Quarles, welcome. It is, as my colleagues have mentioned, nice to have you here 

and testifying before the committee. As we have complained, it has 

been long overdue. So, welcome. 

I first want to thank you for your ongoing work to evaluate the 

systemic risk, or lack thereof, of our U.S. insurance industry; thank 

you for that. Now, we all know that you have direct oversight over 

our savings and loan holding companies and those that have been 

designated as SIFIs (systemically important financial institutions) 

by FSOC (Financial Stability Oversight Council). 

But you have a more indirect role through international insurance standards setting with the Fed’s seat on the FSB and the 

IAIS (International Association of Insurance Supervisors). The 

IAIS is developing international capital standards similar to our 

European solvency standards. First for you, do you believe that our 

State-based insurance regulatory model has been effective in the 

U.S.? 

Mr. QUARLES. Yes. I think that, over the long life of insurance 

regulation that has been— 

Mr. DUFFY. A hundred-plus years, it has been pretty effective, 

right? 

Mr. QUARLES. Yes. 

Mr. DUFFY. OK. And so will you commit that the Federal Reserve 

and your work with Treasury will make clear that we will not cede 

our regulatory system and move forward with the development of 

a European-centric international capital standard unless IAIS leadership acknowledges the U.S. insurance regulatory system has—as 

satisfying any IAIS credit standards—making sure that we are preserving our U.S. model, not ceding our U.S. model to a now European-centric model? 

Mr. QUARLES. In those discussions, the Federal Reserve has been 

a voice for the so-called building-block approach to capital regulation that is, that has been supported through the U.S. processes. 

And we will certainly continue to do that. 

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Mr. DUFFY. So—but in regard to trying to preserve our Statebased model here, what is your view as you negotiate with the 

IAIS? 

Mr. QUARLES. Well, we certainly—we both wouldn’t and couldn’t, 

just given the nature of those bodies, do anything that would affect 

the Federal distribution of—well, by—Federal with a small f—distribution of insurance regulation in this country. 

Mr. DUFFY. Some of us might disagree with what you actually 

can do through international negotiations and agreements. But 

let’s leave that aside, and hopefully we can work together further 

on this issue. 

I want to move—and you have had this issue brought up a couple of times by the Chairman and by Mr. Huizenga, in regard to 

board management and the Federal Reserve pressuring boards to 

fire certain members—are you aware of that actually happening? 

Because we have had a number of people come in and—given us 

feedback that that has taken place. 

Mr. QUARLES. No, I am not aware of that happening. But I am 

not challenging that it has happened, either. I think that that is 

disturbing. 

Mr. DUFFY. OK. And, if you are hearing this, does—as you sit 

here today, maybe for the first time, are you concerned that that 

would take place? 

Mr. QUARLES. Yes. I would think that that is the—I would think 

that that is the sort of supervisory engagement—as I indicated 

with the Chairman, I don’t know that it is—I don’t think that it 

is always inappropriate that the Fed might have a view on that. 

Mr. DUFFY. Let’s hold on for a second—who elects the board? 

Give me 101 here. 

Mr. QUARLES. The shareholders, obviously. 

Mr. DUFFY. The shareholders do. So does the Fed have a role in 

electing a board? 

Mr. QUARLES. If there were a profoundly unsatisfactory director— 

Mr. DUFFY. So, the answer is yes, that the Fed does have a role 

in electing board members? 

Mr. QUARLES. Well, not in electing the board members, but— 

Mr. DUFFY. But firing board members that the shareholders actually elected, is that your position? 

Mr. QUARLES. In very rare circumstances, I think that could be 

appropriate, if there is a completely unsatisfactory board member. 

But it should not— 

Mr. DUFFY. As determined by the Fed, not by the shareholders? 

Mr. QUARLES. If determined by the Fed, yes, I do think that that 

could be appropriate in some circumstances. 

Mr. DUFFY. So, in essence, we can say the Fed, really, can step 

in at any point and say, We don’t like—we don’t like board members, we can supersede shareholders and we can put pressure to 

have them fired, is what you are saying today? 

Mr. QUARLES. Well, the law, for example, would not allow the 

shareholders to elect people who have committed certain crimes 

from being board directors. And, if they did, it would be appropriate for the Federal Reserve to say that that is not an appronshattuck on FSR297 with DISTILLER

19 

priate director. I think I am really on your side on this. I think 

that should be something that is extremely rare. 

Mr. DUFFY. I think this is a space that you—I think you need 

to take a look at. It is concerning, the Fed’s role here. And I think, 

if you take some time, we are going to be on the same page on this 

issue. 

Mr. QUARLES. Exactly. 

Mr. DUFFY. I want to look to examiners, in their exams, asking 

questions of financial institutions about their lobbying efforts. 

Would that concern you? Is that a proper role of the Fed, to ask 

questions about how a financial institution is lobbying the Congress? 

Mr. QUARLES. I can’t imagine how it would be. 

Mr. DUFFY. OK. And are you going to implement policies or procedures to root this problem out? 

Mr. QUARLES. Absolutely. 

Mr. DUFFY. And does that come by memo, directive, e-mail? And 

I think you have to think about, How do I actually stop this practice—get it down to the boots on the ground and make sure this 

practice actually stops? And my—tapped— 

Mr. HUIZENGA [presiding]. Gentleman’s time has expired. 

Mr. DUFFY. —tapping and I yield back. 

Mr. HUIZENGA. Gentleman’s time has expired. 

With that, the Chair recognizes the gentleman from Georgia, Mr. 

Scott, for 5 minutes. 

Mr. SCOTT. How are you, Vice Chairman Quarles? Good to have 

you in the committee. 

Mr. Quarles, in your testimony, you said this—you said that you 

personally believe that our stress-testing disclosures can go further, 

and you said that we should consider additional measures, such as 

publishing our stress testing scenarios out for public comment. 

Well, with all due respect, I couldn’t disagree with you more. Let 

me explain why. 

I was the Democratic lead and negotiator on the stress-testing 

bill that we marked up in committee last week, as you know. We 

passed that out. 

And, when I negotiated with my Republican partner, Mr. Zeldin, 

I negotiated out that language that would have required the Fed 

to publish their stress-test scenario. And let me tell you why. 

I think the Fed must be very, very careful not to expose how they 

are going to conduct these stress tests. Because, as you all know, 

stress tests are meant to evaluate what happens and what may 

happen to a bank’s assets under stress. 

But if a bank knows and is aware in advance of how you are 

going to do the stress testing, then that bank will be able to optimize its balance sheet for that particular day on which you are 

doing the stress test. 

So I hope you will consider that. We passed a bill. It is in there. 

With all due respect to you, I think your point is well taken, but 

I hope you understand that you can’t let the cat out of the bag before it is time to get the fair adjustment. 

Now, on another point on fintech, there are many people who 

think that fintech businesses are just in California and New York. 

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20 

But, in Georgia and in Atlanta, especially, we are becoming the 

burgeoning capital of this new and exciting industry. 

And so you also mention in your testimony, when we talked 

about that, that the innovations in this industry can expand access 

to credit, you said, including to underserved communities and 

small businesses, which can really benefit the economy. 

I agree with you 100 percent. But I also believe that fintechs can 

be the answer to so many other serious problems. But here is 

where we are: The GAO did a report, as you know, and we talked 

about that. And there is a problem. 

There is a lack of coordination, a lack of harmonization. Now, I 

am working on legislation that would give the fintechs a voice, because they need to have a point of entry into this new regulatory 

stream. 

Second, they need to have harmonization. It is not just you in the 

Fed that is seeking to regulate these fintechs. You have got the 

OCC. You have got the CFPB (Consumer Financial Protection Bureau). You have got the CFTC. You have got all of them clamoring 

here. 

So I wanted you to know about our legislation. I would like to 

work with you on that, because, of all of the regulators, it is the 

Fed that is the anchor of our financial system. You are the point 

person for that in this very good and new position that we created 

as the supervisor for regulation for the Fed. 

And, finally, I want to just ask you if you could help us with 

something. My good friend, Mr. Luetkemeyer, got a bill, the SIFI 

bill. It passed, too. Much of what means something is coordinated 

into Senate bill 2155. But it is sitting in the House. People say it 

is going to die. 

Can you help us? Can you get on the phone over there and help 

us move this bill and get it going? 

Mr. QUARLES. Well, I am very supportive of the efforts in both 

the House and the Congress to further increase the legislative 

framework for tailoring the application of our regulation and supervisory principles to institutions, and particularly to relieve the burden on smaller institutions. I am very supportive of that. 

Chairman HENSARLING [presiding]. Time of the gentleman has 

expired. 

The Chair now recognizes the gentlelady from Missouri, Mrs. 

Wagner, Chairman of the Oversight and Investigations Subcommittee. 

Mrs. WAGNER. I thank you, Chairman Hensarling. Vice Chairman Quarles, welcome at long last. Since I have a couple of topics 

that I wanted to touch on today, I will get right to the point. 

In your testimony this morning, you noted that the Federal Reserve is very focused on the increased risk to all financial institutions and are working to strengthen the cyber resiliency of the financial sector. 

Further, you have stated previously that cyber attacks are often 

connected to poor basic information technology hygiene and firms 

must continue to devote resources to these basics. We also know 

that attackers always work to be one step ahead, and we need to 

prepare for cyber events. Those are your words. 

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21 

Recognizing that cyber attacks have increased dramatically over 

the last decade, do you think it is more important that 

cybersecurity staff at financial institutions are better using their 

time to protect their—their company and other critical infrastructure, or to help answer regulatory exam questions from a multitude 

of different regulators? 

Mr. QUARLES. I think you put your finger on something that is 

very important. I do think—and, across the Government, there is 

an effort to approach this in a systematic and effective way. 

You know, I do think that our supervisory engagement on the 

cyber issue can be improved to be better directed at actually supporting the ability of these firms to be resilient to a cyber attack. 

There is a fair bit of pure compliance, as opposed to real focus 

on the cyber risk in our current engagement. And we need to work 

to improve that, and we are. 

Mrs. WAGNER. I think so. We need to make sure that the companies are actually protecting themselves, thus the consumer, as opposed to dealing with a constant flow of regulatory exams and 

things of this nature, doing the real work that keeps us safe, keeps 

our information, our data, our privacy safe when it comes to cyber 

attacks. 

Mr. QUARLES. Completely agree. 

Mrs. WAGNER. Thank you. 

You talked also about continuing to collaborate with our Federal 

agencies on this topic. Are there any specific examples of collaboration where the Federal Reserve is aligning its supervisory activity 

with other financial services regulatory agencies as it relates to 

cybersecurity? 

Mr. QUARLES. So there are existing interagency processes of the 

Government that we participate in, and there are also—and, 

through the FSOC, these consider—these issues are also being considered. 

So there is a fair bit of interagency engagement in trying to determine exactly what the right way to improve our focus on actual 

resilience, as opposed to pure compliance, if you will, can be done. 

We are still in the process of doing that. It is a difficult question, 

but an extremely important one. 

Mrs. WAGNER. You say, then, you are collaborating with the 

FSOC? 

Mr. QUARLES. Yes, with the FSOC and the FBIIC—the FBIIC, I 

think, is the acronym. 

Mrs. WAGNER. OK. Great. Thank you. 

Switching topics somewhat, I want to go back to something you 

said in your testimony about innovation. You talked about making 

sure that regulations don’t stifle innovation. 

But, as regulators, it is your job to make sure it is done in a responsible way. What are you doing to ensure banks understand 

and manage these risks? 

Mr. QUARLES. So that is part of our regular supervisory engagement with the firm. You know, as part of that, we also look at the 

connections of a banking institutions to both their technology exposure, as well as their technology engagement. And a lot of that is 

individual to each type of institution, and the direct supervisory 

teams have individual assessments of each firm. 

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Mrs. WAGNER. Concerned that, by putting a large focus on systemic risk, are we discouraging innovation? Are we putting competition for consumers at risk? 

Mr. QUARLES. Well, it is our job to ensure that we don’t. I think 

that is something that we need to keep in mind. 

And one of the themes that I have tried to stress in general 

about our regulation and supervision currently is that, I think, in 

the decade following the crisis, the focus was entirely on systemic 

risk and safety and soundness. And all—those are important, but 

we also need to focus equally on efficiency and innovation and supporting that. 

Mrs. WAGNER. Completely agree. My time has lapsed. I thank 

the Chairman for his indulgence, and I thank and welcome you. 

Chairman HENSARLING. Time of the gentlelady has expired. 

The Chair now recognizes the gentleman from Missouri, Mr. 

Cleaver, Ranking Member of our Housing and Insurance Subcommittee. 

Mr. CLEAVER. Thank you, Mr. Chairman. Thank you very much 

for being here today. 

Fintech is rapidly becoming a financial behemoth, and I would 

like to get your reaction to, first, this phenomenal and continuing 

growth, and then, secondarily, what, if any involvement in or monitoring of fintech will the Fed look at? 

Mr. QUARLES. There clearly is a lot of innovation that is going 

on in the fintech space currently—has been for some years. And 

the opportunities that that creates for improvement of consumer 

service, I think that they are real. And we are seeing that happen. 

Most of what people think of as fintech—the startup firms in various parts of the country that are creating different types of user 

interface to the financial system—do plug into the traditional financial sector at one point or another. They have behind them a 

traditional bank that is proving the funding or providing the actual 

payments—payment system services that the fintech firms are the 

interface for. 

And, in the supervision of the traditional banks, we both have insight into what is happening in the fintech sector, we can look into 

their activities through our ability to examine them under the 

Bank Service Act—for example, if they are, when the connection is 

such that it allows that kind of examination. 

And so we—I think that we do have tools, currently, that allow 

us to look at that sector and understand what is happening there. 

Mr. CLEAVER. But nothing alarms you? 

Mr. QUARLES. I wouldn’t say there is anything alarming, currently. I think that there are issues that are raised, and we think 

about them and are addressing them. 

Mr. CLEAVER. Do you believe that there is some way that fintech 

can help resolve the payday loan issue that impacts millions of lowincome Americans? 

Mr. QUARLES. Well, one of the hallmarks of fintech generally is 

reducing cost, and particularly for retail transactions. It is not really my role as a supervisor to make suggestions as to how that issue 

ought to be addressed through a particular commercial means, 

but— 

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23 

Mr. CLEAVER. We don’t care. I mean, we are not—we don’t—you 

can do it. Go ahead. 

Mr. QUARLES. But I can certainly imagine that happening. I 

would certainly be something that would be beneficial. 

Mr. CLEAVER. Well, I am just curious, because they really are not 

being regulated right now. And so it would seem to me they have 

enormous flexibility that could be used for something that most 

people believe to be important. 

I don’t have much time left, so I apologize, but—I wanted to get 

into that even more with you. But let me move to the—one of the 

other issues that I am concerned about. And it is unemployment 

among African-Americans and Latinos in this country. 

Through the Obama Administration, and then the Trump Administration continuing, the unemployment in the country has, blessedly, dropped significantly. All of us should be happy about it. 

However, the minority communities are still not dropping at the 

same rate as non-minorities. 

Is there anything that can be done, in your portfolio, there is this 

issue of employment that—do you have anything in the toolbox 

that you think would be of help in trying to reduce minority unemployment? 

Mr. QUARLES. In the Fed’s toolbox, our mandate, which we pursue assiduously, is maximum employment, maximum aggregate 

employment. And, obviously, that has an effect, because, as maximum aggregate employment has been increasing, unemployment 

decreasing. Unemployment for all segments of the population, including minority segments, has been going down. 

That differential remains. We don’t really have the tools to address it. But we do try to provide information and analysis of it to 

help others who do have the tools. 

Chairman HENSARLING. Time of the gentleman has expired. The 

Chair now recognizes the gentleman from Kentucky, Mr. Barr, 

Chairman of our Monetary Policy and Trade Subcommittee. 

Mr. BARR. Congratulations, Mr. Vice Chairman, on your confirmation. And thank you for your testimony today recognizing that 

regulation should support and promote financial system efficiency 

just as much as regulation should support safety and soundness, 

because, I think as you would agree, overregulation and cost-burdening our banking system can just as much weaken our financial 

system and contribute to illiquidity as inadequate supervision 

could. 

As you know, the Federal Reserve’s performance as a bank regulator in the lead-up to the financial crisis has been subject to scrutiny and criticism on both sides of the aisle and across the political 

spectrum. 

Despite having teams of resident examiners embedded in the 

largest financial institutions in the run-up to the financial crisis, 

the Fed failed to identify material weaknesses in these firms’ operations and failed to identify risks that were lurking in those portfolios until it was too late. 

Yet, instead of scaling back the Federal Reserve’s authority, the 

drafters of the Dodd-Frank Act chose to double down, and they conferred broad new power on the Fed to regulate virtually every corner of the financial sector. And it can be argued that the Doddnshattuck on FSR297 with DISTILLER

24 

Frank Act made the Federal Reserve our Nation’s most powerful 

bureaucracy. 

So, given the Fed’s enormous new supervisory and regulatory 

powers now, an argument can be made that the Fed should be 

made more, not less accountable to Congress. 

My question to you is, in reference to my colleague, Congressman 

Davidson’s proposal, the Federal Reserve Regulatory Oversight Act, 

which would bring the non-monetary-policy-related functions of the 

Board of Governors into the appropriations process, what is your 

take on that proposal? 

Mr. QUARLES. I have thought a lot about these issues and wrestled with them, because the importance of the democratic accountability of the Federal Reserve is something you know that I share. 

And it is important to our ability to do our jobs. 

Similarly—and I know it is something that everyone in this committee shares, as well—I think that a democracy can appropriately 

determine, and wisely determine, to create a buffer of independence around certain functions of the country, some of the law enforcement functions, some of the monetary policy functions. 

So the question is, does a proposal to bring the non-monetarypolicy functions of the Federal Reserve—how does it balance those 

two objectives—democratic accountability and independence around 

the monetary policy function? 

I am concerned that it would, because of the fungibility of money, 

create the possibility for some future Congress to put pressure on 

the monetary policy side. 

Mr. BARR. Well, I would like to work with you on that. My time 

is running out, so I want to move on, but I want to work with you 

on that— 

Mr. QUARLES. And I very much so— 

Mr. BARR. I think there are—I respect the Fed’s independence, 

as Chairman of the subcommittee oversight over monetary policy, 

I respect Fed independence with respect to monetary policy. 

But, with respect to your jurisdiction and supervision and regulation, the Fed arguably is the most significant, powerful regulator 

in America with respect to financial services. 

And I think it is altogether appropriate, no matter what your 

perspective—whether there is too little or too great regulation— 

there should be accountability. And I want to work with you on 

that, and Mr. Davidson, to make the Fed more accountable with respect to regulation. 

And, to that end, the Fed’s decision to reduce the burden of 

stress tests on non-complex firms by focusing the qualitative review 

and CCAR to the largest, most complex financial institutions, I believe, is a good first step. And I compliment the Fed on that. 

However, with regard to the Fed’s newly proposed stress capital 

buffer, do you agree also with your predecessor, who was not 

known as a deregulator—Mr. Tarullo, Governor Tarullo—that the 

qualitative assessment in CCAR be phased out for all banking organizations, especially in light of the recent stress capital buffer 

rule? 

Mr. QUARLES. Yes, I think that is something that we should consider and have called for a comment on, definitely. 

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Mr. BARR. Well, I appreciate you considering that. And, with respect to that proposal to create a stress capital buffer, as you know, 

the main driver of these stress tests is the severely adverse scenario. And it has been published by the Fed without the benefit of 

any public comment or external review. And the model that will be 

employed to calculate the bank’s stress losses using that severely 

adverse scenario is the Fed’s proprietary model. 

But is there no transparency regarding the elements used in determining a significantly and potentially highly variable component 

of the minimum capital requirement? And is the Fed open—publishing these scenarios and models for notice in comment? 

Mr. QUARLES. I think that we need to get more public input on 

them. A full APA (Administrative Procedure Act) notice and comment process, which could take years—I think that might be 

logistically difficult. But I think that there are ways that we can 

get genuine, serious input and still be consistent with the purposes 

of the test. I agree with you. 

Mr. BARR. Thank you. Thank you. My time is expired. 

Chairman HENSARLING. Time of the gentleman has expired. 

The Chair now recognizes the gentlelady from Wisconsin, Ms. 

Moore, Ranking Member of the Monetary Policy and Trade Subcommittee. 

Ms. MOORE. Thank you so much, Mr. Chairman, and welcome to 

you, here today, Mr. Vice Chairman Randy Quarles. I welcome you 

to your new position and I hope that you are prosperous. 

I would just like to hear, since you are new, what lessons that 

you learned from the financial crisis that you can share with us. 

Mr. QUARLES. I would say that there are some specific ones; 

there are some general ones. Probably the most general one is a 

sense of humility about the omniscience of the regulators. 

You know, as has been mentioned and is certainly widely known, 

the regulators were closely involved with the financial system at a 

very granular level. And, for a period there, at least on a policy 

level, when I was at the Treasury Department, I certainly was involved with policy regarding the financial sector. 

And while we considered issues about potential financial stress, 

none of us believed—none of us knew that the financial—that this 

sort of financial stress was coming. And, indeed, most people didn’t. 

I approach my current responsibilities with a great sense of humility about the ability of even very well-meaning, smart, engaged, 

informed people to know the future. And I think that has to inform 

how we think about what we think are good ideas currently. 

There are some specific examples, as well. I mentioned one of 

them—the leverage ratio. I did not have a sufficient regard for the 

role of leverage capital requirements in the overall capital system— 

Ms. MOORE. I mean, before the crisis, or since Dodd-Frank? 

Mr. QUARLES. Before the crisis. 

Ms. MOORE. OK. 

Mr. QUARLES. And since then— 

Ms. MOORE. So Dodd-Frank has helped in that regard? 

Mr. QUARLES. Well, I would say that the regulatory response, in 

general, has been appropriate, following the crisis. 

Ms. MOORE. OK. All right. So banks are doing really well right 

now. Their profits are up. Their shares are up. And so—but we see 

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a constant drumbeat of complaints, I think, from some of the larger 

banks and maybe even some of the regional banks regarding so 

many regulations. 

So, very specifically, I would like to know: Do you support the 

Volcker Rule? Do you support what Dodd-Frank has done with the 

new derivative framework provided to FSOC? As examples of two 

things, do you support those things? 

Mr. QUARLES. So the Volcker Rule, as it has been implemented, 

I do think isn’t working well. I think that it is excessively burdensome. I think it creates uncertainty. And so I think it is not really 

an effective implementation of the statutory requirements. 

Ms. MOORE. So you are not—you are not afraid of proprietary 

trading at all and ratcheting things up to where we were? 

Mr. QUARLES. Well, there as a regulator, we can’t change the 

Volker Rule, so that will remain the law of the land. I think that 

we can implement the statutory intent in a way that is actually 

more effective by clarifying, simplifying the rule, and reducing the 

burden of complying with it. 

Ms. MOORE. OK, just let me just briefly share with you. The Fed 

Chair Powell has recently been with us and he has talked about 

the profitability of the banks and their return and their returns on 

capital and buying back stock and so on. And so I am wondering 

if—if you are concerned about the—any negative or adverse impacts that you see with the banks enriching themselves and buying 

back stock, harm to our economy overall? Is there any concern on 

your part? 

Mr. QUARLES. I think that a healthy financial sector is in our interest. It is one of the—having a robust financial sector ensures 

that we have got robust support for the real economy and for economic growth in the real economy. And as long as that sector is 

healthy and is safe and sound, our job as regulators is to ensure 

that they are operating the safe and sound manner. And then the 

distribution of their profits is up to the shareholders and management and some of that will go to customers and some will go to employees and some will go to shareholders. 

Chairman HENSARLING. Time of the gentlelady has expired. The 

Chair now recognizes the gentleman from California, Mr. Royce, 

Chairman of the House Foreign Affairs Committee. 

Mr. ROYCE. Thank you very much, Mr. Chairman. And Vice 

Chairman Quarles, thank you. I think in your analysis the response that you gave in terms of the regulatory community and 

what you did not see coming is partially true but there was one 

thing the regulatory community did see coming and tried to do 

something about, it was the overleveraged—the GSEs (governmentsponsored enterprises), Fannie Mae and Freddie Mac, which 

reached 100 to 1. 

In 2003 and 2004, I had legislation that tried to control for systemic risk. Tried to transfer the authority to the regulatory community to take down the overleveraged in terms of those portfolios, 

and the regulatory community, the Fed in particular was very supportive of that. We could not get that legislation through. 

I would say that they saw that coming. What perhaps they didn’t 

see coming was also the investment banks—the four big investment banks in doing their own modeling had leveraged up the ratio 

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27 

from what should have been 10 to 1, probably 30 to 1. And so the 

combination, first housing collapsing with the GSEs, and then on 

top of it, the big investment banks, I think that was a major blow 

here. 

I think what we are rediscovering in this generation is that this 

cyclical nature of the economy because we fail to adjust or regulate 

for these kinds of problems are with us and I think unfortunately 

Washington tends to exacerbate in some ways, may be exacerbating, rather than mitigating the booms and the busts, and I just 

wanted to ask you about that because Washington is willing to 

come in and scale back capital requirements when times are good. 

When times are bad, as we saw during the last crisis, Washington 

overshoots and limits the ability of banks to aid in the economic 

recovery. 

We all saw countless examples of that with community banks. 

What is your view on regulation in terms of the economic cycle? 

Where do you think we are in the cycle, and how does that impact 

your assessment of regulatory changes, especially now as it relates 

to capital? 

Mr. QUARLES. So those are extremely good questions. In general, 

the banks should, and I think that they are, build their capital during good times so that they can survive stress when it comes. And 

we know that there will be periods of stress in the future. I think 

that it is an open question. There are regulatory tools that are designed to provide those countercyclical incentives. 

The stress test is one of them, it becomes known as asset values 

increase, as times become good, the stress necessarily if you assume that asset values are going to fall to a certain level, that 

stress is going to be greater and that provides a certain countercyclical incentive. 

There are other tools that we could use. At the same time, the 

efficiency of the system does—is supported by predictability—the 

ability of the—of the CFOs and the banks to predict how their 

bank ought to respond to the overall regulatory system, and balancing that is the difficulty that we wrestle with. 

Mr. ROYCE. Let me ask you another question. Is it possible for 

businesses around the world to take advantage, you said of the fact 

that we are in a world of opportunity, but it is an opportunity that 

is unbalanced, that the developed world will face strong significant 

headwinds, for quite an amount of time, the emerging world has 

both robust growth and growth that is being driven by consumer 

consumption? 

So that was your—that was your point. Shouldn’t we be looking 

outward to the emerging world for growth? We have got 5 percent 

of the population, 25 percent of the GDP. Shouldn’t we support a 

renewed interest in the Trans-Pacific Partnership as a net positive 

for the U.S. economy in terms of that engagement? Just your view 

on that. 

Mr. QUARLES. Well the Fed’s responsibility is not trade partnerships, but in general, certainly, the United States has benefited 

from an open trading system and from open trade and that has 

been in our interest over a long period of time. 

Mr. ROYCE. Thank you, Vice Chairman Quarles, very much. And, 

Mr. Chairman, I thank you as well for this hearing. 

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Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Minnesota, Mr. 

Ellison. 

Mr. ELLISON. Good morning, Mr. Quarles, how are you? 

Mr. QUARLES. Thank you. 

Mr. ELLISON. So the Center for Investigative Reporting looked at 

31 million mortgages using HMDA data and they found evidence 

that redlining is still alive in about 61 major American cities. Did 

you see that report? 

Mr. QUARLES. I have not had a chance to study it, no. 

Mr. ELLISON. We will send it to you. I think this is absolutely 

unacceptable; 50 years since the passage of the Fair Housing Act, 

which banned discrimination in lending, 41 years since the passage 

of the Community Reinvestment Act, which requires banks to lend 

and to invest in communities which they operate, including lowand moderate-income communities. 

In a recent speech you said that you want to improve and I will 

quote you, ‘‘the current supervisory and regulatory framework for 

the CRA to further the statutes objective of promoting access to 

credit and financial inclusion.’’ 

What did you mean by that? 

Mr. QUARLES. Well, I think that the objective of the CRA is a 

broad one, which is to— 

Mr. ELLISON. I will reclaim my time. I was hoping you had some 

things in mind. Do you have specific things you want to do with 

the CRA that you could identify today? 

Mr. QUARLES. Well, we are working with the other regulators on 

specific proposals. And since those aren’t out yet, I don’t want to 

prejudge that process. 

Mr. ELLISON. You don’t want to mention them just yet? Well, yes. 

So where—it is in the process. So, look, can you assure the members of this committee today that you will not support any changes 

to the CRA that will result or cut lending in low- and moderateincome communities? 

Mr. QUARLES. The objective of the changes we are considering is 

to improve support to communities, not to— 

Mr. ELLISON. Right, right. 

Mr. QUARLES. —cut it. 

Mr. ELLISON. So that is the objective. But the outcome is what 

I am asking you about. Can you assure us today that you will not 

support changes to the CRA that will cut lending in low- and moderate-income communities? 

Mr. QUARLES. That certainly wouldn’t be my intention. 

Mr. ELLISON. OK. So what assurance can you give us, that your 

intentions will be fulfilled regarding the CRA? 

Mr. QUARLES. Well, I will—I will be here again shortly, and you 

can hold me accountable for the outcome of our proposals. We will 

seek comments, and—on the proposals that we make, and take seriously people’s comments as to whether we are achieving our objectives. 

Mr. ELLISON. OK. Well, earlier this month, the Treasury released 

a series of recommendations for revising the CRA, which you have 

alluded to already. 

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One of those recommendations related to penalties lenders face 

for failing CRA exams. Only about, I don’t know, 1 percent or 1.5 

percent fail, right? 

Mr. QUARLES. It is rare to fail. 

Mr. ELLISON. Yes. It is rare to fail. But the report says, a bank 

with a less-than-satisfactory CRA reading—about 1 percent of the 

people—banks—should continue to receive enhanced scrutiny. But 

more consideration should be given to the bank’s remediation efforts to date, and whether improving the application would benefit 

the communities served by the bank. 

Do you believe Treasury’s plan to relax penalties for banks who 

fail the CRA exam will achieve the CRA’s intention—and your intention—of increasing lending and investment in low-income communities? 

Mr. QUARLES. Well I don’t think that Treasury’s intention there, 

in that reference, is to relax penalties, but rather to consider the 

overall consequences of a particular transaction that may be proposed. 

There are certainly circumstances where the low- and moderateincome portions of a community can be, actually, helped by a particular transaction that, under current practices, might not be allowed for— 

Mr. ELLISON. You mean like payday lending and rent-to-own? Is 

that what you have in mind? 

Mr. QUARLES. No. Simply the increasing the ability of a particular institution to service a low-and moderate-income community 

might be helped. I think they are saying we ought to look at the 

facts and circumstances of the case, and that I would support. And 

try to decide whether we are actually achieving our objective. 

Mr. ELLISON. Well, when you think about 61 major American cities having evidence of redlining based on home mortgage disclosure 

data, and still 98 percent pass, I think that the exams should be 

tougher, not easier. 

And I hope that you will carry that forward. Because for the people who are denied mortgages after they have qualified based on, 

sometimes, the color of their skin, I hope you share my concern 

with that and will use your authority to uphold people’s rights. 

Mr. QUARLES. I definitely share the concern that there should 

not be discrimination in lending. 

Mr. ELLISON. Thank you. 

Chairman HENSARLING. Time of the gentleman has expired, the 

Chair now recognizes the gentleman from Florida, Mr. Ross. 

Mr. ROSS. Thank you Chairman, and Chairman, thank you for 

being here as well. I am one of those people who firmly believe that 

access to capital and liquidity are probably the lifeblood of a stable 

and vibrant flow of commerce. 

I have seen the accumulation of capital, but yet I have not seen 

until recently the investment of capital. 

And what concerns me about that is that while—those that form 

capital for investment purposes to strengthen an economy do so 

and choose to do so in environments that are more conducive to investment and consumer satisfaction, just has not been what DoddFrank resulted in for us as a Nation. 

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30 

And now that we see some tax reform, we see the opening up of 

capital, we see the availability of more liquid markets, some people 

have said that regulation has impaired market liquidity. What is 

your position on that? 

I mean, is it making it—had it made it more harder and costlier 

to transact business? 

Mr. QUARLES. So I think that there are instances where it has. 

I think that the Volcker Rule is an example of that. Again as I 

mentioned, economists will argue over measures of liquidity and 

how great the extent is of its effect on liquidity. 

Certainly practitioners believe it has been great and it is inarguable that it is existent. And I think that it is unnecessary. I think 

that we can have an implementation of the Volcker Rule that 

doesn’t have those costs, or at least reduces those costs. 

Liquidity regulation itself has also had an effect. As I indicated 

in my testimony, I think that we can and will and should give consideration to how to further tailor liquidity regulation along the 

scale of firms. Because that also can have an effect that you are 

describing. 

Mr. ROSS. And as we talk about, and I think my colleague Ms. 

Moore talked about, access to capital for small business. That to 

me is so fundamental to regrowth of a vibrant economy. Thirty 

years ago when I started my law practice, I had very limited access 

to capital. 

And I had to actually go and borrow some from friends to get 

started. And granted, after the track record and solvency and the 

growth of my business came, well the access to capital was there. 

Today, I am not so sure we have that access to capital. 

Apparently some former members of the Federal Reserve have 

dismissed concerns about access to capital, and I have expressed 

the current state of small business lending. For example, a September 2017 Federal Reserve report entitled, ‘‘Availability Of Small 

Credit To Businesses’’ cited a survey from the NFIB. 

Which found that polls suggest credit availability is a relatively 

minor concern for small businesses. I don’t agree with that. I think 

access to capital is one of the huge, most important concerns of a 

small business. 

During a March 26 speech, you discussed the findings of a survey 

published by the 12 reserve banks. Can you tell us what that survey revealed in terms of access to capital to small businesses? 

Mr. QUARLES. Well without getting into the terms of any particular survey, I think that lending to small businesses is an issue. 

And one of the things that I did earlier in my career was— 

Mr. ROSS. Is an issue as that there are—there is a regulatory impediment to the access to capital? 

Mr. QUARLES. I think that there is. Certainly at the community—I think that the cost of regulation on community banks has 

been an impediment. Community banks are an important source 

for credit for small businesses. 

Earlier in my career when I was an investor in smaller banks, 

I was very aware— 

Mr. ROSS. And so the lifting of that regulatory burden would 

allow community banks the ability to lend more, and in turn grownshattuck on FSR297 with DISTILLER

31 

ing those communities and in turn building a more vibrant and 

productive economy? 

Mr. QUARLES. Yes, I believe that. 

Mr. ROSS. And we should be doing what is necessary to see that 

that is done? 

Mr. QUARLES. Yes, we should. And some tailoring has happened. 

I think that there is more that we can do in order to reduce the 

burden on smaller institutions. 

Mr. ROSS. Thank you, and I have just got just a couple seconds 

left, and I just want to reiterate what the Chairman of the Housing 

Insurance Committee had talked about with regard to the sanctity 

of State-regulated insurance. 

I think that we, and I hope that you would continue to advocate 

on behalf of our system of the State-based regulatory scheme, not 

only in terms of capital standards, not only in terms of solvency, 

but also in terms of consumer protection. So thank you for being 

here. I yield back. 

Mr. QUARLES. Thank you. 

Chairman HENSARLING. Time of the gentleman has expired. The 

Chair now recognizes the gentleman from Massachusetts, Mr. 

Lynch. 

Mr. LYNCH. Thank you, Mr. Chairman. Welcome, Vice Chairman 

Quarles. I would like to follow up on Ms. Moore’s earlier question 

regarding the Volcker Rule. On January 19th of this year, you gave 

a speech to the American Bar Association Banking Law Committee. 

And you outlined plans to review and modify numerous bank regulations. During your remarks, you said, and this is a quote, ‘‘The 

relevant agencies have begun work on a proposal to streamline the 

Volcker Rule. It will naturally take a bit of work, but Volcker Rule 

reform remains a priority.’’ 

I am not sure that was the same response that Ms. Moore got. 

I just want to ask you about that. So the Volcker Rule—at least 

the core of the Volcker Rule says no more proprietary trading. We 

had a disaster back during the housing crisis. 

A lot of these banks were engaging in speculative activity, very, 

very highly speculative and risky activity in terms of credit default 

swaps and all that. A lot of these banks got in trouble, we had to 

bail them out. 

So we said no—the Volcker Rule basically said no more proprietary trading, OK? So my question is how do you streamline no 

more proprietary trading? How does that actually work? 

Mr. QUARLES. Well again, I don’t want to directly front run proposals that we are working on with four other regulators and that 

aren’t yet— 

Mr. LYNCH. Just conceptually, then. Don’t go into their stuff, but 

just—if it is a stop sign, don’t proprietary trade, don’t put the 

American taxpayer at risk. How do you streamline that? I am just 

wondering. 

Mr. QUARLES. The key issues will be around the definition of proprietary trading and providing enough certainty that institutions in 

fact know what it is that we will consider to be proprietary trading. 

Mr. LYNCH. So you are going to change the definition of proprietary trading? 

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32 

Mr. QUARLES. Well I think that there is a scope to provide additional certainty around that in order to better affect the intention 

of the statute. 

Mr. LYNCH. So what Congress was trying to prohibit was what 

I just described. So those bets, the speculatory trading, defaults— 

credit default swaps—all of that. We were unwilling—as taxpayers 

we were unwilling partners on that activity and we ended up when 

they lost money the American taxpayer was a loser as well, even 

though we didn’t authorize that—we didn’t support it. Are we going 

back to that? 

Mr. QUARLES. No. I mean, absent statutory change the statutory 

injunction is clear. 

Mr. LYNCH. Right, but you were telling me 2 minutes ago that 

you were going to redefine what proprietary trading is and that 

makes me nervous because Congress spoke in terms of what we 

wanted to prohibit, and no is no. There is no streamlining no. 

Mr. QUARLES. Right, and we are not proposing to say yes. The 

question is, if it is impossible to understand and to implement the 

definition of proprietary trading that the regulators have come up 

with, not the Congress. I mean, we took the statutory language and 

have turned it into a virtually—certainly a very difficult, some 

would say impossible standard. 

Mr. LYNCH. We wanted it to be difficult. We did. We saw what 

happened. So, I just hope you are not trying to disrupt the intent 

of Congress. We wanted it to stop, and it has stopped. 

Mr. QUARLES. I am not even sure that you could say that. 

Mr. LYNCH. If you want to have that debate, we think we are the 

ones that should have that debate about whether it should be relaxed or refined but that is a decision for Congress. We certainly 

sent a clear message in Dodd-Frank and in the Volcker Rule that 

we wanted proprietary trading stopped, we wanted the American 

people to be out of that casino. 

We didn’t want them being partners of that. We didn’t want to 

have another bailout. Everybody on both sides said no more bailouts—that is enough. So, we looked at the risky activity and we 

said we don’t want any more of this. 

So, I just want you to take that back if you would and incorporate that as one ingredient in your discussions. 

Mr. QUARLES. No, I deeply appreciate that. We are not seeking 

to undermine the intent of Congress at all. 

Mr. LYNCH. Thank you so much. Mr. Chairman, I yield back. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from Illinois, Mr. Hultgren. 

Mr. HULTGREN. Thank you Mr. Chairman. Thank you, Vice 

Chairman for being here today and for your work. I want to jump 

right into questions if I might. I am very concerned with the use 

of the current exposure method and requirements for banks who 

cleared the trades of liquidity providers. 

As Chairman Powell noted last year, CEM—and I quote—he 

said, ‘‘ignores whether a derivative is margined and undervalued, 

netting benefits,’’ end quote. The current exposure method is sensitive to risks, so its mandatory use artificially caps market liquidity, particularly in large-cap index options which are crucial hedging vehicles by making it more expensive to hedge artificially connshattuck on FSR297 with DISTILLER

33 

strained liquidity in S&P 500 index options has knock-on effects 

that increase overall market volatility, as we have seen in recent 

months. 

Rulemaking is the long-term answer but that is a slow process, 

taking years. Liquidity providers are dealing with this issue now. 

There is no reason to believe volatility is going to decrease anytime 

soon. What short-term steps can you take to fix current exposure 

methods damaging effect on market liquidity? Short of rulemaking, 

what can be done? 

Mr. QUARLES. Well, I think that the most effective method is for 

us simply to proceed in making that rule effective. Where I completely agree with your assessment of the difficulties that that has 

caused, and I think that we should proceed at pace and simply 

have the final rule that will address that effective. 

Mr. HULTGREN. Again, my concern is just that we get answers 

for people soon. The Treasury Department’s October 2018 report on 

capital markets calls for a near-term solution of risk-adjusted approach for valuing options for purposes of a capital rules to better 

reflect the exposure such as potentially weighting objects by their 

delta. 

Moving on, the Federal Reserve’s current large financial institutions risk-management proposal contains expectations for businessline management that would apply to both business lines and critical operations. 

I believe this is duplicative. It is regulatory inefficiency that 

could be addressed. Why is the holding company regulator, the Fed, 

reviewing the same activities as the bank regulator—banking regulator? If the Fed reviews a bank’s credit card business, for example, 

it is reviewing the same thing the FDIC has already reviewed. 

What is the justification for the Fed to conduct core business line 

reviews of activities contained within a holding company’s bank’s 

subsidiary when those activities are already subject to examination 

by the bank’s primary regulator? 

Mr. QUARLES. Well, I think that to the extent that we do that 

and frequently we ought to be able to rely on the bank’s primary 

regulator. If there are cases where, for a particular supervisory reason, we think that we should also be involved, we should do that 

in a way that doesn’t duplicate the burden on the institution. 

Mr. HULTGREN. With respect to Volcker Rule reform, you have 

said publicly that it is important to, among other things, redefine 

the market-making exemption which is admittedly an important 

issue both for the banks that are market makers as well as for the 

broader economy. 

However, what can be done specifically for smaller banks, say 

those in the $10 billion to $50 billion range to reduce the burden 

of Volcker Rule compliance? There are a number of regional banks 

in Illinois that fall into this category. 

Mr. QUARLES. Well, that is one of the things that we are discussing among the four regulators. I think an approach might be— 

either to be more clear about what it is that would be proprietary 

trading and therefore that they can be clear that it is not something that they are engaged in and supervisors can be clear it is 

not something that they need to look at because we have a very 

clear definition. 

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34 

There may be a way to look at the risks of particular institutions 

and determine that simply as an allocation of supervisory resources 

matter the burden of proof in an examination changes, for example. 

But that you will be presumed not to be in compliance with the 

Volcker Rule unless there is a reason to think otherwise, there are 

a variety of approaches one could use. 

Mr. HULTGREN. My last minute here. I want to get into some 

fintech issues. Technology has significantly changed the way we do 

most everything including access to financial products and services. 

Banks must comply with extensive regulations especially in the 

post Dodd-Frank regulatory environment which other financial 

services companies may not be subject to. 

Are you concerned about nonbanks often times with the competitive advantage of lower regulatory cost, offering nearly identical financial products and services without being subject to the same 

regulation? And if so, how would you address this in your role as 

Vice Chair of Supervision? 

Mr. QUARLES. So, I think that our regulatory system should not 

create unlevel playing fields. That is across a whole range of issues, 

whether it is banks or nonbanks or different banks and different 

types of regulated entities—small banks and big banks. I mean, we 

should not be creating an unlevel playing field. 

And so, on the specifics of how to address that with banks and 

nonbanks, that then gets very complex given the limitations of our 

statutory framework that we have to operate under but something 

that is a high priority for me. 

Mr. HULTGREN. Thanks, Vice Chairman. I yield back. 

Mr. MILLER. The time of the gentleman has expired. The Chair 

now recognizes the gentleman from California, Mr. Sherman. 

Mr. SHERMAN. I believe Mr. Huizenga pointed out that the people 

don’t know what the Fed does. That is not by chance, that is by 

design. The bank is an example of the fact that the elites of this 

country believe in democracy for every country in the world except 

ours. 

And it is undemocratic in at least three ways. First, both parties 

seem to have agreed that monetary policy is too important for politicians to talk about or for citizens to try to influence. 

Second, the Fed has a structure where the Class A voters are 

banks; not one person, one vote, one bank, one vote, or 1 billion, 

one vote. And then the Class B directors are selected by the Class 

A directors. So it is undemocratic in that it is partially bank-controlled. 

And then finally, geographically, 1/5 of all Americans live in the 

western area, and yet that bank is not entitled to a permanent seat 

on the FMOC. Eight percent of Americans live in the New York 

Bank area. That bank is guaranteed. 

So if you ever want an example in the United States, not of democracy, but of the Chinese system of government, the Confucian 

system of government where learned, according to Confucius, men 

self-select a renewable group of people who have the mandate of 

heaven, though not the mandate of voters, there is no better example of the Chinese system in the United States. 

Mr. Vice Chair, believe it or not I have a question. Are there any 

financial institutions in this country that are too big to fail? 

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35 

Mr. QUARLES. I think that we have made really tremendous 

progress since the financial crisis— 

Mr. SHERMAN. That was the exact answer your chairman gave 

until Senator Kennedy pushed him further and asked—and 

pressed, is any single bank right now too big to fail? Do you agree 

with your chairman when he said no? 

Mr. QUARLES. Well, I don’t want to be in the position of disagreeing with my chairman. 

Mr. SHERMAN. You are supposed to. That is why we pay the salaries for more than one person at the Fed. If they are all going to 

agree, then any one of them would be superfluous. 

Mr. QUARLES. But I do think that all of the large banks are 

much more resolvable than they have been before— 

Mr. SHERMAN. Resolvable—are they too big to fail? Could the— 

could a—could a disaster at one bank bring down our whole economy the way we saw in 2008? 

Mr. QUARLES. Currently, I think that the system is much more 

resilient— 

Mr. SHERMAN. I didn’t ask you that. Not going to let you slip 

away. Senator Kennedy was good enough to get your chairman to 

be specific in an answer. Is there any bank whose failure could 

bring down our entire economy? Yes or no? 

Mr. QUARLES. We think that we have made sufficient progress— 

Mr. SHERMAN. That is not an answer. I know you have made 

progress. Is there any bank the failure of which could bring down 

our entire economy? 

Mr. QUARLES. At the moment I don’t see how that could happen. 

Mr. SHERMAN. OK, then would you support getting rid of the limited bailout provisions that were in Dodd-Frank since, if any one 

of those banks were to go under, we should, as good capitalists, 

simply wave and say that is business? Toys R Us are going out of 

business and America will survive and you have described a situation where any one bank would pretty much have the same effect. 

Mr. QUARLES. Well, in response to a previous question, someone 

asked what I had learned from the financial crisis, and the principal lesson I learned was the humility that we all ought to have 

around— 

Mr. SHERMAN. We should all—the— 

Mr. QUARLES. —our judgments of the future at any particular 

time. 

Mr. SHERMAN. I am going to sneak in one more question. Back 

in the old days there used to be banks that would make, to a small 

portion of their—of their loans would be prime-plus-four, primeplus-five loans, made to local businesses that you and I would 

agree aren’t creditworthy enough so that a bank could make a profit made with a loan of prime-plus-one or prime-plus-two. 

Do your regulators allow banks to use 10 or 20 percent of their 

portfolio to make prime-plus-four loans to businesses like the pizzerias in my district where that would be the appropriate rate? Or 

are those folks closed out of the banking system and having to call 

late night television commercial lenders? 

Mr. QUARLES. I hope that we don’t have supervisors that are preventing that type of credit extension. 

Mr. SHERMAN. I will talk to you privately. You do. 

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36 

Chairman HENSARLING. Time of the gentleman has expired. The 

Chair now recognizes the gentleman from North Carolina, Mr. 

Pittenger. 

Mr. PITTENGER. Thank you, Mr. Chairman. Thank you, Chairman Quarles, for being with us, for your leadership. And congratulations. In your March 26th speech at the Hope Global Forums Annual Meeting, you stated, quote, ‘‘Loans entail high fixed costs that 

are roughly the same regardless of whether a loan is for $100,000 

or $1 million, reducing the profitability of smaller dollar loans,’’ end 

of quote. 

Has the composition of credit that is being offered changed? 

Mr. QUARLES. That is an interesting question. I think that inevitably that evolves over time. I don’t think that it has changed in 

a dramatically disadvantageous way. 

Mr. PITTENGER. Well, then are larger financial institutions playing a larger role in financing small businesses because of their ability to better eat the cost of high—of higher underwriting standards? 

Mr. QUARLES. That I definitely think is true. Yes, I do think that 

larger institutions are providing a larger share of the credit to 

small business than happened in the past. 

Mr. PITTENGER. Surely. Well, the Dodd-Frank’s numerous regulatory rules have constrained the flow of bank credit, holding back 

small businesses that depend on bank lending while large corporate—corporates benefit from the nonbank sources of finance. 

In your March 26th speech, you recognized that, quote, ‘‘The 

economy, small businesses need adequate and affordable credit in 

order to form, grow and succeed. Otherwise, they may underperform, slowing growth and employment.’’ What are the side effects 

of reduced access to adequate and affordable credit for small businesses? 

Mr. QUARLES. Well, I think the—small businesses as we all know 

are a principal engine of generating employment. They are an important engine of the economy, and credit to small businesses is an 

important element of allowing them to grow. 

Traditionally, that has come—and a large portion of the credit 

extended to small businesses has come from community banks. 

Community banks are closer to the communities in which these 

small businesses reside, are able to make credit decisions that larger banks sometimes might not be able to make with respect to a 

particular borrower in a community. 

So all of those are issues that are having an effect, clearly. 

Mr. PITTENGER. Yes, sir. Thank you. On another matter, as you 

are fully aware that the Fed Bank of New York, on April the 3rd, 

began publishing its new reference rate, SOFR, the Secured Overnight Financing Rate, which is intended to be an alternative to 

LIBOR (London Inter-bank Offered Rate). Mr. Vice Chairman, has 

there been a robust cost-benefit analysis conducted by the Fed regarding the potential economic impact to consumers and commercial borrowers from shifting from LIBOR to SOFR? 

Mr. QUARLES. So the shift to the extent happens would be entirely voluntary. So this isn’t something that the Fed is going to require. So while that is a question that we have looked at, we also 

think that in determining whether any particular institution would 

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37 

make the shift, that cost is something that they would evaluate as 

well. 

So since we are not mandating it, that is a different kind of analysis. Now obviously, we have been told that LIBOR as a potential 

standard will be disappearing. So I think that our providing this 

alternative is an important option. I think it will be very useful, 

but it is voluntary. 

Mr. PITTENGER. Have you looked at the impact that this change 

would have on the borrowing costs for businesses? 

Mr. QUARLES. In the context of LIBOR disappearing, I think that 

that will be—I think inevitably the alternative of not having it 

available would be a problem. 

Mr. PITTENGER. Yes, sir. Well since repo rates move in the opposite direction of LIBOR during the market stress would any new 

systemic risk arise of the banking sector by shifting to SOFR? 

Mr. QUARLES. That is a question that we have looked at. I don’t 

think that we are increasing systemic risk. And again, when one 

considers the alternative of the current widespread standard disappearing, the provision of an alternative is important I think. 

Mr. PITTENGER. Have you all sought the input from community 

or regional banks concerning the potential costs associated in shifting away from LIBOR? 

Mr. QUARLES. Yes, we have. 

Mr. PITTENGER. Did you find favorable input? 

Mr. QUARLES. Yes, and you know, and as that process continues 

to move forward, we are continuing to evaluate input. 

Mr. PITTENGER. Could you give us a reaction that you have had 

from the smaller banks? 

Mr. QUARLES. You know, again our assessment in general has 

been that since the shift is going to be voluntary, each institution 

will decide of itself whether the costs outweigh the benefits. 

Mr. PITTENGER. Thank you. My time has expired. 

Chairman HENSARLING. The time of the gentleman has expired. 

The Chair now recognizes the gentleman from Pennsylvania, Mr. 

Rothfus. 

Mr. ROTHFUS. Thank you, Mr. Chairman. Vice Chair Quarles, I 

want to start by commending you for the posture you assumed earlier in your tenure by setting efficiency, transparency, and simplicity as guiding principles for your regulatory improvement agenda. The mistakes of the last 8 years demonstrated just how important it is that we have regulations that are straightforward and appropriately tailored. 

As you know, the implementation of the Dodd-Frank Act— 

through the implementation of the Dodd-Frank Act, insurance companies have—that have depository institution subsidiaries were 

brought under Fed supervision. This created a situation in which 

many of these insurance companies are supervised at the holding 

company level by both the Federal and State insurance regulators. 

This leads to duplicative supervision that is disproportionate to 

the risks that these insurance companies pose. And I would argue 

that this violates the principles of efficiency and simplicity. Would 

you support a more streamlined regulatory approach for these insurance companies that would uphold the State insurance supernshattuck on FSR297 with DISTILLER

38 

visory and regulatory regime while rightsizing the Federal Reserve’s examination authority? 

Mr. QUARLES. Yes, the devil is in the details of that. But I have 

spoken to a number of these insurance companies, and I think it 

is clear that the burden of our regulation is, has been excessive relative to the scope of the issue. 

So I think that that is something that we need to work on. Now 

as long as the insurance companies have depository institution subsidiaries, I think that that is something that we need to have an 

appropriate regulatory relation to. But we need to do a better job 

of ensuring that that regulatory engagement is felt by the firms as 

proportional to the scope of the issue. 

Mr. ROTHFUS. I look forward to following up with you on that. 

Mr. QUARLES. Yes, very much so. 

Mr. ROTHFUS. As you know, the FSOC has begun work on reviewing the objective criteria used for designating non-bank SIFIs. 

I support that effort. And I look forward to seeing the formal rulemaking. Can you give us an update on the status of that project? 

Mr. QUARLES. Not a satisfactory one. Beyond that it is underway, 

but I support as well the effort to look at an activities based approach for designation, which is where the—where the rest of the 

thinking is going. 

Mr. ROTHFUS. You mentioned the bank exams tailored to risk or 

BETR (Bank Exams Tailored to Risk) program for regional and 

community banks in your testimony. BETR uses financial metrics 

to differentiate the level of risk between banks before exams and 

ensures that examiners tailor their procedures to minimize regulatory burden for firms engaged in low-risk activities. 

I can see how this approach could make sense for all banks, not 

just community and regional banks. For instance, an institution 

that is not engaged in consumer activities should not have to go 

through the same examination process or modeling review of consumer losses as a bank that has a large credit card or mortgage 

business. Will the Fed expand this risk-based tailoring to supervisory programs for all banks? 

Mr. QUARLES. So we haven’t given consideration yet as to that 

particular program. However, the tailoring of supervision to the 

character and risk of particular institutions is something that I 

completely agree extends along the spectrum of institutions from 

the smallest to the largest. And it doesn’t stop at any particular 

level. And we need to be giving thought as to how we do that. 

Mr. ROTHFUS. Before my time expires, I want to commend you 

for recognizing the negative impacts of the supplementary leverage 

ratio. I know that Congresswoman Maloney had touched on this, 

especially the effect on custody banks. 

As you know, the Fed is currently undertaking a rulemaking to 

alter the application of the enhanced supplementary leverage ratio, 

the rulemaking proposal says the following. Over the past few 

years, concerns have arisen that in certain cases, the standards in 

the ESLR rule have become a generally binding constraint rather 

than a backstop to the risk-based standards. 

Thus, although the ESLR standards provide incentives to maintain a strong capital base, the current calibration also has created 

incentives for banking organizations to reduce their participation in 

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lower risk, low-return business activity, such as taking custody deposits, notwithstanding client demand for those services. This is an 

issue that we have discussed extensively in this committee. 

As you know, we unanimously passed a proposal to address this 

problem earlier this Congress. This solution has also passed the 

Senate. While I applaud the Fed for beginning to address this 

issue, I also want to reiterate my support for a legislative solution. 

With that, I would yield back to the Chairman. 

Chairman HENSARLING. The gentleman yields back. The Chair 

now recognizes the gentleman from Colorado, Mr. Tipton. 

Mr. TIPTON. Thank you, Mr. Chairman. And thank you, Vice 

Chair Quarles, for being here today. First of all, I do want to commend you in terms of comments that you made to my colleague Mr. 

Ross in regards to the banks and wanting to be able to see that 

more tailored to be able to create those access areas. 

But wanted to go on a little bit of a different track in regards 

to some of the proposed rulemaking that is being put forward by 

the Fed regarding the 2-hour recovery time objective (RTO) from 

cybersecurity attacks. In February of this year, you stated that you 

had worked with other financial regulatory agencies on harmonizing cyber risk management standards and regulatory expectations across financial services sector. 

The Fed’s proposal for the 2-hour RTO, obviously, differs significantly from the standards and principles that are established by 

other domestic and foreign regulators. 

As head of the Committee on Supervision and Regulation, have 

you studied the risks and benefits of the 2-hour RTO proposal, its 

lack of harmonization with other regulators, and where it is being 

exercised elsewhere? 

Mr. QUARLES. So those are all important issues. And as part of 

receiving comments on a proposal, we will certainly take all of that 

into account. 

Given the importance of resiliency, the Fed at the time believed 

that that was an important issue to get comment on, but we will 

take into account the comments that we are receiving. 

Mr. TIPTON. Great, yes. I think some of the concern was simply 

the timeframe, 2 hours. And to be able to have the recovery end 

of it, given all of the different challenges that were there, so we 

will look forward to hearing back on that. 

Also in December, you stated that cyber threat to the financial 

system is a matter of national security. I assume that is still your 

position. Do you plan to review the Fed’s proposals for cyber-security? 

Mr. QUARLES. Yes, yes. As I stated a little earlier, I think that 

we really do need to focus our engagement in that area on cybersecurity, to seeing how we, in the bank regulatory community and 

across the Government as a whole, can really support the efforts 

of these firms to be resilient against cyber-attack. 

And because it is such a difficult issue, I do think that a lot of 

our engagement currently is more focused on compliance than real 

resiliency, and I don’t want to denigrate the importance of compliance, but I think we can do more and better. It is a high priority 

for me. 

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Mr. TIPTON. Great. And thank you. Governor Quarles, the Federal Reserve Board is making progress in simplifying the capital 

rules and stress-testing requirements, particularly for smaller institutions. 

I have heard positive feedback from the industry on these goals, 

but I have also heard some concerns that the evaluation of risk 

management can be subjective. And that compliance requirements 

change depending on which supervisor is in charge. 

Are efforts being made to be able to evaluate and potentially 

modify current risk management expectations and supervisory 

practices, to allow for improved effectiveness and greater reliance 

on the rule of law? 

Mr. QUARLES. Yes. I think that ensuring the uniform application 

of principles across a diverse body of supervisors is a difficult management task. 

But it is one that, again, is a high priority for me and that we 

are working, and that we definitely are working on, both within the 

Federal Reserve and across the other bank regulators, to try to ensure that we have more predictability and consistency. 

Mr. TIPTON. Can you give us a couple of ideas on what you are— 

when you say you are looking at it, how trying to be able to pursue 

that? 

Mr. QUARLES. Well, some things that we have actually done 

about trying to ensure consistency. We do have a structure in place 

for the largest institutions, that is designed to try to ensure consistency of supervision. 

On the—with respect to smaller institutions, that is principally 

a matter of training. And so we regularly have, when there is a 

new regulation that comes out or new guidance that comes out, we 

have various training seminars for the supervisors. 

I meet regularly with the leadership in the supervisory function 

at the Fed, to ensure that those messages are going down to individual supervisors. It is a blocking and tackling management function as opposed to a silver bullet. It is something we have to work 

at every day. 

Mr. TIPTON. Well, I appreciate that and that is, probably, one of 

the bigger issues that we are hearing out of our smaller institutions, is the trickle-down effect. 

Mr. QUARLES. Yes. 

Mr. TIPTON. So, obviously, the training will put in a plug for 

some of the legislation that we have passed through the House 

with a lot of bipartisan support to try and make sure that we are 

getting real continuity for the smaller institutions and the opportunity to be able to make those loans for small businesses. I come 

from a rural community and that is a real challenge, thank you for 

being here today. 

Mr. QUARLES. Thank you. 

Chairman HENSARLING. The gentleman yields back. The gentleman from Texas, Mr. Williams, is recognized for 5 minutes. 

Mr. WILLIAMS. Thank you, Mr. Chairman and Vice Chairman, 

good to have you with us today. I am glad to see—finally see a 

Presidentially appointed, Senate confirmed Vice Chairman for the 

long unoccupied post. 

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41 

It has been 8 years since Dodd-Frank was enacted and only now 

is the economy showing signs of recovery, in spite of the overall 

burdensome regulatory environment that we have, not because of 

it. 

The role you play as Vice Chairman for Supervision is crucial in 

tackling some of the regulatory issues that have been plaguing this 

economy for so long. I hope that you will be a catalyst for change, 

inside an agency that has, far too long, become immune to change 

and reform. 

Our economy is as strong as it has ever been thanks to this Congress and this Administration’s folks on deregulation and a modernized tax code that is propelling Main Street toward landmark 

gains. 

My first question, Mr. Vice Chairman, is we must protect small 

businesses and consider their credit needs. The 12 Federal Reserve 

banks recently completed a small business credit survey, which 

concluded that credit needs continue to go unmet. 

As a small business owner, myself, for 47 years, I know, all too 

well, the difficulty some of these companies face. So, now that Congress has passed tax reform to help spread the development of 

Main Street. What actions will you take to ensure that small businesses can have their credit needs met? 

Mr. QUARLES. Well, I think the principle action that we can take 

and we have begun this, there is more that we can do, is to reduce 

the burden on smaller banks, the banks that tend to provide this 

credit and that are best positioned to provide this credit to smaller 

businesses. 

Through the EGRPRA process, for example, we have reduced 

some regulatory burden on the community banks, but that is something that we are always continuing to look at. Are ways to reduce 

the cost of compliance and ensure that the regulations that we are 

applying to particular banks are appropriate to the activities they 

are engaged in and the risks that they pose, which, for community 

banks, is relatively minor. 

Mr. WILLIAMS. Great. In your testimony you state that the financial conditions of the community banks also had strengthened significantly since the financial crisis. So, I want to unpack that a bit 

because I know, first hand, that main—the challenges Main Street 

has continued to face in the last 10 years. 

One credit union or community bank is going out of business 

each working day. Now, this must be addressed and these critical 

institutions have forwarded the relief necessary, which you talked 

about. So, as you examine ways to improve the effectiveness and 

efficiency of supervisory programs, how do you plan to ease the regulatory burden on the community financial institutions? 

Mr. QUARLES. Well, I think, it is through a continuing examination of where it is that we are imposing costs that aren’t necessary 

in order to achieve our objectives. I think that we can. I think that 

over the course of the last couple of years, I think that we have 

reduced those costs. 

As I had mentioned in response to an earlier question. When I 

was an investor in smaller banks, the level of that compliance cost 

was much greater than it had been in the past and was a significant factor in decisions. I think that is a little less over the last 

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couple of years. And, going forward, I think we can make it even 

less. 

Mr. WILLIAMS. Well, that is important because it just hits their 

bottom line and— 

Mr. QUARLES. Precisely. 

Mr. WILLIAMS. —keeps it from getting out in the system. 

Mr. QUARLES. Yes. 

Mr. WILLIAMS. So, as you reflect back on the regulatory actions 

of the Federal Reserve over the past 8 years, you have recently discussed the need to review the costs and benefits of past initiatives. 

While I understand that the Federal Reserve is not like most other 

agencies who are required to adhere to cost-benefit analysis in 

their rulemakings, I would like to see more consideration given to 

the consequences of the board’s regulatory actions. 

So, as you undergo the review of the effectiveness of past initiatives, what factors are you look for and will you make the conclusions of these and reviews available to Congress to examine? 

Mr. QUARLES. We are looking, in general, across a broad range 

of measures of effectiveness of the core elements of regulation. And, 

clearly a significant portion of that is the cost that they impose 

upon institutions particularly, both, direct cost and then a broader 

concept of cost that are imposed on the system and on society. 

We are still determining, as this process go underway, exactly 

how we will deal with the results and how we will make the results 

public, but certainly, that we will inform our interaction with Congress and our public statements, as to the—as we think about improving the efficiency of regulation. 

Mr. WILLIAMS. OK. Mr. Chairman, I yield my time back to the 

Chair, thank you. 

Mr. QUARLES. Thank you. 

Mr. ROTHFUS. [Presiding.] The gentleman yields back. The gentlewoman from Utah, Mrs. Love, is recognized for 5 minutes. 

Mrs. LOVE. Thank you for testifying today, Mr. Quarles. Last 

week, the House passed the Volcker Rule Regulatory Harmonization Act, which would conclude community—which would exclude 

community banks from compliance with the Volcker Rule by exempting banks under $10 billion with limited trading activity. Does 

the Federal Reserve support exempting community banks from the 

Volcker Rule? 

Mr. QUARLES. Yes, I think that that is a decision that Congress 

makes. I think that would be, entirely, appropriate. 

Mrs. LOVE. OK. So, you would—you would support the—OK. 

Does the Federal Reserve believe the Volcker Rule is an appropriate or necessary response to the financial crisis or do you think 

we need to tailor it back a little bit? 

Mr. QUARLES. I do think that certainly, the way that we have implemented the Volcker Rule—and that is less Congress’s fault than 

the regulator’s fault—it has been excessively burdensome. 

Probably the scope of the Volcker Rule limits our ability to really 

focus on what the Volcker Rule is trying to get at. I just—I think 

that it does limit our ability to respond. 

Mrs. LOVE. Would the Federal Reserve support other changes to 

the Volcker Rule such as, what we talked about, maybe even exnshattuck on FSR297 with DISTILLER

43 

panding the range of banks that are exempt from the rule or even 

repealing it altogether? 

Mr. QUARLES. Yes, in terms of supporting them, I think that 

those are decisions for Congress to make. And if Congress makes 

them, we would have no difficulty implementing them. Obviously 

everything depends on the scope of the particular proposals, but I 

don’t that doing that would create any risk to the safety and soundness of the financial system, at all. 

Mrs. LOVE. OK, so, you don’t—it almost sounds like you don’t 

really have an opinion about it. You are just saying we are going 

to take direction from Congress whether it is repealed or not. I just 

want to get some expertise and experience. Would you support expanding the range of banks that are exempt or just— 

Mr. QUARLES. Yes, I don’t think that doing that would create any 

financial stability risk, at all. 

Mrs. LOVE. OK. We are also learning more and more about the 

other unintended consequences with the rule. One that has come 

up has to do with non-financial companies that own depositories, 

such as ILCs (industrial loan companies) or unitary thrifts. As the 

Volcker provision is drafted, if a non-financial company owns a depository, the Volcker requirements apply to all their operations, 

even those not engaged in any financial services. 

This means that non-financial company’s ability to carry out 

some basic risk management could be seriously impacted. Do you 

believe that the intent of the Volcker provision was to apply it to 

the non-financial affiliates of an industrial company that owns a 

depository? 

Mr. QUARLES. I am not sure whether that was the intent of the 

provision, but it may be what the statute says. That is among the 

issues that we have to deal with in the current statutory construct—statutory language of the Volcker Rule. 

Mrs. LOVE. OK, the health and the viability of industrial banking 

sector is something that is really important to me. As a representative from Utah, I can attest to the importance of our ILCs, the vitality of our State’s economy, the size and strength and diversity 

of our State’s banking sector, even to the health of our non-profits, 

which benefit not just from the financial contributions, but also the 

intellectual capital that they are able to draw from their colleagues 

in the banking sector. 

It was a big loss to our State when GE decided to give up their 

banking charter due to the current regulatory environment including the Volcker Rule. I would just be really interested in your 

thoughts regarding industrial bank sectors. Have you had a chance 

to review the safety and soundness records of the ILCs at all? 

Mr. QUARLES. As a citizen of Utah, I am very familiar with them, 

and it hasn’t been a—and I am familiar with all of the facts that 

you cite and they are all true and meaningful. It hasn’t been a 

project of the Federal Reserve up to now to consider our regulatory 

system and how that applies to the ILCs but I am very aware of 

the importance of the issues that you are stating and the importance of ILCs. 

Mrs. LOVE. So you are—you would agree that ILCs have been a 

stable source of capital in our communities, even during the financial crisis? 

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Mr. QUARLES. That certainly was my experience, yes. 

Mrs. LOVE. OK, thank you, Mr. Chairman, I yield back the rest 

of my time. 

Mr. ROTHFUS. The gentlewoman yields back. The Chair recognizes the gentleman from Arkansas, Mr. Hill, for 5 minutes. 

Mr. HILL. Thank the Chairman, thanks Mr. Quarles for being 

here. I want to echo Chairman Hensarling and Chairman 

Luetkemeyer’s comments about cost-benefit analysis. I noted that 

back during disco days in 1979, that the Fed agreed to be—abide 

by OMB’s cost-benefit analysis rules, but really hasn’t as a general 

matter over that 35 years. 

So I was really heartened by your speech in January where you 

thought cost-benefit analysis was important, and you have set up 

a group to look at policy assessment. Does that imply that you are 

supportive of a regular look at all Fed rules on a cost-benefit basis? 

Mr. QUARLES. Yes, I think that we need to do a better job of that. 

We haven’t decided as a board, exactly how we will implement 

that. But I think that we can do a better job, I think that is evident. 

Mr. HILL. And I think, just from my past experience of being in 

the regulated industries for those same 3 decades, this issue that 

economists frequently look at marginal cost of a rule, but not at average costs, not at the cumulative cost. 

And so this idea of looking at compliance cost by bank size on 

a percentage of average assets or a percentage of pretax earnings 

I think should be part of that cost-benefit analysis, and not just 

look at the particulars of the rule that a group of analysts are considering. 

It is the idea that it is—you have heard the old expression of the 

final straw that breaks the camel’s back, let’s measure that whole 

pile of straw and how the marginal rule impacts it. So thank you 

for that. 

Recently I was looking at FINRA (Financial Industry Regulatory 

Authority), a rule that is gone—going final within Rule 4210, which 

has to do with mortgage-backed security agency securities and putting up margin on those securities. 

This is something the commission has asked FINRA to do and 

the SEC has approved this rule, and it is going to final, but from 

reading it, it appeared to me to be two issues. First of all, this says 

that if we are doing a when-issued mortgage-backed securities pool, 

that during that 30-day inter-when-issued basis, we would be putting up margin on those securities based on a mark-to-market, 

which I understand. 

And this is integral to every consumer in our country, because 

that would get a 60-day lock for individual home mortgage, which 

is very important to consumers. But in looking at this rule, it appears to me two problems with it I would like you to look into it. 

One, it appears anti-competitive to me for a bank-owned dealer 

has an advantage over a non-bank-affiliated broker dealer. Why? 

Because if FINRA just applies to the broker dealer, a broker dealer 

that has a bank affiliate, could simply move this one issued business over to the bank, therefore being anti-competitive with nonbank-owned dealers. And I have a problem with that. I think that 

is unfair in public policy. 

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And second, you may want to have a little jurisdictional concern 

because I am not sure that the SEC has the authority to regulate 

margin and agency securities. I think last time I checked, that was 

a Federal Reserve prerogative. So would you commit to me that 

you will look into this rule and see how we can assure a level playing field in the agency market? 

Mr. QUARLES. Yes, absolutely. I think that needs to be a very 

high principle in regulation generally, is that regulation should not 

be tilting a playing field one way or the other across a whole range 

of issues. 

Mr. HILL. Appreciate that, and in the time I have remaining, another issue I think that is—I think the Fed should weigh in on is— 

is this issue where under Dodd-Frank, the TLAC (total loss-absorbing capacity) process, putting up abundant capital to resolve potential bank crisis. 

I think now appears to me to be in conflict with our new and— 

tax reform and tax cut package that we are very proud of in the 

Congress. We believe this is why CBO says we are growing at 3.3 

percent now, a big increase from the past decade. And that is great 

for all Americans. 

But part of that was, as you know, on the international tax regime, this base erosion anti-abuse tax feature of the tax reform bill, 

now appears to me to be in conflict with financial services policies 

on TLAC. Are you familiar with this and have you talked to the 

Treasury about this potential conflict? 

Mr. QUARLES. Yes, I am familiar with the issue, I have talked 

with the affected banks, with the Treasury, and what we are trying 

to do or asking the banks to do is to first quantify the issue because quantifying it is very complex, as you know, because it depends on their whole tax position. 

And that has taken them some time, we are beginning to come 

back with some estimates now from at least some banks at what 

they think the quantifications are, and then the question is—is the 

best way to do that through a Treasury rulemaking, through thinking about Federal Reserve regulatory policy, and we are just beginning to start working with the Treasury on that. 

Mr. HILL. Good, well best wishes and please keep up apprised on 

your thoughts there. Thank you very much, I yield back, Chairman. 

Mr. QUARLES. Thank you. 

Chairman HENSARLING [presiding]. Time of the gentleman has 

expired. The Chair now recognizes the gentleman from Georgia, 

Mr. Loudermilk. 

Mr. LOUDERMILK. Thank you very much, Mr. Chairman, and 

thank you for being here with us. A couple areas I just—I want to 

talk about with you is—is first a 1977 bill, the Community Reinvestment Act, to start with, then I want to talk a little bit about 

cybersecurity, if we have time for it. 

But, as you know, this bill was implemented in 1977, and I, as 

many others believe, it is time to revisit and revise this bill. And 

last month I wrote a letter with Mr. Tipton and Mr. Luetkemeyer 

to the three banking agencies and the Treasury Department about 

modernizing the implementation of the CRA. 

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And we received back from the Treasury Department, which recently released its recommendations for CRA reform, and the OCC 

will be doing the same, and the FDIC Chairman, Mr. Gruenberg, 

wrote us back and said he agrees that we need to revisit this. 

And the three areas that I—I think—that we have been focusing 

on and I think we need to pay attention to, is, first, the taking in 

account of the recent developments in fintech; two, is being transparent with banks about which loans receive CRA credit; and the 

third is giving banks timely CRA exam results. 

And so, my first question is simple. Do you agree that there is 

a need to revisit the implementation, particularly in these areas? 

Mr. QUARLES. Very much so. As you have noted, it is a law from 

1977, and the world is very different today than it was in 1977, 

and achieving the same objectives will probably require different 

measures now than it did then. 

Mr. LOUDERMILK. And it—I am often reminded, when I go back 

and I watch movies from 1977, how much has changed. And it is 

not just the hair styles, but the economy and technology has 

changed, and we have been extremely slow in keeping up with 

technology and the regulations for that. And so I appreciate your 

answer. 

Follow up on that, do you think the CRA can be modernized 

without detracting from its core purpose? 

Mr. QUARLES. Not only without detracting from its core purpose, 

I think that for it to achieve its core purpose in the modern world, 

I think it can better achieve it if we take a fresh look at it. 

Mr. LOUDERMILK. Well, I appreciate it, and I agree with you on 

that. So I look forward to working with you as—as we do this. Shift 

over a little bit on cybersecurity, I spent 20 years in the IT business, this is an area that is very important to me. 

And I know during your speech at the Financial Services Roundtable in February, you stated that you support the private sector’s 

efforts to harmonize cybersecurity efforts across the financial services industry, and I agree with that. 

But I also think there is a need for Federal regulators to harmonize the many overlapping and sometimes conflicting 

cybersecurity standards that are applied to private sector companies. 

Especially a lot of banks will have multiple cybersecurity requirements—or financial institutions, I should say—that are differing 

from the different regulating agencies. In fact, I had one tell me 

one time, Well, if I am in compliance with Regulator A, I am out 

of compliance with Regulator B in certain instances. 

What is the Federal Reserve doing to coordinate these 

cybersecurity supervisory activities with the other regulatory agencies? 

Mr. QUARLES. There are some standing processes—interagency 

processes that are intended to help coordinate that are focused on 

the IT infrastructure exams, and the infrastructure of the financial 

system, generally. 

But, as I have indicated, I do think that we need to, in those 

processes, and within the Federal Reserve, we really need to rejuvenate the way we are thinking about it, and focus on real resilnshattuck on FSR297 with DISTILLER

47 

iency, and what we can do to support that, as opposed to pure compliance. 

Mr. LOUDERMILK. So do you think there is more that we can do 

to coordinate between the— 

Mr. QUARLES. Very much so. 

Mr. LOUDERMILK. —various agencies? You say, when you have 

conflicting requirements, it actually harms cybersecurity than actually strengthens it, so I think— 

Mr. QUARLES. Absolutely. 

Mr. LOUDERMILK. —the same thing that you were saying about 

the CRA, I think we can apply to cybersecurity. Last question: In 

your testimony, you said that you are focusing on mitigating 

cybersecurity risk to financial institutions. Can you just hit on a 

few of the things that you are doing in that arena? 

Mr. QUARLES. Right now the principal effort is in these interagency discussions, to think about where are the real risks in the 

system. So it is behind the scenes, as to figure out exactly what we 

ought to be doing, and then we work on how to affect what we 

ought to be doing. 

And they are difficult questions, and we are still working on 

them, but at very high priority. 

Mr. LOUDERMILK. Well, thank you. I see my time is expired, and 

I yield back. 

Chairman HENSARLING. Gentleman yields back. Chair now recognizes gentleman from Ohio, Mr. Davidson. 

Mr. DAVIDSON. Thank you, Chairman, and thank you Vice Chairman Quarles. I really appreciate your testimony today, both written and in the Q&A session, so thanks for helping with the transparency that is part of the role. 

But I will confess that the average constituent, the average person who is maybe looking at the clock, saying, Hey, I am coming 

up on my second-shift job, catching lunch or something—they may 

know that the Federal Reserve’s out there. They may know that 

the Federal Reserve Chairman deals with setting interest rates. 

They might not differentiate that as monetary policy. 

Could you succinctly describe, in a basic way, where the distinction between monetary policy and regulatory supervision is drawn? 

Mr. QUARLES. I will try to do that succinctly, but because the two 

are related in important ways, and that gets very complicated to 

try to describe. 

But our regulation of the financial sector and of the banking system is the development of rules to ensure the safe, sound, and efficient operation of the system. 

And then we have a supervisory function, where we examine all 

of the banks that are subject to our jurisdiction to ensure that they 

are complying with the rules and operating in a safe, sound, and 

efficient manner. 

Mr. DAVIDSON. Thank you. And having been the first person to 

fill this role, I appreciated your testimony earlier with Mr. 

Luetkemeyer, when he was differentiating guidance from rulemaking. 

And, of course, rulemaking is generally subject to more oversight 

from Congress, and we struggle with the guidance. And, frankly, 

there is very little accountability for what guidance is given, except 

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reactionary after the fact, and then it is hard to substantiate, and 

it is finger pointing—no, he didn’t, yes he did—kind of events. 

But it has a profound impact on the economy. In your role, how 

do you see you personally and your team being able to contribute 

to clarity around that? 

Mr. QUARLES. I think that transparency in all of our processes 

ought to be something that is a high priority for us. And it has 

been a priority, but I think it is becoming a higher priority. 

And that means that when we—when we are taking an action 

that we think is going to have the effect of a rule that we intend 

to apply as a rule, then we should take that through a fully APAcompliant process, and seek notice and comment, and put that forward as a rule. 

And then, perhaps in the past at the margin that sometimes 

hasn’t happened. I mean, that distinction has been blurred. I do 

think there is a role for guidance. I don’t think that, it is never the 

case that we would—that we would put out guidance. The banks 

ask us for guidance, right? Once we have gone through the complex— 

Mr. DAVIDSON. We appreciate that distinction from the Fed’s activity and the CFPBs, for example, where they don’t want to be accountable for even giving guidance. 

Mr. QUARLES. Precisely. 

Mr. DAVIDSON. Yes. 

Mr. QUARLES. And with respect to our guidance, I think that we 

can be, as opposed to that, which sometimes in the past—that is 

less than the case of the recent past, but sometimes in the past 

has—has just gone out to the examiners and the banks. 

I think we can go out for comment on guidance, even when something is not a rule. I think that we—I think we benefit from that 

process. It is not just—again it is not just a question of being fair 

to the regulated industry, it is not just a question of being accountable to the public. It is also a question of improving the content of 

what it is that we do by getting as much comment on it as possible. 

Mr. DAVIDSON. Well, thank you and thank you for that role in 

the ability to protect the average American in their safety and 

soundness of the financial markets in that way. 

And Chairman Barr alluded to a bill that I have introduced that 

would provide a way to do more of that accountability through putting the regulatory side, the supervision side of the Fed on appropriations. And so I look forward to working with you and Chairman 

Barr on that as you committed to do, so thank you. 

Another important role is the engagement with international 

agreements, and I will confess I have been very concerned about 

the previous path and personally affected by some of those decisions. How do you plan on having the Fed represented at these 

international accords in the future given your leadership role? 

Mr. QUARLES. So, as I have indicated, I do think that it is in our 

interest. I know that there has been frustration with these bodies 

in the past. I think that our engagement with them is in our interest, in part precisely because of that reason. We have particularly 

for our institutions that do operate globally; we don’t want the decisions made in those bodies made without our strong and effective 

engagement. 

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I think that we need to argue for them to continue their evolution toward more transparency. I think they have been. I think 

that as we implement the rules we need to be transparent about 

how to do that. 

Mr. DAVIDSON. Thank you, my time is expired and I yield. 

Chairman HENSARLING. Time of the gentleman has expired. The 

Chair now recognizes the gentleman form North Carolina, Mr. 

Budd. 

Mr. BUDD. Thank you, Mr. Chairman, and also thank you, Vice 

Chairman Quarles, for coming today and again for your service. 

You are a breath of fresh air. 

My questions are about a smaller part of your portfolio but no 

less important. It is about insurance oversight. 

Mr. QUARLES. Yes. 

Mr. BUDD. So specifically I want to talk about the ongoing work 

on international capital standards that are being developed by the 

International Association of Insurance Supervisors. So in November of last year at a meeting in Kuala Lumpur, IAIS announced 

that it was moving forward with an ICS (Insurance Capital Standard) version 2.0. It will be very similar to European Solvency Regulation and will use European accounting rules and European capital resource determinations. 

So in my view, this European-centric approach is unworkable for 

the U.S. Insurance Regulatory system. So with that being said, my 

first question is do you believe existing State-based capital requirements promote the solvency of the U.S. insurance companies? 

Mr. QUARLES. I think they do, yes. 

Mr. BUDD. OK, very good. Last week I received a response from 

Chairman Powell to a letter I sent him on this same topic. Specifically, Chairman Powell cites two rationales for the creation of ICS. 

One was to provide a level playing field. The second was to prevent 

regulatory arbitrage. So while I know the response I received was 

not from you, you and Chairman Powell work very closely together 

on these, and so I have two brief questions on Chairman Powell’s 

response. 

First, why is capital the only component when EU regulators and 

EU insurers talk about a level playing field? And I will go on. So 

does Europe have the robust insured—consumer protection insurer 

resolution mechanisms that we have here in the U.S., and where 

is the level playing field on these very important topics? 

Mr. QUARLES. I agree with you that we need to be thinking about 

a level playing field across the whole regulatory regime— 

Mr. BUDD. And not just with capital standards? 

Mr. QUARLES. And not just with capital, certainly yes. That is— 

that is—that ought to be an important part of our general engagement. 

Mr. BUDD. Could you elaborate other areas where we would want 

to have a level playing field? 

Mr. QUARLES. As you have indicated, I think that all the elements of a regulatory regime affect the burden and competitiveness 

of an institution and it is in our interest to look across all of the 

elements. And different fora—there may be different fora that are 

the right places to try to push those arguments, depending on difnshattuck on FSR297 with DISTILLER

50 

ferent types of regulation, but it is in our interest to ensure that 

the whole playing field is level. 

Mr. BUDD. So beyond the capital standards insurance and consumer protections and insure resolution mechanisms, level the 

playing field there, as well, is fair to say? Next question, should the 

Federal Reserve as a prudential or safety and soundness regulator 

be concerned about an international level playing field. Isn’t that 

more of a focus of trade policy and not just monetary policy? 

Mr. QUARLES. Well, as a financial regulator though, I do think 

that it gets a little weedy. You know our trade policy generally 

stands back. Our trade representative and trade negotiations stand 

back from financial regulation and those are separately negotiated—positions are simply negotiated because we do have an interest in ensuring that our internationally active firms are treated 

equally and—and—and not subject to differing rules in different jurisdictions in ways that might be deleterious to them. 

I do think that we have an interest in engaging in those fora to 

try to ensure level rules in those areas, and I think that it is appropriate for that to be done in the financial regulatory sphere, both 

with the Federal Reserve and with other participants. 

Mr. BUDD. I appreciate the clarification. Mr. Chairman, I yield 

back. Thank you. 

Chairman HENSARLING. Would you yield to the Chairman? 

Mr. BUDD. I yield to the Chairman. 

Chairman HENSARLING. Mr. Chairman, under the living will requirements, and I think we may have touched upon this once, you 

are really given—the Fed is given unreviewable discretion to really 

fundamentally restructure a number of private businesses that 

seemingly lack objective standards. And so the entirety of the annual living will process is all predicated on a quote, unquote, credible plan, whatever that is. 

So you have talked about transparency. What is it you can do to 

increase transparency to the living will process? And with respect 

to having to do this on an annual basis, do you have it within your 

power to do it on a less frequent basis? 

Mr. QUARLES. With respect to transparency, I do think that as 

with many of our regulatory and supervisory issues we have with 

firms, I think that we can just be more interactive and open about 

what our expectations are, get more comment from them about— 

about our expectations, ask more questions, all of that is something 

I think that we can do better. 

On the frequency, yes, we do have it in our power to have these 

assessments done less frequently and I think we are probably at 

a time where it is appropriate to do that. Whatever the merits of 

the prior process of restructuring, it is largely complete. 

Chairman HENSARLING. Time of the gentleman from North Carolina has expired, and the Chair now recognizes the gentleman from 

Tennessee, Mr. Kustoff. 

Mr. KUSTOFF. Thank you, Mr. Chairman, and thank you, Vice 

Chairman Quarles, for being here with us today this afternoon. I 

am going to go a little bit more broad than some of the other questions. 

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Obviously the Federal Reserve—community bank background 

and, I saw that firsthand with good community banks, especially 

in my area of West Tennessee. 

You gave a speech a few weeks ago to the HOPE Global Forums 

annual meeting and in that speech, the way I read it, you acknowledge that the small business credit needs are in many instances 

not being met. Do you believe that there is a need to reduce the 

regulatory burden on our small community institutions so that they 

can continue to meet the needs of our small local businesses? 

Mr. QUARLES. Yes, I think that there is a need to do that and 

that it is important for us to address it. 

Mr. KUSTOFF. And you talked in your speech about the easing, 

and in particular, are there particular types of companies that you 

have identified or that you would identify as having the most difficulty finding adequate access to credit? 

Mr. QUARLES. So I am sure that that study has been done. I do 

not know the facts, but I can certainly get them for you as to our 

assessment of whether there are particular companies that have 

the most difficulty getting access credit. 

Mr. KUSTOFF. Thank you very much. As it relates to—as it related to fintech, can you explain, if you would how the Fed carries 

out a supervisory role in new and expanding markets to protect 

consumers from fraud and cyber attacks? 

Mr. QUARLES. With respect to fintech, our supervisory relationship with fintech principally comes from where the fintech firms 

connect with the directly regulated financial system of the banking 

system, which most of them do. They receive their funding or access to the payment system through a regulated bank usually in 

one place or another. 

And when they do that, then we both supervise the bank as it 

engages with the fintech company and in certain cases, we have 

the ability to look at the fintech company and its connection to the 

bank, and then we look and determine the compliance of that activity, both with safety and soundness regulation, as well as with consumer compliance regulation. 

Mr. KUSTOFF. Thank you very much, and I yield back the balance of my time. Thank you, sir. 

Chairman HENSARLING. Would you yield to the Chairman? 

Mr. KUSTOFF. I yield to Chairman to the gentleman. 

Chairman HENSARLING. I thank the gentleman for yielding. 

Chairman Quarles, back to the living wills. As I understand it Section 165 of the Dodd-Frank Act would allow you to publicly disclose 

the assessment framework. Is that your understanding, as well? 

Mr. QUARLES. Yes, I think that we could disclose it. 

Chairman HENSARLING. OK. Are you familiar with H.R. 4292 of 

Congressman Zeldin’s Financial Institutions Living Will Improvement Act? 

Mr. QUARLES. I am. 

Chairman HENSARLING. Well, it would—it would do just that. 

And are you familiar that this bill passed the House 414–0? 

Mr. QUARLES. I knew that there was a bill that had and now I 

know it is that one. 

Chairman HENSARLING. You might want to just take my word for 

it. Anyway, please take this as a very strong suggestion of the 

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House of Representatives. So, you do have the authority to publicly 

disclose this assessment framework. The House unanimously is 

suggesting that you do that. I hope that you will give it careful, 

careful consideration. 

In addition, I believe one—Section 165 of Dodd-Frank would also 

allow the Federal Reserve to provide feedback on Section 165D, living wills. Is that your understanding, as well? 

Mr. QUARLES. Yes. 

Chairman HENSARLING. And I suppose you could do this in a 

timeframe of, say, 6 months? 

Mr. QUARLES. That would be possible. 

Chairman HENSARLING. OK. Just for your edification, you will 

also find this in H.R. 4292—and I would suggest that the Fed take 

a very serious look at doing just that. 

Time of the gentleman has expired. The Chair now recognizes 

the gentleman from Indiana, Mr. Hollingsworth. 

Mr. HOLLINGSWORTH. Well, good afternoon. Thank you so much 

for being here. You have reached the end of the line here. Like 

Chamberlain at Little Round Top. Well, I wanted to reiterate a few 

things. I know you have talked a lot about cost-benefit analysis, 

comprehensive analysis, the importance of that overall, and obviously I am working on a bill specifically that we have dropped that 

really helps and drives the Federal Reserve to do cost-benefit analysis where their regulations are in excess of the international 

standard. 

And just the statement that says, look, if it needs to be in excess 

than it should be delivered through a cost-benefit analysis. People 

deserve to know the reasons why we have done this right and if 

the analysis itself does not bear out that it should be in excess of 

international standards then we want to know that as well. 

And so it does nothing to force it to match international standards, does nothing to change existing standards, but just as you 

have said in your testimony as you said in the Q&A period here 

how important transparency is really helps with that process. So 

I would love it if you take a look at that as well. 

Mr. QUARLES. Absolutely. 

Mr. HOLLINGSWORTH. On a very, very different topic I also want 

to talk about G-SIB surcharge, and how important that is and I am 

actually reading a book right now that talks a lot about Wheeler 

and Feynman’s collaboration on quantum mechanics. And one of 

the things that really stuck with me was they said the hardest part 

about quantum mechanics is the constant change as well as the 

variables. 

And that brings me back to some of the coefficients in the method, too. They have been in place and they have been set since 2015 

but the economy, the world, the environment, the risk profile have 

all changed since then. And so, I wondered if you might comment 

a little bit about the potential to update some of those coefficients 

to reflect the new reality and specifically with regard to economic 

growth. We don’t want our firms to be penalized because the economy is growing, because the world has gotten bigger. I wonder if 

you might comment on that a little bit. 

Mr. QUARLES. I think that those are very good points. I think 

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53 

tion of the G-SIB surcharge in general. The original calculation of 

that was made a number of years ago and in part in relation to 

the living will process that we have just been talking about—were 

just talking about. 

If we leave, which I do believe I think we—I think it is generally 

accepted that that has resulted in improvement in resolvability of 

the firms and that means that the consequence of their default is 

less. And the reason for the G-SIB surcharge is precisely our assessment of the heightened consequence of their default. 

If we have reduced that consequence, we ought to be able to 

think about—now I don’t know exactly what the size of that effect 

is, what the outcome of that would be, but then a process of thinking about is appropriate now. 

Mr. HOLLINGSWORTH. Yes. And, we should reflect that with the 

reality that we see on the ground, like you said, not only with their 

lowered risk profile, but the enhanced economic environment, as 

well. 

Ultimately, we haven’t slaughtered the business cycle. But we 

want to make sure that at every step of the way, that the coefficients themselves reflect reality, because if they don’t, they start to 

drive reality and cause firms to make decisions that might not be 

in the best interest of a stable, safe, secure, but also efficient financial system like you pointed out. 

Specifically, one of the things that I wanted to talk about within 

the method to and within the coefficients is how the short-term 

wholesale funding is measured and how certain—are treated. And 

I just wanted to draw your attention to those, as well. 

Obviously, like you talked about, I think in your written testimony, you even refer to the great changes that have been made 

over time, specifically with the G-SIBs in reducing their reliance, 

but making sure that ultimately we have that reflected in the 

equations themselves. And I appreciate your work. 

And then, as David mentioned, how important it is to overall 

step back, and how much we appreciate the work that you are beginning, and really looking at, and as you say in your testimony, 

the fact that it is not incompatible to say we want a safe and secure system, but we also need an efficient, effective system, as well, 

and making sure that those two go in hand. And I really appreciate 

the fact that you have been willing to look at so many things, recalibrate so many things. 

Because I think this is very much an iterative process and making sure that the things that we have done in the past, whether 

that is Congress or regulators, haven’t had a deleterious effect on 

the economy, either credit availability, but also on U.S. firms’ ability to compete around the world. 

Because ultimately financial services is something we do exceptionally well in this country. I will make sure that that continues 

to be the case and that public policy doesn’t stand in a way of that. 

So thank you for being here today. With that I go back, Mr. Chairman. 

Chairman HENSARLING. Would you yield to the Chairman? 

Mr. HOLLINGSWORTH. I would, indeed. 

Chairman HENSARLING. Mr. Chairman, going back to the CCAR 

process, recently, the Fed announced that it would no longer object 

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54 

to a company’s capital plan based upon the qualitative deficiencies 

for banks under $250 billion, is that correct? 

Mr. QUARLES. Yes. 

Chairman HENSARLING. So, under Section 165 of the DoddFrank, you also have the power to do that for all banks, is that correct? 

Mr. QUARLES. That is also correct. 

Chairman HENSARLING. Are you considering doing that for all 

banks? 

Mr. QUARLES. We are. 

Chairman HENSARLING. Excellent. 

The time of the gentleman has expired. There being no further 

members in the queue. The Chair notes that some Members may 

have additional questions for this panel, which they may wish to 

submit in writing. Without objection, the hearing record will remain open for 5 legislative days for Members to submit written 

questions to these witnesses and to place their responses in the 

record. Also, without objection, Members will have 5 legislative 

days to submit extraneous materials to the Chair for inclusion in 

the record. 

[Whereupon, at 12:58 p.m., the committee was adjourned.] 

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(55) 

A P P E N D I X 

April 17, 2018 

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For release on delivery 

10:00 a.m. EDT 

April 17, 2018 

Statement by 

Randal K. Quarles 

Vice Chairman for Supervision 

Board of Governors of the Federal Reserve System 

before the 

Committee on Financial Services 

U.S. House of Representatives 

April 17, 2018 
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Chairman Hensarling, Ranking Member Waters, and other members of the committee, I 

appreciate the opportunity to testify on the Federal Reserve's regulation and supervision of 

financial institutions. 

The Federal Reserve, along with the other U.S. banking agencies, has made substantial 

progress in building stronger regulatory and supervisory programs since the global financial 

crisis, especially with respect to the largest and most systemically important firms. These 

improvements have helped to build a more resilient financial system, one that is well positioned 

to provide American consumers, businesses, and communities access to the credit they need even 

under challenging economic conditions. At the same time, we are mindful that--just as there is a 

strong public interest in the safety and soundness of the financial system--there is a strong public 

interest in the efficiency of the financial system. Our financial sector is the critical mechanism 

for directing the flow of savings and investment in our economy in ways that support economic 

growth, and economic growth, in tum, is the fundamental precondition for the continuing 

improvement in the living standards of all our citizens that has been one of the outstanding 

achievements of our country. As a result, our regulation of that system should support and 

promote the system's efficiency just as it supports its safety. 

In fact, I believe that the supervisory objectives of safety, soundness, and efficiency are 

not incompatible, but rather arc mutually reinforcing. Our job as regulators is to pursue each of 

these objectives. Moreover, our achievement of these objectives will be improved when we 

pursue them through processes that are as transparent as possible and through measures that are 

clear and simple, rather than needlessly complex. In doing this, we at the Federal Reserve intend 

to maintain the core elements of the post-crisis framework that have been put in place to protect 
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the financial system's strength and resiliency, while also seeking ways to enhance its 

effectiveness. 

In my testimony today I will: (1) review the current condition of the nation's banking 

institutions; (2) review our regulatory and supervisory agenda in light of the efficiency, 

transparency, and simplicity principles that enhance effectiveness; and (3) touch upon our 

engagement with foreign regulators. 

Current Condition of Regulated Firms 

Before I discuss our regulatory and supervisory agenda in more detail, let me provide an 

update regarding the current condition of the nation's banking institutions. 

Overall, the U.S. commercial banking system has strengthened considerably over the past 

decade. The largest U.S. banking organizations--those the failure of which would pose the 

greatest risk to the financial system and that are subject to the Federal Reserve's stress testing 

framework--have increased the dollar amount of their loss-absorbing common equity capital by 

more than $700 billion since 2009, more than doubling their common equity capital ratios from 

approximately 5 percent to more than 12 percent. In addition, the eight U.S. global systemically 

important banking organizations, or G-SIBs, have developed significantly more stable funding 

positions as their reliance on short-term debt--including repurchase agreement, or repo, 

financing--has decreased by more than half since 2007 and now is equal to less than 15 percent 

of their total assets. The G-SIBs now also hold approximately $2.4 trillion in high-quality liquid 

assets, representing an increase of more than 60 percent since 2011. 

The financial condition of community banks also has strengthened significantly since the 

financial crisis. Aggregate reporting data from the more than 5,000 community-based holding 

companies subject to Federal Reserve oversight show marked improvements in profitability that 
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have contributed to a strong overall capital position. Community banks reported net income of 

$20.6 billion during 2017, up 4 percent from 2016. They also experienced particularly strong 

loan activity, as their most recent year-over-year loan growth of7.7 percent materially exceeded 

that of the banking industry as a whole. 

In the aggregate, banks realized profits of approximately $152 billion during 2017. 

While total net income fell in 2017 compared with 2016, this was largely a result of nonrecurring items. Total loans held by U.S. commercial banks grew roughly 5 percent during 2017 

and currently exceeds the previous peak from 2008. 

While the overall position of the banking system is strong, the Federal Reserve continues 

to monitor ongoing risks that pose potential threats to banking firms of all sizes. It is often said 

that bad loans are made during good times. Therefore, more than eight years into the recovery, 

we continue to emphasize the need for banking organizations to maintain underwriting discipline 

and strong risk-management practices. We are particularly focused on banking organizations 

that have or are developing concentrations in loan segments vulnerable to adverse economic 

developments. Banks generally would also be vulnerable to an unexpected and swift change in 

the shape of the yield curve. 

In addition, banks continue to innovate and keep pace with financial technology, or 

fintech, developments. These innovations can present promising opportunities, and I believe our 

role as regulators is to allow that innovation to develop in a responsible way. These innovations 

can expand access to credit, including to underserved consumers and small businesses, which in 

tnm can benefit the real economy. We must also acknowledge that these opportunities likely are 

not without risk. Our supervision regarding fintech is therefore focused on ensuring that banks 

understand and manage these risks and that consumers remain protected. 
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We are also very focused on the increased risk to all financial institutions of cyberattacks 

and are working with key public- and private-sector entities to strengthen the cyber resiliency of 

the financial sector. 1 Cyber risk continues to grow, driven by unprecedented technological 

innovation, the interconnectivity of the financial services sector, and inadequate or incomplete 

defenses. We also observe, and incorporate into our own supervisory approach, the reality that 

many of the most serious cyber vulnerabilities are rooted in the basic challenges of managing 

large IT infrastructures. We continue to collaborate with other governmental agencies, and 

F cderal Reserve supervisors are closely following each of these areas of concern. 

Regulatory and Supervisory Agenda 

The U.S. banking agencies' build-out of the regulatory and supervisory framework since 

the financial crisis has resulted in a substantially more resilient financial system, particularly at 

the largest firms. Stronger regulatory capital rules and the development of the Federal Reserve's 

stress testing regime have resulted in higher levels and quality of capital, new liquidity 

regulations and a heightened supervisory focus on liquidity have resulted in stronger liquidity 

positions, and resolution rules and living wills have contributed to improvements in the 

resolvability of systemically important firms. 

That said, this body of regulation is broad in scope and complicated in detail. It is 

inevitable that there will be ways to improve the framework, especially with the benefit of 

experience and hindsight, and--given the public interest in the financial system's efficiency--it is 

important that we pursue this task as assiduously as we can. I will tum now to highlighting some 

' See Randal K. Quarles, "Brief Thoughts on the Financial Regulatory System and Cybersecurity," speech at the 

Financial Services Roundtable 2018 Spring Conference, Washington, February 26, 2018), 

\VWW. federalreserve. e:ov/newsevents/~~ch.:'quarles20 18022 6b. htm. 
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of the ways we have sought to improve the effectiveness of the post-crisis framework through 

increased efficiency, transparency, and simplicity. 

Efficiency 

Efficiency of supervision and regulation means that if we have a choice between two 

methods that are equally effective in achieving a supervisory goal, we should strive to choose the 

one that is less burdensome. That can take many forms, including focusing the most stringent of 

supervisory standards and practices on the riskiest firms, as well as refining the calibration of 

specific requirements to make them more aligned with their original intent. I will briefly discuss 

a few recent measures that the Federal Reserve has taken designed to increase efficiency and 

thus improve the effectiveness of our regulation and supervision, such as the enhanced 

supplementary leverage ratio calibration proposal, the removal of midsized banking firms from 

the qualitative objection of our annual supervisory stress tests, and specific examination and 

supervisory process adjustments. I will also provide a few thoughts on where I believe 

additional improvements in efficiency can be made. 

The Board and the Office of the Comptroller of the Currency last week issued a proposal 

that would recalibrate the enhanced supplementary leverage ratio, or eSLR, applicable to G-SIBs 

and most of their insured depository institution subsidiaries.2 The proposal would help ensure 

that leverage capital requirements generally serve as a backstop to risk-based capital 

requirements. When the leverage ratio acts as a primary constraint, it can actually encourage 

excessive risk-taking behavior because it does not distinguish between the capital cost of safer 

and that of riskier assets. The eSLR's current calibration has made it the primary capital 

2 Board of Governors of the Federal Reserve System, "Rule Proposed to Tailor 'Enhanced Supplementary Leverage 

Ratio' Requirements," news release, April!!, 2018, 

W\VW. fedcralreserve.gov/newsevents/pressreleases 1bcreg20 180411 a.htm. 
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constraint for some of the largest firms, which is inconsistent with its original purpose and 

provides an incentive for inappropriately risky behavior. The proposal would calibrate the eSLR 

so that it is less likely to act as a primary constraint while still continuing to serve as a 

meaningful backstop. The proposal also would enhance efficiency by making each firm's 

leverage surcharge a function of its individual systemic footprint. 

Last year, the Board also adopted a rule that reduced the burden associated with the 

qualitative aspects of the Federal Reserve's Comprehensive Capital Analysis and Review, or 

CCAR, for midsized firms that pose less systemic risk. Under that rule, the Board will no longer 

object to the capital plans of firms with total consolidated assets between $50 billion and $250 

billion because of deficiencies in their capital planning process; rather, any deficiencies in their 

capital planning processes will be addressed in the normal course of supervision.3 Recently, we 

have solicited comment on whether that approach should be applied to a broader range of firms. 

I believe that our supervisory goal of ensuring a robust capital planning process at most firms can 

be achieved using our normal supervisory program combined with targeted horizontal 

assessments without compromising the safety and soundness of the financial system. 

I also believe that there are additional tailoring opportunities with respect to large firms 

that are not G-S!Bs to ensure that applicable regulation matches their risk. In this regard, I 

support congressional efforts regarding tailoring, as offered in both the House and Senate, which 

have proposed prudent modifications. In addition to this potential legislation, I believe there are 

further measures we can take to match the content of our regulation to the character and risk of 

3 Board of Governors of the Federal Reserve System, "Federal Reserve Board Announces Finalized Stress Testing 

Rules Removing Noncomplex Firms from Qualitative Aspect ofCCAR Effective for 2017," news release, January 

30, 2017, W\\'W. federalrescrve.gov/newsevents/pressreleases;bcreg20 170 130a.htm. 
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the institutions being regulated. Liquidity regulation, for example, does not have a G-SIB versus 

non-G-SlB gradation. In particular, the full liquidity coverage ratio requirement of enhanced 

prudential standards apply to large, non-G-SIB banks in the same way that they apply toG-SIBs. 

I believe it is time to take concrete steps toward calibrating liquidity requirements differently for 

non-G-SIBs than for G-SIBs. 

I believe that we can also improve the efficiency of our regulation with respect to our 

requirements regarding living wills. In light of the substantial progress made by firms over the 

past few years with their resolution planning processes, I believe that we should adopt a 

permanent extension of submission cycles from annually to once every two years, and that we 

can again reduce burden for firms with less significant systemic footprints by reducing specific 

information requirements. 

The U.S. banking agencies have also taken a number of steps to advance more efficient 

and effective supervisory programs. For example, in response to feedback from banks in the 

context of the review required by the Economic Growth and Regulatory Paperwork Reduction 

Act of 1996, the agencies recently increased the threshold for requiring an appraisal on 

commercial real estate loans from $250,000 to $500,000, determining that the increased 

threshold will not pose a threat to the safety and soundness of supervised financial institutions. 4 

Over the past several years, the Federal Reserve has also instituted various measures to 

clarify and streamline its overall approach to the supervision of community and regional banks in 

particular. For example, the Federal Reserve implemented a program it calls Bank Exams 

Tailored to Risk, or the BETR program. BETR uses financial metrics to differentiate the level of 

4 Board of Governors of the Federal Reserve System, "Federal Banking Issue Final Rule to Exempt 

Commercial Real Estate Transactions of$500,000 or Less from Requirements," news release, April2, 

2017, =~sim~ITY!;,g.Q.YLill;~=wc~"lc'!k'!lLt:;;,!JlE~IlJ.~H.~~illlJ:Jlb 
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risk between banks before exams and ensure that examiners tailor examination procedures to 

minimize the regulatory burden for firms that engage in low-risk activities, while subjecting 

higher-risk activities to more testing and review. The Federal Reserve has also shifted a 

significant amount of its examination activity offsite to address concerns from community banks 

about burden. 

We have also implemented less complex and burdensome examination approaches in the 

supervision of regional banking organizations with assets between $10 and $50 billion. For 

example, we have streamlined procedures to reduce the burden associated with assessing 

compliance with Dodd-Frank Wall Street Reform and Consumer Protection Act company-run 

stress testing requirements and decreased reporting burden by refining our tools for assessing 

liquidity positions at these banking organizations and eliminating the quarterly FR Y2052(b) 

liquidity report. 

Finally, the Board has begun a broad review to identify ways to increase the efficiency of 

the applications process, which we expect to reduce processing times for certain types of 

applications. 

Transparency 

Transparency is central to the Federal Reserve's mission, in supervision no less than in 

monetary policy. In addition to transparency being a core requirement for accountability to the 

public, there are valuable, practical benefits to transparency around rulemaking: even good ideas 

can improve as a result of exposure to a variety of perspectives. 
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A prime example of the Board's efforts to increase transparency was its release for public 

comment of an enhanced stress testing transparency package late last ycar.5 The Board issued 

the package in response to feedback from firms that there should be greater visibility into the 

supervisory models that often determine their binding capital constraints, as well as questions 

from analysts, investors, academics, and others who want to better understand details of how the 

Federal Reserve's supervisory stress tests work in practice. We are continuing to think about 

how we can make the stress testing process more transparent without lowering the strength of the 

test itself or undermining the usefulness of the supervisory stress test. I personally believe that 

our stress testing disclosures can go further, and that we should consider additional measures, 

such as putting our stress scenarios out for comment. My colleagues and I on the Board will be 

paying particularly close attention to comments on how we might improve the current proposal. 

Looking ahead, we are also in the process of developing a revised framework for 

determining "control" under the Bank Holding Company Act. This framework would be more 

transparent, simpler to understand, easier to apply, and would liberalize some existing 

limitations. A clearer set of standardized rules should facilitate the raising of capital by banks, 

particularly community banks where control issues arc generally more prevalent, and noncontrolling investments by banking organizations in non-banking companies. 

Simplicity 

The third principle that should guide an assessment of our current framework, simplicity, 

is about promoting public understanding and compliance by the industry with regulation. 

Confusion and compliance burden that results from overly complex regulation does not advance 

5 Board of Governors of the Federal Reserve System, "Federal Reserve Board Requests Comment on Package of 

Proposals that Would Increase the Transparency of Its Stress Program," news release, December 7, 2017, 
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the goal of a safe financial system. The Federal Reserve has worked to simplifY the vast and 

often complex post-crisis regulatory framework in several different ways. The most recent 

example was the issuance of the proposed stress capital buffer rulemakingjust last week.6 The 

proposal would effectively integrate the results of the supervisory stress test into the Board's 

non-stress capital requirements. Doing so would result in a much simpler capital framework 

overall while maintaining its risk-sensitivity. For example, for the largest bank holding 

companies, the number of required loss absorbency ratios would be reduced from 24 to 14. 

While the proposal would result in burden reduction for both firms and supervisors, the proposed 

changes would generally maintain or increase the minimum risk-based capital required for GSIBs (although no firm would be required to raise capital, since all firms currently maintain 

capital above these minimum levels) and generally modestly decrease the amount of risk-based 

capital required for most non-G-S!Bs. Note, however, that a firm's stressed capital requirement 

is expected to vary in size throughout the economic cycle. 

Let me tum to the Volcker rule. Many within and outside of the industry have said that 

this is an example of a complex regulation that is not working well. While the fundamental 

premise of the rule is simple, the implementing regulation is exceedingly complex. Our fellow 

rej,>ulators arc working actively with the Federal Reserve in seeking ways to further tailor 

implementation of the Volcker rule and to reduce burden, particularly for firms that do not have 

large trading operations and do not engage in the sorts of activities that may give rise to 

proprietary trading. 

6 Board of Governors of the Federal Reserve System, "Federal Reserve Board Seeks Comment on Proposal to 

Simplify Its Capital Rules for Large Banks while Preserving Strong Capital Levels that Would Maintain Their 

Ability to Lend under Stressful Conditions," news release, AprillO, 2018, 

www. fcderill_I~erve. gov/newsevents/pressreleases/bcreg20 1804 1 Oa.htm. 
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Also with regard to large financial institutions, last year we issued for comment a 

proposal that would simplifY the Board's ratings system by reducing the number of ratings. The 

proposed ratings system would be better aligned with the Board's post-crisis supervisory 

program for large financial institutions, which will allow us to target our supervisory messaging 

to those areas of greatest concern. 7 

Our simplification efforts have, of course, also extended to our supervision and regulation 

of smaller community banks. For example, in its continuing efforts to reduce data reporting and 

other burdens for small financial institutions, the U.S. banking agencies implemented a new 

streamlined Call Report form for small financial institutions in 20178 Applicable to financial 

institutions with less than $1 billion in total assets, the streamlined reporting form removed 

approximately 40 percent of the nearly 2,400 data items previously included. The agencies have 

also proposed further streamlining of this Call Report. The cumulative effect would implement 

burden-reducing revisions to approximately 51 percent of the data items previously reported by 

small banks. 

International Engagement 

Finally, I would like to briefly touch upon the Federal Reserve's engagement with our 

foreign counterparts. As the supervisor of both U.S. banks operating overseas and foreign banks 

operating in the United States, we continue to maintain effective working relationships with our 

foreign supervisory counterparts, including through our participation in the Financial Stability 

Board (FSB) and the Basel Committee on Banking Supervision (BCBS). Our engagement with 

7 Board of Governors of the Federal Reserve System, "Federal Reserve Board Invites Public Comment on Two 

Proposals; Corporate Governance and Rating System for Large Financial Institutions," news release, August 3, 

20 17, www.federalreserve. gov/ncwsevcntsipressrcleases/bcrcg20 l70803a.htm. 8 Federal Financial Institutions Examination Council (FFIEC), "FFIEC Finalizes June 2017 Proposed Revisions to 

Streamline the Call Report," news release, January 3, 2018, www.ffiec.gov/pressipr010318.htm. 
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foreign bank regulators aids in promoting global financial stability and a more level playing field 

for our supervised firms. Let me note that I believe transparency in these process is important, 

and I support the BCBS 's efforts to increase the transparency of its international standard setting. 

With respect to more specific initiatives of each of these bodies, I also expect to implement the 

BCBS's recently completed package of reforms, which conclude its post-crisis capital standard 

reforms. I also want draw the Committee's attention to the FSB's recent statement, which I fully 

support, that now is the appropriate time to pivot focus from new policy development toward 

evaluating policies that have been implemented to ensure the reforms are efficient and effective 

and to address any unintended consequences. 

Conclusion 

The reforms we have adopted since the financial crisis represent a substantial 

strengthening of the Federal Reserve's regulatory framework and should help ensure that the 

U.S. financial system remains able to fulfill its vital role of supporting the economy. As I have 

outlined, the Board has already taken steps to increase the effectiveness of the framework 

currently in place by improving its efficiency, transparency, and simplicity. There are other 

areas where 1 believe that we can increase the framework's effectiveness, and we will look to do 

so where we are confident that we still have all appropriate tools needed to maintain the gains in 

safety and soundness made over the past several years. 

At the same time, it is critical that we continue to monitor for emerging risks affecting the 

financial system. This calls for better analysis and more agility by supervisors in identifying 

emerging risks, as well as vigilance against complacency. We will do everything we can to 

fulfill the responsibility that has been entrusted to us by the Congress and the American people. 
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Thank you again for the opportunity to testify before you this morning, and I look 

fmward to answering your questions. 
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C!tnngrcnn nf flrc l!tnifcll ~fafcn 

El!aslringtan, !l<lr 2U515 

The Honorable Jerome Powell 

Chairman 

Board of Governors of the Federal Reserve System 

20'" Street and Constitutions Ave., NW 

Washington, D.C. 20551 

Dear Chairman Powell and Vice Chairman Quarles: 

April13, 2018 

The Honorable Randal Quarles 

Vice Chairman for Supervision 

Board of Governors of the Federal Reserve System 

20'" Street and Constitutions Ave., NW 

Washington, D.C. 20551 

The Federal Reserve's input to bank holding companies on effective senior management, the management of 

business lines, and independent risk management and controls for large financial institutions is valuable but the 

Federal Reserve should exercise extreme caution and rarely substitute its will over the will of shareholders and 

boards of directors. 

The Federal Reserve's proposed guidance on Supervisory Expectations for the Board of Directors (Docket No. OP1570)("Guidance") has the potential to further empower the Federal Reserve to manage to address the regulatory 

overreach into the boardroom that has placed undue burdens on bank boards. 

Boards of directors continue to spend far too much time on matters that do not relate to their core functions to 

oversee management on behalf of shareholders. Although the proposed guidance purports to distinguish between 

the role of the board (one of oversight and guidance) and the role of management (day-to-day functions), it 

continues to inappropriately blur these lines by creating numerous new requirements that a board "ensure," 

~·establish/ 11approve/' 11Set," 11develop/' or "detail11 items that simply do not reflect a board's oversight of and 

guidance to management. As such, these terms would impose new legal and managerial requirements on a board 

that would have the board direct a bank holding company's daily business decisions. 

Additionally, the proposed guidance is overly prescriptive and does not seek to tailor the guidance to bank holding 

companies based on activities or size. Instead, it takes a granular ucheck the box" or "one-size-fits-all" approach in 

ordefforthe Federal Reserve to consider a board to be "effective." This is particularly problematic as the Federal 

Reserve attempts to regulate through the use of "examples" set forth in the proposed guidance. Realigning 

supervisory expectations for boards of directors is critical, nonetheless, just because a topic may relate to a core 

board function, for example the oversight of strategy, it does not necessitate that the Federal Reserve regulate these 

areas. The Federal Reserve cannot assume the legal duties of care and loyalty from an elected board of directors. 

This proposed guidance must not become another supervisory tool for examiners, who generally lack expertise in 

corporate governance, to demand additional obligations for boards. Shareholders elect a board to then appoint and 

oversee management to operate the business. 

The Federal Reserve must revise the proposed guidance to specifically acknowledge that there is no "one-size-fits-all" 

or "gold standard" approach to corporate governance and expressly allow boards of directors and management of 

bank holding companies the necessary discretion to operate in a manner they deem most appropriate given their 

business, structure and practices. 
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We appreciate your willingness to consider our comments. We expect that the Federal Reserve will improve the the 

proposed guidance so that upon its adoption those institutions that are subject to the Federal Reserve's oversight 

will have the legal clarity and certainty that smart regulation demands. Clear and specific guidance would reduce 

examiner discretion and prevent the micro management of private companies by the federal government. 

Sincerely, 

Subcommittee on Monetary Policy and Trade 

and Investment 

Chairman 

Subcommittee on Housing and Insurance 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Beatty: 

1. Governor Quarles, you dedicated a large part of your written testimony discussing 

efficiency and the efficiency of financial regulation at the Federal Reserve, including 

focusing on the most stringent of supervisory standards and practices on the riskiest firms. 

I represent the Third Congressional District of Ohio where we have two insurance 

companies that are supervised by the Federal Reserve, because they are insurance savings 

and loan holding companies. These two companies are some of only a handful of insurance 

companies who are regulated by the Federal Reserve due to the fact one of their 

subsidiaries is a depository institution. 

Recently, I joined with my colleague from Pennsylvania, Mr. Rothfus, to introduce 

legislation to provide some regulatory relief to these insurance companies from duplicative 

federal group-wide supervision by the Federal Reserve that our state insurance 

departments already regulate. This duplicative, bank-centric supervision and examination 

of these insurance companies does not appear to be efficient or reflect the actual risk these 

companies pose to the financial system. 

Have you and your team looked into this duplicative supervision framework at the Fed, 

and what are you doing to ensure that the Federal Reserve's rules and regulations are 

appropriate and proportional to risks these companies pose to the financial system? 

The Federal Reserve relies on state insurance regulators to supervise the business of insurance 

and does not conduct its own independent supervisory work on insurance activities. To avoid 

duplication and promote efficiency, Federal Reserve supervisors also meet regularly with each 

insurance savings and loan holding company's (ISLHC) state insurance regulator(s) to discuss 

any risks associated with insurance activities and whether they could affect the bank or the 

consolidated condition of the ISLHC. State insurance regulator documents, such as the Own 

Risk Solvency Assessment (and any accompanying state regulator analysis) and Insurer and 

Group Profile Summaries are used in the Federal Reserve's supervision. This allows the Federal 

Reserve to draw conclusions about the condition and performance of a company's insurance 

activities based on state reports and analysis rather than conducting its own analysis of these 

activities. In addition, the Federal Reserve tailors its consolidated supervisory approach to focus 

on areas outside of the business of insurance, including assessing an ISLHC's consolidated risk 

management framework, material non-insurance subsidiaries, and the potential impact the firm's 

nonbanking activities may have on its subsidiary insured depository institution. 

2. Throughout today's bearing, you have discussed the Federal Reserve's ongoing effort to 

streamline the Volcker rule. While I would certainly urge caution in your approach, I 

believe that one area ripe for review is the inequity in the market of requiring a small 

subset of insurance companies to comply with the rule, while most do not. As you know, the 

text of section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

requires that implementation oftbe Volcker rule appropriately accommodate the business 

of insurance. While many insurance companies are not subject to the Volcker rule, several 

smaller, less risky, less complex insurance companies are subject to it due to Federal 

Reserve group-wide supervision. I would urge the Federal Reserve to include examination 
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ofthe Volcker rule as it pertains to insurance companies regulated by the Federal Reserve 

aud adjust application of the rule to these companies to eliminate these inequities in the 

market. What are your views on this topic? 

Section !3 of the Bank Holding C~mpany Act (commonly referred to as the "Volcker Rule") 

applies by its terms to banking entities, the definition of which includes insured depository 

institutions and their affiliates. Accordingly, any insurance company that is affiliated with an 

insured depository institution would be deemed to be a banking entity under the Volcker Rule. 

However, the statute and the implementing regulations provide specific exemptions for the 

activities of regulated insurance companies. Under these exemptions, regulated insurance 

companies are generally exempt from the proprietary trading and covered fund restrictions of the 

Volcker Rule to the extent that these activities are conducted in compliance with the insurance 

laws and regulations of the state in which the insurance company is domiciled. Under the 

current statutory framework, the Board and other implementing agencies are unable to 

completely exclude from the application ofVolcker Rule insurance companies that are affiliated 

with banking entities. 

3. For being the global leader the in financial services industry, the United States has 

lagged behind many other countries when it comes to our payments systems, specifically 

with regards to the speed of those payments. Last year, the Federal Reserve's Faster 

Payments Task Force released recommendations for accelerating real time payments in the 

United States with the goal of reaching real time payments by 2020. Since taking office, 

what, if any, steps are being taken by the Federal Reserve to modernize our payments 

system to get to faster, real time payments? 

The Federal Reserve plays many roles in the payment system, including payment system 

operator, supervisor of financial institutions and systemically important financial market utilities, 

regulator, researcher, and catalyst for improvement. Acting primarily in its catalyst role, the 

Federal Reserve encouraged payments stakeholders to join together to improve the payment 

system in the United States in its "Strategies for Improving the U.S. Payment System" paper 

(Strategies Paper), issued in January 20!5. 1 The strategies outlined in the paper included the 

creation of task forces focused on faster payments and payment security, both of which have 

provided a forum for a diverse group of industry participants to collaborate on an ongoing basis 

since they were established in mid-2015. 

The Faster Payments Task Force (FPTF) had the mission to identifY and assess alternative 

approaches for implementing safe, ubiquitous, faster payments capabilities in the United States. 

In support of this mission, the FPTF created the Faster Payments Effectiveness Criteria to assess 

faster payments solutions and as a guide for innovation in the payments industry. 2 The FPTF 

also designed a process for which faster payment solution proposals could be submitted for 

assessment against these Effectiveness Criteria. 

1 Federal Reserve System, "Strategies for Improving the U.S. Payment System," January 26, 2015. Available at 

https://fedpaymentsimprovement.org/wp-contentluploads/strategies-improving-us-payment-system.pdf. 2 Faster Payments Task Force, "Faster Payments Effectiveness Criteria," January 2016. Available at 

https://fasterpaymentstaskforce.org/effectiveness-criteria-and-solution-proposals/. 
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The FPTF released the first part of its final report in January 2017. The second part of the final 

report, released in July 2017, reflected the FPTF's perspectives on challenges and opportunities 

with implementing faster payments in the United States, outlined its recommendations for next 

steps, and included the proposals and assessments for the 16 participants that opted to be 

included in the final report. 3 The FPTF recommendations identified the need for ongoing 

industry collaboration to address infrastructure gaps; to develop models for governance, rules 

and standards; and to consider actions and investments that will contribute to a healthy and 

sustainable payments ecosystem. A number of recommendations called for Federal Reserve 

support to facilitate this ongoing collaboration. 

The mission of the Secure Payments Task Force (SPTF) was to provide a forum for stakeholders 

to advise the Federal Reserve on payment security matters, and identify and promote actions that 

could be taken by payment system participants collectively or by the Federal Reserve System. 

The SPTF worked to advance understanding of the industry's most pressing paymerrt system 

security issues: identity management, data protection, and fraud and risk information sharing. 

The SPTF concluded its efforts in March 2018, following publication of its final delivcrables. 4 

Following up on the work of the task forces and other efforts to advance both the desired 

outcomes (focused on speed, security, efficiency, international payments, and collaboration) 

outlined in the Strategies Paper, the Federal Reserve published, in September 2017, a paper 

presenting refreshed strategies and tactics that the Federal Reserve is employing in collaboration 

with payment system stakeholders.5 

The Federal Reserve kicked off these refreshed strategies and tactics in the summer of2017 by 

facilitating the industry's work to address the FPTF recommendations related to governance, 

directories, rules, standards, and regulations. In addition, consistent with the FPTF 

recommendations, the Federal Reserve has been assessing the needs and gaps to enabling 

24x7x365 settlement in support of a future ubiquitous real-time retail payments environment. 

Further, the Federal Reserve has started to explore and assess the need, if any, for any other 

operational roles to support ubiquitous real-time retail payments. These efforts are being 

pursued in alignment with Federal Reserve policy on the provision of payment services. With 

respect to payment security, the Federal Reserve is conducting a secondary research review that 

is intended to understand more fully what data is available regarding payments fraud. 

4. Since assuming your role as Vice Chairman of Supervision, you have sought several 

changes to supervision and policy regulations within the Federal Reserve. In your 

testimony before this Committee you have made it clear that the Federal Reserve, in 

collaboration with the OCC and FDIC, will seek public comment on changes to the 

Community Reinvestment Act. 

3 Faster Payments Task Force, "Final Report Part One: The Faster Payments Task Force Approach," January 2017, 

and "Final Report Part Two: A Call to Action," July 2017. Available at https://fasterpaymentstaskforce.org/. 4 See, https://securepaymentstaskforce.org. 5 Federal Reserve System, "Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the 

Payments Improvement Journey," September 6, 2017. Available at https://fedpaymentsimprovementorg/wpcontent/uploads/next-step-payments-joumey.pdf. 
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Section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, 

specifically section 342(b)(3), requires each Director of the Office of Minority and Women 

Inclusion (OMWI) to advise the agency administrator on the impact of the policies and 

regulations of the agency on minority-owned and women-owned businesses. 

a. Pursuant to this section, have you met with the Federal Reserve's OMWI Director? 

b. Have you met with, or received input from, the Federal Reserve's OMWI Director in 

preparation of publicizing your joint proposal to modernize the Community Reinvestment 

Act? 

If so, what was the nature of those conversations? 

If not, do you plan to meet with your Director before you release your joint proposal? 

c. Have you met with, or received input from, the Federal Reserve's OMWI Director 

regarding any changes in policy you have made since assuming your role as Vice Chairman 

of Supervision? 

If so, please list those topics of discussion and a short explanation of those explanations? 

If not, please provide a legal justification for non-compliance with this legally-mandated 

requirement? 

In addition to the Director of the Office of Minority and Women Inclusion (OMWI) reporting to 

our Chairman, I too am available to meet and discuss cultivating diversity and inclusion in all 

aspects of employment and to be informed and apprised on the impact of the supervision policies 

and regulations on the communities we serve. 

The OMWI Director and the Deputy Director for Policy in the Supervision and Regulation 

Division also have established a process and schedule to meet and discuss regulations to 

ascertain potential impact on women, minorities and underserved communities. The OMWI 

Director also participates with Division Directors, senior staff, and Board Members in an internal 

work stream at the Board established to coordinate economic inclusion and diversity efforts. The 

group focuses on initiatives not just at the Board, but also more broadly throughout the Federal 

Reserve System. Board Members meet regularly with the staff to discuss initiatives and 

progress. 

With regard to the Community Reinvestment Act (CRA), Board staff is continuing to analyze the 

recommendations made by the Department of the Treasury. I share the Treasury Department's 

goal of improving the current supervisory and regulatory framework for the CRA based on 

feedback from industry and community stakeholders. The Board is open to considering ways to 

make the CRA more effective and believes there are ways to expand the area where we evaluate 

a bank's CRA performance without losing the regulation's focus on the unique role banks play in 

meeting local credit needs. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the .FederalReserve System from Representative Budd: 

1. Thank you again for your recent testimony, Governor Quarles. Your insights, 

thoughtful comments, and responsiveness were much appreciated. 

I wanted to follow up and ask some additional questions along the same line of discussion 

we had during your testimony. 

As I mentioned at the bearing, Chairman Powell and I recently corresponded about the 

recent developments at the International Association oflnsurance Supervisors (IAIS) and 

the International Capital Standard (ICS) that is currently under development. In this 

correspondence, I asked: 

" ..• why is it necessary to develop a new international capital standard for a small group of 

internationally active insurance groups?" 

Chairman Powell responded: 

" .•. the ICS, if done in an appropriate way that is implementable in the U.S., can limit 

regulatory arbitrage and help provide a level playing field for U.S. firms that are IAIG and 

operate globally." 

While I appreciate the Chairman's response and attempt to provide a rationale for the 

ongoing work on an ICS by the IAIS, I am deeply concerned that the stated goals of 

limiting "regulatory arbitrage" and providing "a level playing field" are just examples of 

vague regulatory jargon, used by the IAIS, without any real evidence that these dangers 

exist today in the global insurance markets. I realize you did not send me Chairman 

Powell's response, but I assume you and the Chairman work closely together on important 

matters such as this. Also, you sited a number of times that ensuring a level playing field 

internationally was a goal of yours for international standard setting. I would like to 

develop a better understanding of these two rationales and why a new global capital rule 

for the insurance industry will address these issues in a satisfactory way. 

Provide a Level Playing .Field 

Every U.S.-based insurer that I have spoken to about the ICS has informed me that the 

"level playing field" rationale is actually what the European-based insurers and regulators 

usc to justify the ICS because they don't like their costly and burdensome new solvency 

rules (Solvency II) and leveling the playing field means, to them, imposing Solvency II or its 

look alike- the ICS---nn US insurers and the rest of the world. As Dr. Adam Posen of the 

Peterson Institute testified at a Senate Banking Committee bearing in July of 2015: 

"Right now, the biggest mistake the .FSB is making in this regard is in the attempt to 

extend Solvency II, the European Commission's regulation for insurance firms, to global 

application ... Insurers certainly need regulation and supervision, including clear 

capitalization to meet their policyholders' expected payouts. But almost every jurisdiction, 
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and certainly the US states, already provides such pure protective supervision ... The 

insurers in Europe for the most part rightly hate it, but since it seems inevitable to be 

imposed on them, they have given np fighting Solvency II, and instead back using the FSB 

to impose it on the US, Japanese, and other competing insurers. They figure if they will be 

limited, they want to be sure their global competitors are as well. The US needs to stand up 

against this in the FSB." 

Why would we want to complete a European-centric ICS like the one currently envisioned 

under the Kula Lumpur Agreement that will make U.S. insurers less competitive with their 

European competitors? 

Are Federal Reserve participants at the IAIS agreeing to construct a new capital 

requirement for U.S. insurers in order to impose new burdens on US insurers to "level the 

playing field"? What evidence is there that this is necessary from a solvency regulation 

standpoint? Further, why would we be doing that without ensuring the Europeans create a 

new insurance consumer protection regime and policyholder guarantee system to mirror 

the robust U.S. state-based approach to consumer protection and resolutionirecovery? 

As a member of the International Association ofinsurance Supervisors (IAIS), the Federal 

Reserve, in partnership with the National Association of Insurance Commissioners and the 

Federal Insurance Office, remains committed to pursuing an engaged dialogue to achieve 

outcomes on international standards that are appropriate for U.S. firms, U.S. consumers, and the 

U.S. market. 

In the absence of appropriate international standards, non-U.S. firms may derive competitive 

advantages relative to U.S. firms based on local standards or may take advantage of such 

standards in accepting risk from U.S. counterparties. With regard to the Insurance Capital 

Standard (ICS) being developed through the IAIS, I completely agree with you that-- in order 

for it to be implementable --it cannot be unsuited or inappropriate for the U.S., the world's 

largest insurance market. 

Among other things, this motivates our advocacy of an aggregation alternative and the use of 

Generally Accepted Accounting Principles-plus in the ICS being developed through the IAIS. 

Through field testing and monitoring, we may be able to further advocate that an aggregation 

method, applied in accordance with U.S. law, provides comparable outcomes to the ICS that is 

emerging from the IAIS. 

The Federal Reserve continues to consider the inclusion of an aggregation alternative to be 

important to an ICS that is acceptable and implementable in the U.S. It is also important to recall 

that the IAIS does not have the ability to impose requirements on any national jurisdiction, and 

any standards developed through these fora are not self-executing or binding on the U.S., unless 

adopted by the appropriate U.S. lawmakers or regulators in accordance with applicable domestic 

laws and rulemaking procedures. 

2. Limit Regulatory Arbitrage: 
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Similarly, I am concerned about the assertion that the ICS is needed to combat regulatory 

arbitrage. I would greatly appreciate it if you could provide me with examples during (or 

since) the recent financial crisis where a large global insurance company chose to locate 

itself in a country based on the capital 1·equirements of that country and then collapsed and 

spread financial contagion into the U.S. fmancial system based on this risk? 

When you examine the largest insurance markets in the world --where the IAIGs are 

located-- and their insurance regulatory systems- specifically the U.S., EU, Japan, 

Switzerland, and Bermuda- do you see a major danger of regulatory arbitrage? If there is 

a problem with one of those jurisdictions, this seems to be an issue to be addressed in 

supervisory colleges, via the FSAP reviews of regulatory jurisdictions or other regulatory 

tools, not by a one-size-fits-all group capital standard. 

During your testimony, you stated to me that you believed the U.S. state-based system of 

insurance regulation provided a solvent U.S. insurance system. Given that, could you 

please provide me a specific, hypothetical example of how an insurance entity could 

conduct "regulatory arbitrage" without an International Capital Standard and put U.S. 

taxpayers and consumers at risk? 

If we do not need to "level the playing field" for U.S. insurers with an ICS for the reasons 

listed above AND if the argument to "limit regulatory arbitrage" is the red herring it 

appears to be AND if the current state-based solvency regime has ensured sound and 

solvent U.S. insurance companies; then please explain to me why we are working on an ICS 

in the first place? What specific problem are we trying to solve for'? What specific benefits 

will U.S. insurers receive? Doesn't this whole process likely entail more harm than good 

for U.S. insurance policyholders and U.S. insurance industry? 

As noted in the answer to question 1 above, we are not participating in the IAIS to level the 

playing field by imposing a European-style capital standard on U.S. firms, but rather to level the 

playing field by seeking to ensure that a U.S.-appropriate alternative is included in the capital 

recommendations being discussed there. If we ignore these discussions, they will proceed 

without us, and could result in global agreements being reached that disadvantage our companies 

(one possibility if we withdrew, for example, would be other jurisdictions requiring that US 

firms operating in those jurisdictions comply with capital standards that those U.S. firms would 

have had no say in developing, and with which they could not comply, potentially making it 

more costly for U.S. firms to compete abroad). The better altemative is to engage in these 

discussions to vigorously defend U.S. interests by seeking an altemative capital standard based 

on the aggregation method that would be suitable for U.S. firms. As also noted above, these 

discussions are not treaty negotiations and do not lead to any enforceable obligations on any 

country, including the United States. 

3. Kuala Lumpur 

One of the reasons there is so much concern regarding where the ICS is beaded is because 

of the IAIS Kuala Lumpur Agreement in November of last year. In that agreement, 

"Team USA" agreed that the ICS (known as "the reference ICS") would (1) be a 
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prescribed capital requirement (PCR) and (2) use the European-centric accounting 

methodology of market-adjusted valuation (MA V). 

US State Insurance Commissioners are now developing a group capital assessment tool (the 

Group Capital Calculation- GCC) that is directly at odds with the two key attributes 

agreed to in Kuala Lumpur. First, the GCC will be an assessment tool- that is, part of the 

toolkit a US regulator uses to evaluate groups. The GCC will not be a capital target or 

requirement. Second, the GCC will be based off US accounting principles- and not MA V. 

The KL Agreement pays lip service to the possibility that the US GCC could be deemed 

"an outcome-equivalent approach for implementation of ICS as a PCR" -but given the 

very different approaches- that does not seem even theoretically possible. 

Moreover, your predecessor, Governor Daniel Tarullo, stated in a speech at the National 

Association of Insurance Commissioner's International Insurance Forum on May 20,2016: 

"There are, as all of you know, a lot of ideas out there as to how we should construct the 

capital requirements we will apply to btsurance companies. Some, such as variations on the 

Solvency II approach used in the European Union, strike us as unpromising. The valuation 

frameworks for insurance liabilities adopted in Solvency II differ starkly from U.S. GAAP 

and may introduce excessive volatility. Such an approach would also be inconsistent with 

our strong preference for building a predominantly standardized risk-based capital rule 

that enables comparisons across firms without excessive reliance on internal models. 

Finally, it appears that Solvency II could be quite pro-cyclical." 

Do you share this assessment of your predecessor? If so, why did the Federal Reserve staff 

participating in the Kuala Lumpur negotiations agree to accede to the Europeans at the 

IAIS to mandate that the financial reporting for the reference ICS be done using a 

Solvency II MA V -type approach and not something more suitable for the U.S. insurance 

industry like GAAP or Statutory accounting? If you do agree with Governor Tarullo that 

a Solvency II accounting approach introduces excessive volatility into U.S. insurance 

markets, how do you plan on remedying this at the next IAIS negotiations on ICS? 

Please explain how you will ensure the US approach (GCC) is deemed as satisfying the 

eventual ICS given that the only conceivable outcome that could work for the U.S. 

insurance industry is to have our system recognized as satisfying the eventual f"mished ICS. 

As I continue to see the work product from the IAIS and the increasingly potential negative 

outcome it can have for the U.S. insurance industry, I am reminded of the quote, "Don't 

cling to a mistake just because you spent a lot of time making it." Seems like this advice 

might also be apt for the IAIS in regard to the ICS. 

Additional Questions: 

The cornerstone of the November Kuala Lumpur agreement by the IAIS, seeking an 

international capital standard, is the Market-Adjusted Valuation (MA V). The MAVis 

wholly inconsistent with GAAP and Statutory Accounting Principles (SAP) used by all 50 

states in regulating the business of insurance. Given the likely de-designation of Prudential 

as the only remaining SIFI, how do you reconcile the inconsistencies of MA V with the 

Building Block Approach as applied to 1-SLHCs-many of which only utilize SAP? 
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The Insurance Capital Standards Clarification Act of2014 prohibits the Federal Reserve 

from requiring certain SAP-only 1-SLHCS companies to use GAAP. How do you reconcile 

this statutory prohibition with the IAIS's demand forMA V? Do you believe the Fed can 

mandate I-SLHCs to use MAV, notwithstanding the GAAP prohibition? 

The IAIS does not have any authority to impose enforceable obligations on U.S. insurance firms, 

and therefore no outcome of these discussions could result in an application of any capital 

standard to U.S. insurance firms that is inconsistent with U.S. statutory prohibitions. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Delaney: 

1. In a recent speech you noted that, "The fundamental premise of the Volcker rule is 

simple: banks with access to the federal safety net--Federal Deposit Insurance Corporation 

insurance and the Federal Reserve discount window--should not engage in risky, 

speculative trading for their own account." Or to put it another way, the Volcker Rule is 

intended to limit banks from using subsidized funds from getting so big that their 

speculative trading creates the hazard of systemic risk to our banking system - a point I 

wholeheartedly agree with. 

You have also been very public in your beliefthat the Federal Reserve and the other 

regulators tasked with implementing the Volcker Rule need to revisit the rule to reduce its 

complexity. With that in mind, I wanted to raise one point as it relates to the free flow of 

capital. 

In today's modern banking system, we are seeing a growing number of firms looking at 

different avenues to serve their customers with traditional banking products, including 

through bank-fintech partnerships or an industrial loan company charter, both of which 

have an element of deposit insurance and thus have restrictions related to the Volcker 

Rule. At the end of the day, I believe you and I share the goal of ensuring depository 

institutions are run in a responsible manner that does not put the Deposit Insurance Fund 

at risk, and I am confident that the FDIC will take whatever steps necessary to ensure that 

remains the case. However, I have been made aware of circumstances where the Volcker 

Rule could restrict the availability of equity capital and certain investment activities 

unrelated to the insured depository institution. 

Is this something you are also aware of, and do you anticipate addressing this type of 

issue in your future rulemaking related to the Volcker Rule? 

Section 13 of the Bank Holding Company Act (commonly refen-ed to as the "Volcker Rule") 

applies by its tenus to banking entities, the definition of which includes insured depository 

institutions and their affiliates. Accordingly, the Volcker Rule's restrictions cover certain 

entities, such as non-bank subsidiaries of bank holding companies, which are not insured by the 

Federal Deposit Insurance Corporation, but which are affiliated with insured depository 

institutions. The Federal Reserve Board (Board) and other implementing agencies recently 

issued a notice of proposed rulemaking that would make changes intended to streamline and 

simplifY the requirements of the implementing regulation. Some of these proposed changes are 

expected to improve the ability of banking entities to provide market liquidity and facilitate 

capital fonnation consistent with the requirements of the statute. 

Given the complex:ity of the Volcker Rule, are you committed to having Federal Reserve 

staff, as appropriate, engage directly with companies that may have unique 

circumstances related to Volcker Rule in order to assist those companies with 

understanding their obligations under the rule? 
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Board staff regularly engage with fums with respect to unique circumstances that come up 

related to the application of the Volcker Rule to various aspects of their businesses. I am 

committed to ensuring that this process continues, and to ensuring that Board staff provides as 

much clarity and transparency as possible so that firms can operate with certainty that their 

activities are consistent with their obligations under the mle. 

In the Fed's planned future rulemaki:ng on Volcker, do you intend to have an open and 

transparent rulemaking process and duly consider all submitted comments? 

Yes. The agencies recently issued a joint notice of proposed rulemaki:ng that would revise the 

Volcker Rule implementing regulation. The Board and the other agencies are requesting public 

comment on the proposed 1ule and will carefully consider all comments. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Hultgren: 

1. During your testimony before the Committee, I asked you about malting changes to the 

Current Exposure Method (CEM) to acknowledge the concept of delta-weighting for 

certain derivatives. As Chairman Powell noted last year, the CEM "ignores whether a 

derivative is margined and undervalues netting benefits." The CEM is insensitive to risk so 

its mandatory use artificially caps market liquidity, particularly in large-cap index options, 

which are cmcial hedging vehicles. You responded that rulemahlng, presumably to 

implement the Standardized Approach for Counterparty Credit Risk (SACCR), would be 

the appropriate course to address the issue that you acknowledged is damaging liquidity in 

our derivatives markets. As I mentioned during your testimony, the Treasury 

Department's October 2018 Report on Capital Markets calls for a "near-term" solution. 

1. Does the Federal Reserve Board have authority to address this issue through 

Exemptive Relief, Interpretive Relief, or an Interim Final Role? 

2. If so, why hasn't the Federal Reserve Board taken action to address this pressing 

issue? The implementation timeframe for SACCR is unclear; some observers 

estimate that it could be three of four years until it is finalized in the United States 

given the myriad of topics it proposes to address. 

3. Can we expect the Federal Reserve Board to pursue Exemptive Relief, Interpretive 

Relief, or an Interim Final Rule to address the issue? If so, please provide a 

reasonable deadline for advising the public of your intention to take such action. 

The Federal Reserve Board (Board) has reviewed the capital rule in order to detemune whether 

there are opportunities for inte~pretive relief or other near-term solutions to address the concems 

raised in your question and by market participants. The primary means of near-term relief 

identified by the Board would be to exercise its reservation of authority under the mle to provide 

an alternative risk-weighted asset amount for particular types of exposures, such as listed 

options. However, the Board can exercise the reservation of authority only on a case-by-case 

basis for an individual banking organization that requests such a treatment. Addressing the 

treatment of only a subset of derivative products such as large-cap index options through the 

reservation of authority would result in disparate treatment under the mle an10ng de1ivative 

products that present similar risks and, potentially, among banking organizations. 

Due to these concems, the Board's prefened approach to address the concerns raised regarding 

the cunent exposure method (CEM) is to revise the capitalmle to inco~porate Standardized 

Approach for Counte~party Credit Risk (SA-CCR). SA-CCR, as compared to CEM, would 

allow for increased recognition of netting and margin and results in a more risk-sensitive 

exposure amount for listed option contracts. The rule making process would allow a wide 

variety of market participants to consider the potential impact of SA-CCR and would open the 

way for its potential benefits to apply to a wide range of derivative products. Accordingly, the 

Board is working expeditiously to implement SA-CCR in the United States. Our aim is to issue 

a SA-CCR proposal for public comment, jointly with the Federal Deposit Insurance Corporation 

(FDIC) and the Office of the Comptroller of the Currency (OCC), as soon as feasible. 
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2. Custodial banks, which provide safekeeping and related services to pension funds, 

mutual funds, endowments, and other institutional investors, have engaged in substantial 

dialogue with the Federal Reserve in recent years to develop a new standardized capital 

methodology for agency securities lending services provided to clients. These discussions 

have led to the inclusion of technical changes to these capital rules in the finalization of the 

Basel Committee's post-crisis capital refonns agreed to by the Federal Reserve in 

December, 2017. 

!. When does the Federal Reserve plan to adopt these technical changes to the capital 

rules for securities financing transactions? 

2. Is there an opportunity for the Federal Reserve to propose rules to implement these 

technical changes, and perhaps others, separately and ahead of its longer range plan 

to solicit public input on the broader and more substantive capital changes later this 

year through the Advanced Notice of Proposed Rulemaking (ANPR) process? 

As noted, Board staff, in coordination with the other federal banking agencies, is evaluating this 

new standard as well as other standards adopted by the Basel Committee. The revised treatment 

of securities financing transactions adopted by the Basel Couunittee in December 2017 is 

meaningfully different from the cun·ent treatment in the Board's capital rules. Accordingly, it is 

unlikely that these changes could be addressed through a technical rulemaking. 

3. As you know, one of the perennial problems in bank supervision is how policymakers in 

Washington, like yourself, ensure that their decisions are faithfully executed in the fieldin this case, by your examiners. As you know, a lot can be "lost in translation" as we've 

learned over the years. It seems to me that this is a key management challenge for you in 

your current position. 

L Is there any evidence to suggest that examiners are not faithfully executing the 

policies established by the Federal Reserve? 

It is very impo1iant that we communicate consistent messages to our examiners and to the banks 

we supervise. Our examiners, who are on the fi·ont lines of delive1ing supervisory messages to 

the finns we supervise, are committed to public service, and are faced with making tough calls 

every day. We at the Board have a responsibility to ensure that we provide them enough 

guidance that they can make those calls without micromanaging a bank's business decisions. 

When we implement new regulations, guidance or supervisory practices, we conduct training 

though webinars or teleconferences to explain the new policies and practices to examiners. 

Board staff, who have drafted the regulation, guidance, or practices, will typically lead the 

training to ensure consistent messaging. We also incorporate these new policies and practices 

into our examiner commissioning training programs for bank examiners. As examiners 

implement new policies through the examination process, exam findings are carefully vetted to 

make sure they are consistent with the new policies. We also communicate regularly with senior 

leaders at the Reserve Banks to provide clear messages fi·om the Board and to understand 

challenges they may be facing on the ground as they implement the policies and practices that 

are set here in Washington. 
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I do not cunently have evidence that would suggest examiners are not diligent in executing 

Federal Reserve policies, but I fully agree with you that preventing gaps from developing 

between the policy of the Board, on the one hand, and supervisory practice in the field, on the 

other, will be a continuing challenge and one on which I am very focused. As mentioned above, 

the Board uses various communication mechanisms, including W1itten guidance, System calls, 

and portfolio management group meetings, to clarify expectations for policy implementation and 

execution. The Board also has a formal process for overseeing the supervision activities of the 

twelve Federal Reserve Banks (Reserve Bank). Through ongoing monitoring and Reserve Bankor topic-specific reviews, the Board is able to identify situations where a Reserve Bank may not 

be effectively executing policies established by the Board and would recommend conective 

action. 

2. If so, what steps do you plan to make to oversee cxam.iners to ensure they are 

following the policies established by the Federal Reserve? 

By statute, the Board is responsible for overseeing the supervision activities of the twelve 

Reserve Banks, including assessing how well Reserve Banks execute the supervisory authority 

delegated to them by the Board under 12 U.S.C. §248. 

The Board has several oversight mechanisms designed to ensure that examiners are effectively 

applying supervisory policies, rules and guidance. 

At least annually, in accordance with the Federal Reserve Act and U.S. Banking Code, the Board 

provides an assessment of each Reserve Bank's perfotmance. The assessment incorporates 

results from ongoing monitoring of the Reserve Banks, horizontal reviews, and triennial 

operations reviews. The Reserve Banks are evaluated on the effectiveness and efficiency of their 

supervisory programs, their applications processes (e.g. mergers and acquisitions), as well as 

their support programs (e.g. infotmation technology, training). 

Apart from the Reserve Bank oversight process, Board staff also ensure adherence to our 

guidance, rules and regulations, through regular and ongoing consultation with Reserve Bank 

staff. Board staff regularly review Reserve Bank work products and provide program direction 

with the objective of promoting consistency in our supervisory approach around the 

Federal Reserve System. 

To further promote consistency, the Board provides examiner training and commissioning 

programs along with continuing professional development opportunities on a variety of topics 

including emerging issues. 

4. You have noted that the metrics to identify internationally active banks- such as $250 

billion in total assets or $10 billion in on-balance sheet foreign exposures- were formulated 

well over a decade ago and have not been refined since then. Yet the $10 billion on balance 

sheet foreign exposure threshold triggers the application of the "advanced approaches" 

methodology for calculating a Bank Holding Company's capital requirement in addition to 

the standardized approach, more stringent single party credit limit requirements, and 

higher Liquidity Coverage Ratio (LCR) requirements. 
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1. When will the Fed revisit the Basel Committee's "advanced approaches" thresholds 

that identify internationally active banks? 

2. Will the Fed bring these criteria into better alignment with your objectives to tailor 

supervision and regulation to the size, systemic footprint, risk profile, and business 

model of banking firms? 

The advanced approaches threshold was established on an interagency basis with the FDIC and 

OCC, and is relevant for multiple elements of the Board's regulatory framework, including 

capital requirements, the liquidity coverage ratio rule, and related repmiing requirements. The 

Board believes that capital and other pmdential requirements for large banking organizations 

should be set at a level that protects financial stability and maximizes long-term, through-thecycle credit availability and economic growth. At the same time, the Board recognizes that 

prudential requirements should be tailored to the size, risk, and complexity of the firms subject to 

those requirements and is considering ways to adjust its regulations that will simplify rules and 

reduce unnecessary regulatory burdens without compromising safety and soundness. We are 

currently considering ways to better align the advanced approaches threshold with this objective, 

which could include changing both the total asset and foreign exposure thresholds, and would 

take into account the recently enacted Economic Growth, Regulatory Relief, and Consumer 

Protection Act as part of this evaluation. Any proposed changes to the thresholds would be 

issued for public notice and comment after consultation in coordination with the FDIC and OCC. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Luetkemeyer: 

l. The National Institute of Standards and Technology (NIST) recently released its 

Cybersecurity Framework Version 1.1, after consulting numerous experts in private 

industry and government. Financial services firms have told us that this work is the state of 

the art, and are concerned that they will now have to spend vast amounts of time mapping 

how compliance with NIST 1.1 satisfies the reams of guidance, handbooks and informal 

mandates that the banking agencies have issued over the years. Is this an appropriate time 

for the Federal Reserve and the other agencies to do a zero-based review, and seek public 

comment on whether any agency standards in addition to NIST 1.1 are necessary? 

The Federal Reserve Board (Board) is committed to aligning our guidance to the National 

Institute of Standards and Technology Cybersecurity Framework Version 1.1 (N1ST 1.1) as part 

of our efforts to reduce potential regulatory burden. NIST 1.1 was published on April 16,2018, 

and the Federal Reserve is considering changes to our guidance as appropriate. In addition, the 

Federal Reserve is working with other regulatory agencies to streamline and harmonize existing 

cybersecurity guidance across the financial sector in a manner that aligns with the NIST 

Cybersecurity Framework. 

For example, through the Financial and Banking Information Infrastructure Committee, the 

Federal Reserve, the Commodity Futures Trading Commission, the Federal Deposit Insurance 

Corporation (FDIC), the Office of the Comptroller of the Currency (OCC), and the Securities 

and Exchange Commission are engaged in a cybersecurity regulatory harmonization effort 

designed to identify opportunities to further coordinate cyber risk supervisory activities for firms 

subject to the authority of multiple regulators. 

The Federal Reserve also works through the Federal Financial Institutions Examination Council 

(FFIEC), which includes the FDIC, OCC, the National Credit Union Administration and the 

Consumer Financial Protection Bureau, to promote uniformity in the supervision of financial 

institutions, including supervisory assessments related to cybersecurity, and to execute 

examinations in a manner that is consistent across entities supervised by FFIEC member 

agencies. 

2. During the course of the hearing, Chairman Hensarling asked whether Federal Reserve 

staff had the legal authority to participate in bank board meetings. Please provide an 

answer to whether or not any Federal Reserve staff have such authority and, if 

appropriate, the mechanism by which that authority is derived. Have Federal Reserve 

staff in the past or do any Federal Reserve staff currently participate in bank board 

meetings? 

The Federal Reserve Board (Board) is responsible for examining state member banks and bank 

holding companies to ensure that they are operated in a safe and sound manner. The Board's 

supervisory examinations evaluate a broad set of quantitative and qualitative factors to identifY 
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material risks to the safety and soundness ofthe examined institution and the financial stability 

of the United States. 1 

When an examination is complete, Board examiners may attend certain board meetings, or 

portions of meetings, to present the supervisors' examination findings and to allow for the 

exchange of information. A dialogue between examiners and boards of directors is part of the 

normal interactive supervisory process, and often serves as an opportunity to ensure that the 

entire board of a banking organization is aware of any supervisory concerns. When I have 

served on boards in the past, I have generally wanted the opportunity to hear directly from the 

bank's supervisors concerning their sentiment of an institution's condition. The Board views 

boards of directors as critical players in supporting the safety and soundness of their institutions 

and promoting compliance with laws and regulations. The Board's bank holding company rating 

system (also called the "RFI rating system") provides the frarnework2 for communicating 

supervisory findings to the institution. 

The RFI rating system also provides the framework for assessing a bank holding company's 

overall managerial condition, which is captured under the rating system's risk management 

component. To conduct the risk management component of the RFI rating system, Board 

examiners may from time to time attend portions of boards of directors meetings. Risk 

management examinations generally assess the ability of the bank holding company's board of 

directors to identify, measure, monitor, and control risk, and evaluates the adequacy and 

effectiveness of the board's understanding and management of risk inherent in the bank holding 

company's activities, as well as the general capabilities of management. 

In exercising its general examination authority for state member banks 3

, the Board uses the 

Uniform Financial Institutions Rating System (UFJRS). Under UFIRS, which is also used by the 

Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation, a 

supervisory assessment of management is made, which generally considers the capability of the 

board of directors and management, in their respective roles, to identify, measure, monitor, and 

control the risks of a bank's activities and to ensure a bank's safe, sound, and efficient operation 

in compliance with applicable laws and regulations. 

1 Section 5(c)(2)(A) of the Bank Holding Company Act (12 U.S.C. 1844(c)(2)(A)) and section JO(b)(4)(A) of the 

Home Owners' Loan Act(l2 U.S.C. 1467a(b)(4)(A)) authorize the Federal Reserve to write rules to conduct 

examinations of bank holding companies (BHCs) and savings and loan holding companies (SLHCs), respectively, 

to assess the financial, operational and other risks that may pose a threat to the safety and soundness of the 

company, its subsidiaries, or to U.S. financial stability. 2 SR Letter 04-18, Bank Holding Company Rating System, at 

https:/ /www .federalreserve.gov lboarddocs/srletters/2004/sr0418.httn. 3 Section 9(7) of the Federal Reserve Act (12 U.S.C. 325.) requires, as a condition of membership in the Federal 

Reserve System, that state member banks to be subject to examinations by the Federal Reserve. 
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Consistent with the above, it would not generally be appropriate for examiners or other 

supervisory personnel to insist on being present during an entire board meeting or at every board 

meeting or to routinely participate in the deliberations of a board of directors. 

3. The availability of cleared markets for end-users like farmers and manufacturers is 

being discouraged by the lack of an off-set for client margin in the supplemental leverage 

ratio. How do you propose to deal with this issue specifically? 

The Board is carefully evaluating its regulatory capital framework to ensure that its post-crisis 

regulations do not create unintended consequences and do not create undue regulatory burden, 

including for the provision of central clearing services. In 2017, the Board and the federal 

banking agencies issued supervisory guidance on the treatment of certain centrally-cleared trades 

that are conducted under a new settle-to-market model, which has provided regulatory capital 

relief for certain trades. The Board also is actively engaged with the domestic and international 

standard-setters in discussing the impact of the regulatory capital rules, including the 

supplementary leverage ratio, on the provision of the central clearing services. In April of2018, 

the Board and OCC issued a proposal that would recalibrate the enhanced supplementary 

leverage ratio ( eSLR) standards to further tailor leverage ratio requirements to the business 

activities and risk profiles ofthe largest domestic firms. The proposed recalibration may provide 

firms with additional flexibility to reallocate some of their regulatory capital to central clearing 

and other business lines if they choose to do so. In addition, the Board is participating in a 

review of the impact of the leverage ratio on clearing services being conducted at the Basel 

Committee on Banking Supervision (BCBS). 

4. The Federal Reserve proposal to reduce the enhanced supplementary leverage ratio 

impacts only the nation's 8largest banks. What additional steps will you take to encourage 

other banks to return to providing clearing services and thus improve competition in the 

cleared markets? 

As noted in the response to question 3, the Board is participating in the BCBS leverage ratio 

monitoring exercise to address potential unintended consequences of the leverage ratio on client 

clearing. The exercise is focused on monitoring the impact of the leverage ratio's treatment of 

client cleared derivative transactions and reviewing the impact of the leverage ratio on banks' 

provision of clearing services and its effect on central counterparty clearing. The review 

involves surveying client clearing market participants to understand the impact of the leverage 

ratio on incentives to centrally clear over-the-counter derivatives. 

5. Since 2008, policymakers and regulators have determined that cleared markets improve 

the safety of the financial system as a whole as well as safety for customers. How does your 

proposal to reduce the enhanced supplementary leverage ratio improve incentives to clear 

when the exposure reducing nature of initial client margin is still not recognized? 

The purpose of the eSLR proposal is to recalibrate the Board's capital standards for banking 

organizations such that the ratio generally serves as a backstop to risk -based capital requirements 

and not as a binding constraint. Over the past few years, concerns have arisen that, in certain 

cases, the supplementary leverage ratio has become a generally binding constraint rather than a 

backstop to the risk-based requirements. Thus, under the eSLR proposal, a clearing-focused firm 
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may have additional capacity to engage in centrally cleared transactions. We recognize that the 

treatment of initial client margin is an additional question to address and we are doing so through 

the mechanisms described in questions 3 and 4 above. 

6. If the enhanced supplementary leverage ratio proposal is finalized, the U.S. will be more 

in line with the global standard on its calibration. However, the European Union is in the 

process of recognizing client initial margin by providing an offset under the leverage ratio. 

Until the time the U.S. provides such an offset, European banks continue to have a 

competitive advantage over U.S. banks. Do you plan to take steps to look at providing U.S. 

banks such an offset for client initial margin? 

As noted in the response to questions 3 and 4, the Board is participating in the BCBS leverage 

ratio monitoring exercise. The results of that exercise would in part inform any additional 

adjustments to the leverage ratio that we would consider. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Rothfus: 

1. Mr. Quarles, thank you for your thoughtful response to my questions regarding the 

supervision of insurance savings and loan holding companies ("ISLHCs"). I appreciate 

your commitment to resolving this issue your sense of urgency around it. As you know, 

currently the Federal Reserve Board treats ISLHCs over $50 billion as "large banking 

organizations" under SR 12-17. This has led to an inappropriate, bank-like supervisory 

regime that is disproportionate to the risk to the taxpayers posed by these institutions. Will 

you immediately suspend SR 12-17 while you are undertaking your important review of the 

supervisory regime for ISLHCs? 

Our principal supervisory objectives for insurance savings and loan holding companies 

(ISLHCs), reflecting a baseline of consolidated supervision that accompanies insmed bank 

ownership, include protecting the safety and soundness of the consolidated firms and their 

subsidiary depository institutions, which serves to safeguard the taxpayer-backed federal safety 

net. In applying our consolidated supervision, we should work to ensure that rules, supervisory 

guidance, and expectations are appropliately tailored to account for the unique complexities and 

characteristics ofiSLHCs. We remain committed to tailoring our supervision ofiSLHCs to the 

firms and their insmance operations, as well as conducting our consolidated supervision of these 

firms in coordination with state insurance regulators. 

The framework set forth in Supervision and Regulation Letter 12-17 (SR 12-17) is designed to 

be general and flexible enough to be applied to large fmancial institutions supervised by the 

Federal Reserve Board, as well as support a tailored supervisory approach that accounts for the 

unique risk characteristics of each firm. I believe we can make better use of the flexibility 

permitted in SR 12-17 to tailor om supervisory program for ISLHCs to each finn's size, 

structure, risk profile, and business model as well as the size and scale of banking and other noninsurance activities. The Federal Reserve also seeks to protect the subsidiary insured depository 

institution (IDI) from risks related to nonbanking activities, including insurance, as well as 

intercompany transactions between the parent and IDI to ensure thatthe IDI is not adversely 

affected. To avoid duplication, we also rely on the state insurance depa1tments to the greatest 

extent possible, including their supervision of the business of insurance. 

In applying SR 12-17 while we further tailor our supervisory framework (including, as relevant, 

SR 12-17), we will review and adjust our supervisory expectations to ensure that they are 

appropriate for the ISLHCs' business models and structures. We remain committed to tailoring 

our approach to supervising ISLHCs and welcome feedback on ways we can improve our 

supervision. 

2. Recently, there has been interest both domestically and internationally in developing an 

"activities-based approach" (ABA) to regulating systemic risk in the insurance industry. 

Such an appmach, if not properly tailored, could result in significant, unwarranted 

regulation that will make it harder for Americans to obtain affordable financial security 

products. To ensure that such an approach does not result in overregulation, do you believe 

that an ABA should look broader than an insurer's activities in isolation and consider 
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whether an insurer's activities are also sufficiently connected to the larger financial 

markets so that they could actually increase systemic risk? 

It is impmiant for an activities-based approach to look broader than a firm's activities in isolation 

and take into account the firm's activities in relation to the wider economy. The Federal Reserve 

aims to promote financial stability through, among other things, working with domestic agencies 

directly and through the Financial Stability Oversight Council (FSOC), and engaging with the 

global community in relation to monitoring, supervision, and regulation. A central tenet of the 

Federal Reserve's efforts in promoting financial stability is an approach that accounts for the 

stability of the financial system as a whole, in addition to a micro-pmdential approach that 

focuses on the safety and soundness of individual institutions. In the development of the 

activities-based approach in the International Association oflnsurance Supervisors, the 

Federal Reserve continues to advocate the broader use of cross-sectoral comparison of insurers 

against banks and other financial intermediaries, reflecting an approach grounded in risk 

exposures together with their associated transmission channels. The analysis of the FSOC also 

reflects activities of a finn that could pose tlu·eats to U.S. financial stability, including through a 

firm's connections to financial markets as a channel for systemic risk. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Tipton: 

1. Market Structure 

Background: On October 15, 2014, the market for U.S. Treasury Securities, one of the 

deepest, most liquid, and critical markets in the world, experienced price volatility of 

historical magnitude with no obvious explanation. The 2015 Joint Staff Report developed 

and issued by stafffmm Treasury, the Fed, the SEC, and the CFTC could point to no clear 

culprit for the extreme volatility that day. They did id.entifY several potential issues with 

the market structure, however, including wash trading (i.e., self-trading) and a lack of 

clearing by principal trading firms through a centralized counterparty. Since the release of 

Joint Staff Report in 2015, FINRA has mandated that its member firms report secondarymarket transactions in Treasury securities to the Treasury and their supervisors. The 

reporting is not available to the public. 

Question: There have been recent media reports suggesting that the Treasury Department 

is considering ways to bring even more transparency to the marketplace for Treasuries, as 

recommended in the department's Capital Markets Report from last year. Do yon support 

this recommendation, and do you agree that bringing principal trading firms into clearing 

would also increase the safety, soundness, and stability to the U.S. Treasury securities 

market? 

Regarding the first part of your question on bringing further transparency to the marketplace for 

Treasury securities, as was discussed in the 2015 Joint Staff Report (JSR) following the high 

level of volatility in the Treasury market on October 15,2014, the structure of the Treasury 

market has evolved considerably over time. As highlighted in the JSR, the Treasury market has 

changed in ways not easily understood by either the official sector or the public due to a lack of 

readily available data on Treasury secondary market transactions. Through the JSR, we learned 

a great deal about how the Treasury market has evolved and the analysis conducted in the report 

made clear that gaining further insights into the Treasury market would be appropriate. 

In July 2017, the Financial Industry Regulatory Authority (FINRA) began collecting from its 

members, Treasury secondary market transaction data through its Trade Reporting and 

Compliance Engine (TRACE). The collection of this data has been a useful conttibution to the 

official sector's ability to monitor and understand the structure of, and activity in, the deepest 

and most liquid government secutities market in the world. The recommendations in the 

Treasury Department's Capital Markets Report to require trading platforms opemted by FINRA 

members to identifY customers in their repotis of Treasury security transactions to TRACE, as 

well as inter-agency efforts to collect Treasury transactions data from depository institutions, 

would likely further this understanding. 

The Treasury TRACE data collection effort is still in its early stages, and a number of issues 

regarding the data collection are currently being worked out among FINRA and the members of 

the Inter-Agency Working Group on Treasury Market Surveillance (IA WG). Therefore, before 

taking a position on what data should be made available to the public, if any, further assessment 

is needed of the available data and of the potential impact on market functioning or other. 
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potential costs of public dissemination of the Treasury TRACE data. Note that the issue of 

public dissemination was raised in the Treasury Department's Request for Information in 

January 2016 and this received mixed feedback from market patiicipants. As a general matter, 

my view is that increased transparency in the Treasury market would be desirable and can further 

bolster investor confidence in this market. However, any policy regarding public dissemination 

of Treasury market data would need to be consistent with the principle of not hatming market 

functioning or adversely affecting liquidity. 

Regarding your question on bringing principal trading firms (PTFs) into clearing, the 

implementation of more comprehensive clearing aiTangements for Treasury securities, including 

appropriate risk management, would likely increase the stability of the Treasury market. 

However, what the potential solutions are for achieving this objective remains an open question, 

and significant study would be required. For example, the Treasury Department's Capital 

Markets Repmi notes that the fees and other standards imposed by the Fixed Income Clearing 

Corporation (FICC) on its members are not widely understood, and that these arrangements 

could pose an economic baiTier for entry to PTFs. While FICC has recently altered its fee 

structure, the effect of this change is still unclear. Implementing more comprehensive clearing 

arrangements should take into consideration the potential risks and costs of any significant 

disruption to the structure and functioning of the Treasury market 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors of the Federal Reserve System from Representative Velazquez: 

1. Chairman Quarles,. I appreciated your commitment during our recent hearing that you 

will ensure the continuation of robust capital requirements for large, systemicallyimportant banks. I believe these capital reforms were some of the most important 

components of the Dodd-Frank Act and the actions of the Obama Administration. 

Ensuring that larger banks hold significant capital buffers is critical to protecting 

consumers and ensuring financial stability. Similarly, I was heartened to hear you explain 

your views on the need for a rigorous stress testing program, predicated on risk- based 

measures, to guarantee that global banks have capital sufficient to withstand shocks. To 

lhat end, I am closely reviewing the capital reform and stress testing proposal the Fed 

recently published. 

You correctly pointed out in your testimony that leverage capital standards should be a 

strong backstop, but not the binding, capital constraint. As you know, this is because 

binding leverage standards penalize low-risk banking activities such as accepting deposits 

and processing transactions, and create incentives to pursue higher-risk activities. I am 

concerned that having firms primarily engaged in custody and asset servicing operations 

bound by leverage-based standards could have the perverse effect of increasing, rather 

decreasing systemic risk. 

As you finalize the new stress testing program will you commit that the Fed will not create 

a new binding leverage standard through the imposition of a stressed leverage buffer? 

I believe that, as a general matter, leverage capital requirements should serve as a backstop to 

risk-based capital requirements in order to reduce incentives for films to increase their exposure 

to riskier assets. The Federal Reserve Board (Board) has recently taken two important steps to 

help ensure that leverage-based capital requirements generally serve as a backstop to risk -based 

capital requirements. First, the Board, in conjunction with the Office of the Comptroller of the 

Currency, issued a proposal that wouldrecalibrate the enhanced supplementaty leverage ratio 

standards for certain large domestic finns in a manner that is expected to help ensure that these 

finns' risk -based capital requirements remain their binding regulatory capital constraint. 

Second, the Board's stress buffer proposal, which would integrate the quantitative assessment of 

the Comprehensive Capital Analysis and Review program with the capital rule's requirements, 

was designed with the goal of simplifying capital requirements while helping to ensure that 

leverage-based capital requirements generally continue to serve as a backstop to risk-based 

capital requirements. The Board is currently seeking public comment on these proposals. In 

addition to these two proposals, the Board, in collaboration with the other federal banking 

agencies, will revise the capital rule to address the recent legislative exclusion of central bank 

reserves from the total leverage exposure amount of certain banking organizations. 
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Questions for The Honorable Randal K. Quarles, Vice Chairman for Supervision, Board of 

Governors ofthe Federal Reserve System from Ranking Member Waters: 

I. Fair Lending 

As we discussed during the bearing, the Center for Investigative Reporting published 

several disturbing articles after a yearlong investigation of 31 million records publicly 

available under the Home Mortgage Disclosure Act (HMDA) to identiJY lending 

disparities. 1 

(a) I appreciate your initial reaction, but I would ask you to review the materials, 

and provide a detailed written assessment of the reporting. What lessons, if any, 

should the Federal Reserve and Congress bear in mind as we explore ways to 

address modern-day redlining and end pervasive discriminatory practices in the 

financial sector? 

As we mark the 50th anniversary of the Fair Housing Act (FHA), at the Federal Reserve, we 

believe the fair lending Jaws remain critical to addressing discrimination, including redlining, as 

well as fostering vibrant communities and a fair and transparent consumer financial services 

marketplace. We share the vital goal of promoting a fair and transparent marketplace for 

financial services, which is crucial for advancing economic opportunity and inclusion. Our 

economy is stronger when everyone has a chance to contribute fully and share in our national 

prosperity. Our fair lending laws help us realize a founding notion of our country--that this is a 

place where opportunity, innovation, and productivity are encouraged and rewarded. 

The recent study of publicly-available Home Mortgage Disclosure Act (HMDA) data highlights 

serious concerns about racial disparities in lending. This study of HMDA data conducted by the 

Center for Investigative Reporting and published by Reveal News concluded that African 

Americans, Latinos, and other individuals of color were more likely to be denied conventional 

loans for home purchases and home remodeling than white borrowers.2 Studies such as these put 

much-needed focus on racial disparities and Federal Reserve staff is carefully reviewing them. 

However, HMDA data have limitations. These data do not include important underwriting 

criteria, such as credit scores and loan-to-value ratios. If concerns arise regarding a 

Federal Reserve-regulated institution, we will request additional data beyond the publiclyavailable HMDA data to fully evaluate whether applicants with similar characteristics received 

different underwriting outcomes on a prohibited basis (for example, on the basis of race), or 

whether legitimate underwriting criteria can explain the differences. 

1 The reporting is available online at: https://www.revealnews.org/articlelfor-people-of·color-banks-are-shuttingthe-door-to-homeownership/, https://www.revealnews.org/article/gentrification-became-low-income-lendinglaws-unintended-consequence/, https://www.revealnews.org/article/8-lenders-that-arent-serving-people-of-colorfor-home-loans/, https://www.revealnews.org/articlelhow-we-identified-lending-disparities-in-federal-mortgageda!al, and https://s3-us-west2.amazonaws.comireveatnews.org/uploadsllending_ disparities_ whitepaper _180214.pdf. 2 We note that the study excluded FHAN A and other government program loans. Tbese loans can be an important 

resource for lower-income borrowers. 
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(b) You discussed the ongoing work that the Federal Reserve is engaged with the 

Office of the Comptroller of the Currency (OCC) and other regulators with respect 

to modernizing the Community Reinvestment Act (CRA). To that end, does the 

Federal Reserve plan to adopt a change the OCC made last October to its CRA 

examination policies that has weakened CRA enforcement by easing the 

consequences for banks that violate fair lending laws and harm consumers? Will 

this kind ofCRA reform benefit megabanks, like Wells Fargo, which has repeatedly 

harmed consumers? 

The Community Reinvestment Act (CRA) establishes an affirmative obligation on banks to help 

meet the credit needs of their entire community, including low-and moderate-income (LMI) 

communities. We have not changed our approach to considering violations involving 

discrimination or other illegal credit practices when assigning CRA ratings. When illegal credit 

practices are identified, we follow the examination procedures and consider whether such 

practices should result in a ratings downgrade. 

(c) As we discussed, the Treasury Department issued a memorandum regarding 

CRA modernization on April3, 2018, addressed to the U.S. banking regulators, 

including the Federal Reserve Board, and made 15 recommendations in the areas of 

CRA assessment areas, examination clarity and flexibility, examination process, and 

performance.3 You generally seemed favorable toward Treasury's CRA 

recommendations in your testimony and responses to questions. Please note 

whether you agree or disagree with each recommendation, along with an 

explanation and assessment ofthe public policy pros and cons of each 

recommendation. 

The Federal Reserve Board (Board) staff is continuing to review the U.S. Department of 

Treasury's recommendations to modernize the CRA. I share the Treasury Department's goal of 

improving the current supervisory and regulatory framework for CRA based on feedback from 

industry and community stakeholders. I agree that many of the issues and potential solutions 

they raise are worthy of consideration. 

The Board is open to considering ways to make the CRA more effective and believes there are 

ways to expand the areas where we can evaluate a bank's CRA performance without losing the 

regulation's focus on the unique role banks play in meeting local credit needs. 

I agree that it is time to review changes to the definition of a bank's "assessment area," which is 

the area in which its CRA performance is evaluated. The banking environment has changed 

since CRA was enacted and the current CRA regulation was adopted. Banks may now serve 

consumers in areas far from their physical branches. Therefore, it is sensible for the agencies to 

consider expanding the assessment area definition to reflect the local communities that banks 

serve, while retaining a consideration of place. 

3 https:/ /home. treasury .gov /sites/default/files/20 18-04/4-3-18%20CRA %20memo.pdf. 
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(d) Would you review the National Community Reinvestment Coalition's (NCRC) 

analysis of Treasury's recommendations,< and consider their perspective in 

responding to the question above? 

Any change we make to the CRA implementing regulation will be proposed through the 

rulemaking process. The Federal Reserve takes every comment it receives about its regulations 

into consideration. Board staff will consider the National Community Reinvestment Coalition's 

(NCRC) analysis you mention and other public comments we expect will be submitted through 

the rulemaking process. 

We agree with the analysis that it is time to consider updating the CRA to reflect changes in the 

banking industry. Among the many suggestions offered by NCRC, the Federal Reserve is 

reviewing their suggestions for updates to the assessment area definition to include areas with 

branches and other areas where banks gather deposits or conduct substantial business, as well as 

their suggestion to establish more real time communication among banks, regulators, community 

groups, and advocates to promote more objective measures of performance. 

As with other stakeholders, the Federal Reserve seeks input from NCRC on a regular basis. 

NCRC will be meeting with the Chair and Federal Reserve staff very soon. This meeting will be 

an opportunity for NCRC to share their analysis in more detail with the Board. 

(e) Previously, NCRC submitted a letter to Treasury on CRA reform efforts on 

February 5, 2018. 5 Would you please review NCRC's letter and recommendation, 

and provide responses if you agree or disagree with their recommendations along 

with any analysis supporting your views? 

The Board staff has also reviewed the NCRC letter to the Treasury Department and will be 

taking their perspective into consideration as we receive public comments through the 

rulemaking process. As stated previously, we agree with the NCRC that it is time to consider 

updating the CRA to reflect changes in the banking industry. 

The NCRC letter refers to a number of topics with regard to CRA reform efforts including: 

expanding CRA to nonbank subsidiaries; updating assessment areas to capture outside lending; 

maintaining the threshold for small bank test and fair lending; standardizing CRA exams across 

the agencies; continuing to focus the definition of community development on LMI; and not 

shortening merger approval timelines for banks earning a rating of outstanding on a CRA exam. 

The Federal Reserve will review each of these ideas as we consider each aspect of the CRA 

regulation under review. 

(f) Based on the Center for Investigative Reporting on discriminatory lending 

practices and otber evidence, are there ways the Federal Reserve Board can utilize 

CRA or other tools to incentivize banks to lend on affordable terms and invest in 

communities that are being ignored and underserved? 

4 NCRC's analysis is available at: https://ncrc.org/ncrc-analysis-of-cra-treasury-repor1!. 5 The letter is available at: https://ncrc.org/letter-to-treasury/. 
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The research conducted by the Center for Investigative Reporting and published by Reveal News 

lamented the lack of progress in the 50 years since Congress enacted the Fair Housing Act. We 

note the study analyzed 2015 and 2016 publicly-available HMDA data on 31 million mortgage 

applications in 409 geographies for conventional loans and concluded that African Americans, 

Latinos, and other individuals of color were more likely to be denied loans for home purchases 

and home remodeling than white borrowers in 61 of those geographies. 

As I noted above, studies based on publicly-available HMDA data have limitations. Irrespective 

of that, the financial regulators must ensure that we continue to act consistently with the purpose 

of CRA and provide incentives for banks to remain engaged in local community and economic 

development initiatives. We will also continue to identify promising practices of banks that offer 

deposit and credit products to help rent-burdened customers save for homeownership and that 

support underserved communities. Even with an improved economy, LMI areas have significant 

hurdles remaining, which is why I believe that the CRA is more important than ever. 

(g) To the extent the Federal Reserve Board considers expanding options for banks 

to receive CRA credit, how do you ensure these adjustments are done in an efficient 

and robust manner so they don't otherwise water down the CRA grading system in 

light of the fact that 99% of banks get high marks even though discriminatory 

lending remains pervasive? 

The Federal Reserve takes its CRA obligations very seriously and any update to the regulation 

will seek to maintain the integrity of examinations. The Federal Reserve's highest interest is to 

see credit flowing to consumers and businesses in all communities consistent with safe and 

sound lending. This includes meeting credit needs in LMI areas and furthering economic 

development and financial inclusion. The Federal Reserve consumer examiners are speciallytrained and solely dedicated to conducting CRA reviews and consumer compliance 

examinations, which include fair lending. As with any regulatory change, we will provide 

examiners training and tools to ensure that they are able to conduct rigorous reviews of the 

institutions that we supervise. 

(h) What is the timetable for any new regulations or guidance that we should expect 

the Federal Reserve Board to issue on CRA reforms? 

The Federal Reserve has been in discussions with the Office of the Comptroller of the Currency 

(OCC) and the Federal Deposit Insurance Corporation (FDIC) on how to approach revisions to 

the CRA regulations. Unfortunately, I am not in a position to announce a timetable at this point. 

(i) Will the Federal Reserve Board consider holding public hearings across the 

country on any new CRA proposal you consider to better ensure you get the 

maximum amount of feedback, especially from the communities that CRA was 

intended to help. If so, what would the timetable be of such hearings? What other 

steps will the Federal Reserve Board take to ensure.you receive the maximum 

amount of input on proposed CRA changes? 
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The Federal Reserve participated in interagency public hearings on the Community 

Reinvestment Act (CRA) in 2010 and in the interagency public outreach meetings related to the 

Economic Growth and Regulatory Paperwork Reduction Act of 1996 in 2014 and 2015, in which 

CRA was one of many regulations discussed. The agencies with responsibility for CRA rule 

writing have not yet determined whether and, if so, when to hold public hearings. In the 

meantime, the Federal Reserve will continue to collect feedback through roundtables and 

listening sessions with banks, community groups, and other stakeholders. 

G) Do you have any legislative recommendations with respect to strengthening CRA, 

and how the Federal Reserve Board can better fulfill the intent and purpose of the 

law? 

The Federal Reserve recognizes the importance of basic banking services to meeting the 

financial needs ofLMI areas and people. We believe that revisions to the regulations should be 

sufficient to address concerns that the CRA has not kept pace with changes in the banking 

industry. 

(k) Beyond CRA, are there other legislative or regulatory reforms that policymakers 

should consider to end pervasive discriminatory practices in the financial sector? 

Discrimination has no place in the financial marketplace. Beyond the CRA, there are already 

legislative and regulatory protections in place to address discrimination in the financial 

sector. For all state member banks, we enforce the federal Fair Housing Act, which prohibits 

discrimination in mortgages, including redlining, pricing, and underwriting discrimination. For 

state member banks of $10 billion dollars or less in assets, we also enforce the Equal Credit 

Opportunity Act, which prohibits discrimination in any credit product. Together, these laws 

prohibit discrimination on the basis ofrace, color, national origin, sex, religion, marital status, 

familial status, age, handicap/disability, receipt of public assistance, and the good faith exercise 

of rights under the Consumer Credit Protection Act. We believe that enforcing existing 

legislative and regulatory protections is critical to addressing pervasive discrimination. 

With respect to other legislative reforms, we stand ready to consult with Congress as appropriate. 

2. Diversity at the Fed and in the Financial Sector 

(a) Democrats have repeatedly pushed the Federal Reserve and other regulators to 

do their part to promote diversity in its work. As the Vice Chair of Supervision, 

wha.t steps have you taken to promote diversity with the Fed's supervisory, 

regulatory and enforcement staff? 

The Board approved the Diversity and Inclusion Strategic Plan 2016-2019 which reflects the 

Board's strategic initiative on diversity, inclusion, and equality. The implementation of the plan 

involves the active involvement of senior leaders throughout the Board. In support of the 

Board's strategic objectives and commitment to attract, hire, develop, promote and retain a 

highly diverse workforce, each functional division is required to establish a diversity and 

inclusion scorecard. The purpose of fhe scorecard provides a process that helps us organize and 

develop a systematic effort in support of the diversity and inclusion strategic plan. I am firmly 

committed to the achievement of these goals. 
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(b) What steps can the Fed take to promote diversity within the financial system, 

especially with respect to the firms the Fed regulates? 

As directed by section 342 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act), the Board continues to request a submission from the entities we regulate 

containing information that supports the diversity policies and practices of their institutions. The 

assessment of submissions provides an opportunity to strengthen and promote transparency of 

organizational diversity and inclusion within the entities' U.S. operations and provide 

opportunities to discuss leading practices and challenges in addressing the lack of diversity in the 

financial services industry. The Board and the financial regulatory agencies are collaborating to 

develop symposiums, webinars and other support initiatives to address what is needed to advance 

diversity. 

(c) How closely do you work with the Fed's Office of Diversity and Inclusion?6 

Please give examples of how your work leverages the office's expertise in carrying 

out the Federal Reserve Board's regulatory, supervisory and enforcement work. 

In addition to the Director of the Office of Minority and Women Inclusion (OMWI) reporting to 

our Chairman, I too meet with to the Office of Minority and Women Inclusion (OMWI) director 

to discuss cultivating diversity and inclusion in all aspects of employment. The OMWI director 

is involved in the appointment process of official staff to ensure that the Federal Reserve Board's 

(Board) leadership nomination criteria and process are inclusive. Additionally, a meeting 

schedule has been established for the OMWI Director and the Deputy Director for Policy of the 

Supervision and Regulation Division to discuss regulations that may disproportionally affect 

minority-owned and women-owned businesses. The OMWI Director also participates with 

Division Directors, senior staff, and Board Members in an internal work stream at the Board 

established to coordinate economic inclusion and diversity efforts. The group focuses on 

initiatives not just at the Board, but also more broadly throughout the Federal Reserve System. 

Board Members meet regularly with the staff to discuss initiatives and progress. 

(d) What legislative recommendations do you have for how Congress could 

strengthen efforts to promote diversity and inclusion at the Federal Reserve Board, 

as well as the firms you regulate? 

The Board continues to be committed to cultivating diversity in all aspects of employment and 

recognizes the value of building and sustaining an inclusive work environment. This includes a 

commitment to the letter and spirit of all current law. While we have made progress 

implementing section 342 of the Dodd-Frank Act, we continue to focus on areas of opportunity 

where there is more to be done. We continue to encourage firms we regulate, to provide 

assessments of their diversity and inclusion practices in order to promote transparency and 

identifY opportunities for improvement. Additional outreach initiatives regarding submission of 

self-assessments as well as meetings to discuss diversity strategies needed to increase diversity 

are continuing. 

6 The Office of Diversity and Inclusion fulfills the See https://www.federalreserve.gov/publications/files/omwireport-20180330.pdffor the Fed's 2018 Report to the Congress on the Office of Minority and Women Inclusion. 
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3. Fintech, Payments and Digital Currency 

(a) What is your view of the rapid growth of financial technology, or fintech, in the 

financial services marketplace? What are your top priorities at the Fed with respect 

to fin tech? 

The Federal Reserve views developments in financial technology through the lens of our longstanding public policy goals of safety and soundness of financial institutions, consumer 

protection, safety and efficiency for the payment system, financial stability more broadly, and an 

innovative financial system that provides widely shared benefits to the public over time. 

Overall, the Federal Reserve is supportive of private-sector innovation in the financial services 

industry. At the same time, because of the transformative potential of financial technology in the 

financial services marketplace, we attach considerable importance to the Federal Reserve 

actively researching and monitoring these digital innovations. With this objective in mind, we 

have been evaluating developments in financial technology through a multidisciplinary lens, 

combining information technology and policy analysis to study the potential implications of 

digital innovations for payments policy, supervision and regulation, financial stability, monetary 

policy, and the provision of financial services. In its research, the Federal Reserve is working to 

identifY both the benefits of various digital innovations as well as challenges associated with 

their implementation. 

Almost all fintech innovations rely on connections to banks for: (I) access to consumer deposits 

or related account data; (2) access to the payment system; or (3) credit origination. Accordingly, 

when considering the Federal Reserve's role as a bank supervisor, first and foremost, we have a 

responsibility to ensure that the institutions subject to our supervision are operated safely and 

soundly and that they comply with applicable statutes and regulations and sound principles of 

consumer protection as they explore advances in financial technology. 

Within that framework, we have an interest in encouraging socially beneficial and financially 

sound innovations to flourish, while ensuring the risks that they may present are appropriately 

identified and managed. I believe we should allow responsible innovations to develop, which 

can benefit consumers and small businesses through expanded access to financial services or 

greater efficiency, convenience, and reduced transaction costs. If the marketplace and regulators 

can support responsible connectivity between fintech firms and supervised entities, such 

integration could benefit banks, particularly community banks, which may be able to more 

readily outsource the development of more efficient digital consumer interfaces, mobile apps, 

digital wallets, or lending products. 

The Federal Reserve System's (System) approach in the payments, clearing, and settlement 

space is similar. Board and System staff have been monitoring developments related to 

cryptocurrencies, central bank-issued digital currencies, wholesale digital tokens, and distributed 

ledger technology. Staff have found that although cryptocurrencies are innovative and may 

provide benefits related to automation and validation, they also pose challenges associated with 

speculative dynamics, investor and consumer protections, money-laundering risks, and 

governance. In addition, although central bank-issued digital currencies may be able to 

overcome some of the particular vulnerabilities that cryptocurrencies face, they too have 
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significant challenges related to cybersecurity, money laundering, and the retail financial system. 

Even so, digital tokens for wholesale payments and some applications of distributed ledgers~ the 

key technology underlying cryptocurrencies ~may hold promise for strengthening traditional 

financial instruments and markets. 

(b) GAO issued a recent report making a series of recommendations that the Fed 

and other regulators coordinate better on fin tech issues. 7 What steps is the Fed 

taking to respond to these recommendations, and coordinate better with other 

regulators? 

The Federal Reserve recognizes the importance of working collaboratively with other regulators 

when determining how best to encourage socially beneficial innovation in the marketplace, while 

ensuring a safe and sound financial system and that consumers' interests are protected. Even 

prior to the U.S. Government Accountability Office (GAO) report, the Federal Reserve and other 

regulators had already committed to coordinating on these issues in a variety of fora, including 

the Federal Financial Institutions Examination Council (FFIEC) Task Force on Supervision, the 

FFIEC Task Force on Consumer Compliance, and the Interagency Fintech Discussion Forum. 

This calendar year, the Federal Reserve has also organized a number of meetings with industry 

actors, trade associations, and consumer advocates in a variety of fin tech areas, which have 

included joint participation from a number of relevant regulators, like the OCC, FDIC, Consumer 

Financial Protection Bureau (CFPB), and several Federal Reserve Banks. 

With regard to the GAO report's recommendation that the Board invite the National Credit 

Union Administration (NCUA) to participate in the Board's Interagency Fintech Discussion 

Forum, we agree that the NCUA's oversight of credit unions provides it with experiences and 

perspectives that are relevant to the group's collaborative work on fintech consumer protection 

issues. Accordingly, Board staff has invited NCUA staff to take part in future meetings of the 

Interagency Fintech Discussion Forum. 

Similarly, staff at the Federal Reserve Banks of Atlanta and Boston have discussed with staff at 

the Federal Communications Commission (FCC) the benefits of the FCC's participation in the 

2018-2019 Federal Reserve's Mobile Payments Industry Working Group (MPIW). FCC 

representatives advise that they plan to attend the next occurring MPIW meeting. 

Among other efforts that focus on financial innovation, the Federal Reserve System has recently 

organized two System-wide teams of experts tasked with monitoring fintech and related 

emerging technology trends as they relate to our supervisory and payment system 

responsibilities, respectively. The new teams include representation from all of the Federal 

Reserve Banks, with Board staff providing leadership. The teams' critical objectives include 

ensuring that fintech-related information is shared across the System and informs relevant 

supervisory, policy, and outreach strategies. 

We will continue to facilitate and engage in collaborative discussions with other relevant 

financial regulators in these and other settings to address in the context of the Federal Reserve's 

supervisory and regulatory responsibilities the important issues raised by the GAO report. 

7 https://www.gao.gov/products/GA0-18-254. 
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(c) The United States continues to have au outdated payment system, especially 

compared to other countries that have real-time payment systems. What steps is the 

Fed taking to modernize our payments system? 

The Federal Reserve plays many roles in the payment system, including payment system 

operator, supervisor of financial institutions and systemically important financial market utilities, 

regulator, researcher, and catalyst for improvement. Acting primarily in its catalyst role, the 

Federal Reserve encouraged payments stakeholders to join together to improve the payment 

system in the United States in its "Strategies for Improving the U.S. Payment System" paper 

(Strategies Paper), issued in January 2015. 8 The strategies outlined in the Strategies Paper 

included the creation of task forces focused on faster payments and payment security, both of 

which have provided a forum for diverse industry participants to collaborate on an ongoing basis 

since they were established in mid-2015. 

The Faster Payments Task Force (FPTF) had the mission to identifY and assess alternative 

approaches for implementing safe, ubiquitous, faster payments capabilities in the United States. 

In support of this mission, the FPTF created the Faster Payments Effectiveness Criteria to assess 

faster payments solutions and as a guide for innovation in the payments industry.9 The FPTF 

also designed a process for which faster payment solution proposals could be submitted for 

assessment against these Effectiveness Criteria. 

The FPTF released the first part of its final report in January 2017. The second part of the final 

report, released in July 2017, reflected the FPTF's perspectives on challenges and opportunities 

with implementing faster payments in the United States, outlined its recommendations for next 

steps, and included the proposals and assessments for the 16 proposers that opted to be included 

in the final report. 10 The FPTF recommendations identified the need for ongoing industry 

collaboration to address infrastructure gaps; develop models for governance, rules and standards; 

and consider actions and investments that will contribute to a healthy and sustainable payments 

ecosystem. A number of recommendations called for Federal Reserve support to facilitate this 

ongoing collaboration. 

The mission of the Secure Payments Task Force (SPTF) was to provide a forum for stakeholders 

to advise the Federal Reserve on payment security matters, and identifY and promote actions that 

could be taken by payment system participants collectively or by the Federal Reserve System. 

The SPTF worked to advance understanding of the industry's most pressing payment system 

security issues: identity management, data protection, and fraud and risk information sharing. 

The SPTF concluded its efforts in March 2018, following publication of its final deliverables. 11 

Following the work of the task forces and other efforts to advance both the desired outcomes 

(focused on speed, security, efficiency, international payments, and collaboration) outlined in the 

8 Federal Reserve System, "Strategies for Improving the U.S. Payment System," January 26, 2015. Available at 

https://fedpaymentsimprovement.org/wp-contentluploads/strategies-improving-us-payment-system.pdf. 9 Faster Payments Task Force, "Faster Payments Effectiveness Criteria," January 2016. Available at 

https://fasterpaymentstaskforce.org/effectiveness-criteria-and-solution-proposals/. 1

° Faster Payments Task Force, "Final Report Part One: The Faster Payments Task Force Approach," January 2017, 

and "Final Report Part Two: A Call to Action," July 2017. Available at https://fusterpaymentstaskforce.org/. 11 See,https://securepaymentstaskforce.org. 
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Strategies Paper, the Federal Reserve published, in September 2017, a paper presenting refreshed 

strategies and tactics that the Federal Reserve is employing in collaboration with payment system 

stakeholders. 12 

The Federal Reserve kicked off these refreshed strategies and tactics in the summer of2017 by 

facilitating tbe industry's work to address tbe FPTF recommendations related to governance, 

directories, rules, standards, and regulations. In addition, consistent with tbe FPTF 

recommendations, the Federal Reserve has been assessing the needs and gaps to enabling 

24x7x365 settlement in support of a future ubiquitous real-time retail payments environment. 

Further, the Federal Reserve has started to explore and assess the need, if any, for any other 

operational roles to support ubiquitous real-time retail payments. These efforts are being 

pursued in alignment with Federal Reserve policy on tbe provision of payment services. With 

respect to payment security, the Federal Reserve is conducting a secondary research review that 

is intended to understand more fully what data is available regarding payments fraud. 

(d) What concerns, if any, do you have about Bitcoin and the use of other virtual 

currency in the U.S. financial system? Should banks promote or discourage their 

use? What protections are needed to ensure these cryptocurrencies can't be used to 

evade anti-money laundering laws? 

The Board does not currently have financial stability concerns related to virtual currencies 

because their current levels of adoption and near-terrn potential for scalability of virtual 

currencies are limited. The Board is concerned about some of the consumer protection, AntiMoney Laundering (AML) and Countering the Financing of Terrorism (CFT), governance and 

payment risk issues that have emerged and are linked to these virtual currencies and the 

exchanges where they are traded. 

Banks have, to date, taken a very cautious stance with respect to the use and promotion of the use 

of virtual currencies; many have been reluctant to even provide banking services to virtual 

currency-related businesses. 

With regard to AML/CFT issues, cryptocurrencies and virtual currencies have features that make 

them a potential vehicle for money laundering and terrorist financing. Many cryptocurrencies 

store in their ledger little to no information about the identity of owners of the cryptocurrency. 

Further, cryptocurrencies are easy to transfer across international borders. Indeed, a 

cryptocurrency that mimics a bearer instrument and provides significant privacy in transactions 

could raise significant money-laundering and terrorist-financing concerns. For example, large 

amounts of an electronic instrument could be easily transferred and peer-to-peer transactions 

outside of the United States could be very challenging to prevent and detect. Where a banking 

organization supervised by the Federal Reserve provides services to a business or individual that 

deals in a crypto-asset, the Federal Reserve seeks to ensure that the banking organization fully 

complies with all applicable AML/CFT requirements, under the Bank Secrecy Act (BSA) and 

Office of Foreign Assets Control (OFAC) regulations, and is adequately addressing risks posed 

by this type of activity. 

12 Federal Reserve System, "Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the 

Payments Improvement Journey," September 6, 2017. Available at https://fedpaymentsimprovement.orgiwpcontent/uploads/next-step-payments-joumey.pdf. 
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Considerable work is being done domestically and internationally to understand and potentially 

to address some of the concerns mentioned, including evasion of AML laws. However, it is too 

early to say what steps need to be taken to address all of these concerns, as these currencies and 

their usage is changing rapidly. Board staff support international cooperation to study and 

monitor crypto-assets, through venues such as the Basel Committee on Banking Supervision, the 

Committee on Payments and Market Infrastructure, the Financial Stability Board (FSB) and 

others. Because crypto-asset trades do not respect international borders, international 

cooperation is likely to be crucial to any steps taken to address concerns. 

(e) What are your views on "open banking"? Other countries seem to be pursuing 

this approach to ensure consumers have full access and control of their personal 

information, and can use new mobile applications to do a better job shopping for the 

best financial products and services. What are the pros and cons of promoting 

"open banking" in the United States? 

"Open banking" is an approach that allows third parties to access a financial institution's data 

and systems in order to build applications and services around the financial institution. There are 

important distinctions between the United States and other countries that are exploring open 

banking .. Open banking regulations in other countries mitigate the attendant data-security and 

consumer-protection risks with a number of measures that, by and large, are not readily available 

policy options in the United States, where banking regulators have different and overlapping 

statutory authorities. For example, under the European Union's Revised Payment Systems 

Directive (PSD2), third parties with access to bank accounts will be subject to licensing and 

registration requirements, as well as associated capital and insurance requirements. PSD2 also 

requires that electronic payments will be authorized by two-factor authentication--for example 

"something you know" and "something you are." Further, many jurisdictions that are exploring 

open banking frameworks feature far fewer banks than the United States. The open banking 

mandates in these other jurisdictions are often forwarded by regulators that have competition 

mandates, in addition to prudential and conduct authorities. In the United States, by contrast, 

banking regulators' statutory mandates generally do not extend to competition issues. 

Given these distinctions, the United States is likely to address these issues in a different way, at 

least initially, given that regulatory authorities are more broadly distributed, and the relevant 

statutory language predates these technological developments. Safety and soundness regulation-

-and with it, concerns about data security, cyber security, and vendor risk management--is 

distributed among a number of regulators. Accordingly, we are actively collaborating with other 

regulators and monitoring the rapidly-changing data aggregation space, recognizing that a variety 

of actors (e.g., large banks, small banks, core system providers, fintech developers, data 

aggregators, and regulators) are working through the different ways that banks can facilitate 

connectivity to outside developers. Regarding interpretation of statutory language, the 

Consumer Financial Protection Bureau (CFPB), for instance, issued a Request for Information 

last fall to explore issues surrounding consumers' granting access to account information to third 

parties under Section I 033 of the Dodd-Frank Act. 

Of particular concern is a current open banking practice whereby data aggregators log onto a 

bank's online consumer website as if they were the actual consumers and extract information. 
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This practice of"screen scraping" raises concerns about creating large repositories of consumers' 

on-line banking logins and passwords. This is particularly concerning because most data 

aggregation companies are generally not subject to bank-like examinations by regulators at a 

state or federal level for data security or consumer compliance. 

But even when screen scraping is not involved, it is not clear the extent to which banks 

understand (or have input into) the criteria used by data aggregators in choosing which 

developers the data aggregators will provide data obtained from the banks. Similarly, it is not 

clear if banks are even aware of which developers receive the data- much less what limitations 

those developers have on the use, preservation, or dissemination of the data they receive. 

From a consumer protection perspective, it is unclear if consumers understand that they are 

entering into agreements with data aggregators when using third-party applications. Log-in 

screens used by screen scrapers may feature the logos of banks, making it difficult for consumers 

to discern whether or not their bank has an underlying agreement with a developer or aggregator. 

Consumers may not understand the extent to which their liability for erroneous and fraudulent 

transactions may change when they are using a data aggregator. And many aggregators use 

contractual provisions that limit their liability to consumers and prevent consumers from seeking 

relief in court or as a class. Consumers also may not understand that data aggregators may 

continue to access their bank accounts well after consumers have stopped using or even deleted 

the fintech "apps" that created the data aggregation relationship in the first place. 

4. Lessons from the Financial Crisis and the Benefits of Dodd-Frank 

Mr. Quarles, you have repeatedly said that since it has been a decade since the 2008 

financial crisis, it is time to review and revisit all of the post-crisis financial rules to seek 

irn provements. 

(a) Will these modifications to post-crisis reforms be one-sided with a focus on 

deregulating the financial industry? 

The regulatory reforms that were put in place in the wake of the financial crisis have helped to 

make the U.S. financial system stronger and more resilient. As I have stated publicly on several 

occasions, I believe that the core regulatory reforms -- heightened capital and liquidity standards, 

stress testing, and resolution planning -- should be preserved. 

My focus is not deregulation. Rather, my goals are to match the character of our regulation and 

supervision to the risk characteristics of firms and to find ways to reduce unnecessary burdens 

while maintaining the safety and soundness of the financial system. I also support exploring 

whether our supervisory and regulatory objectives can be met in a way that is more transparent, 

efficient, and simple, while still ensuring that the financial system remains resilient. 

(b) Do you think lessons from the financial crisis have faded in the minds of some 

policymakers? 

I certainly hope that policymakers have not forgotten the material adverse impact that the 

financial crisis had on families, businesses, and the broader economy. The core reforms that 

were put in place in the wake of the crisis-- notably, higher capital and liquidity requirements, 
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stress testing, and resolution planning --were aimed at reducing the risk that bank failures or 

distress will have such a harmful impact on economic growth in the future. 

(c) What is your diagnosis for the causes ofthe financial crisis? 

The causes of the financial crisis are complex and will be studied for years, but there are things 

that we can say, in general terms, about the causes at present. In the years leading up to the 

crisis, there was a buildup of financial vulnerabilities that left our financial system in a fragile 

state by late 2007. Financial institutions, households, and many businesses were highly 

leveraged. At financial institutions this vulnerability was compounded by a mismatch between 

the maturity of the assets held and the maturity of the borrowing that supported those assets. In 

many cases the assets were long-term and illiquid, like housing, while the funding was shortterm and could be called at a moment's notice. This buildup of vulnerabilities was not limited to 

the United States, and many foreign financial systems experienced similar conditions. 

As a result of these domestic and international vulnerabilities, the financial system-- which 

lacked sufficient capital and liquidity, particularly at the largest and most complex firms -- was 

not able to handle the unexpected downturn in U.S. asset values. When that occurred, these 

vulnerabilities amplified the effect of the initial shock, and the result was the financial crisis. 

(d) What Dodd-Frank requirements do you think have helped address the 

numerous problems exposed by the crisis? 

While a number of post-crisis reforms addressed problems that were exposed during the financial 

crisis, I would point to several that were particularly valuable. 

Stronger capital requirements. Maintaining the safety and soundness of the largest U.S. banks 

is fundamental to maintaining the stability of the U.S. financial system and the broader economy. 

To be safe and sound financial institutions, these firms must be well-capitalized. The U.S. 

banking agencies have substantially strengthened regulatory capital requirements for large 

banking firms, improving the quality and increasing the amount of capital in the banking system. 

In fact, since the crisis, capital has increased by approximately $800 billion. 

Stress testing. The capital adequacy of the largest U.S. banking firms has been further bolstered 

by the annual stress testing and Comprehensive Capital Analysis and Review (CCAR) exercises, 

which consider the losses these firms would suffer under adverse economic scenarios on a 

forward-looking basis. In doing so, these programs help determine firms' capital needs in a 

serious economic downturn. 

Enhanced liquidity requirements. The financial crisis demonstrated that large global banks had 

outsized liquidity risks that were insufficiently constrained by the existing regulatory framework. 

These liquidity risks often led to the failure of the firm or to substantial dependence by the firm 

on liquidity support from the federal government. The federal banking agencies have 

subsequently required large banking firms to substantially reduce their liquidity risk through 

stronger regulatory and supervisory requirements. Liquidity positions within the U.S. banking 

system have improved substantially since the financial crisis. 
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Resolution planning. The focus of resolution planning is for firms to structure their operations 

in normal times to facilitate orderly resolution in bankruptcy to mitigate the systemic risks of a 

firm's failure. The resolution planning process has caused the largest U.S. banking firms to 

substantially improve their internal structures, governance, information collection systems, and 

allocation of capital and liquidity in ways that promote resolvability. 

(e) Do you believe the Fed failed, as many of us do, at implementing and enforcing 

our consumer financial protections laws prior to the creation of the Consumer 

Financial Protection Bureau? 

Before the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) in 2010, the Board had responsibility for writing regulations to implement 

many consumer protection laws. The financial crisis revealed the need to address fundamental 

problems across the financial system in both the private and public sectors, including failures of 

risk management in many financial firms, and deficiencies in government regulation of financial 

institutions and markets. Congress enacted the Dodd-Frank Act to address the weaknesses that 

had emerged in various areas of the mortgage market, including underwriting standards, 

capitalization, and securitization, as well as consumer protection. To that end, the Dodd-Frank 

Act transferred most of the Federal Reserve's rulewriting responsibilities pertaining to consumer 

protection to the CFPB, as well as considerably expanding its consumer protection statutory 

authorities for supervision and enforcement, and granting the CFPB broad authorities to 

promulgate consumer protections regulations covering banks and non-banking entities. 

Although the Board no longer has rulewriting authority for most consumer protection regulation, 

we remain committed as we have for over 40 years to strong consumer protection to promote a 

fair and transparent financial marketplace. We carry out this commitment through the Board's 

Division of Consumer and Community Affairs (DCCA), which is solely dedicated to consumer 

compliance supervision, community development, and consumer-focused research, analysis, and 

outreach. The DCCA facilitates our oversight of the Federal Reserve System's supervision and 

examination policies and programs for the approximately 800 banks we supervise to ensure 

consumer financial protection and promote community reinvestment. 

The Federal Reserve supervises all state member banks for compliance with the Fair Housing 

Act and Equal Credit Opportunity Act, as well as for other consumer protection rules for state 

member banks of $10 billion or less. Federal Reserve staff coordinate with the prudential 

regulators and the CFPB as part of the supervisory coordination requirements under the 

Dodd-Frank Act to ensure that consumer compliance risk is appropriately incorporated into the 

consolidated risk-management program of the approximately 135 bank and financial holding 

companies with assets over $10 billion. 

Additionally, we have addressed unfair and deceptive practices through public enforcement 

actions that have collectively benefited hundreds of thousands of consumers and provided 

millions of dollars in restitution, and our examiners evaluate fair lending risk at every consumer 

compliance exam. Pursuant to the Equal Credit Opportunity Act, if we determine that a bank has 

engaged in a pattern or practice of discrimination, we refer the matter to the Department of 

Justice (DOJ). Federal Reserve referrals have resulted in DOJ public actions in critical areas, 

such as redlining and mortgage-pricing discrimination. 
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The Board also provides oversight for the Reserve Bank consumer compliance supervision and 

examination through our policy development, examiner training, and supervision oversight 

programs. A number of critical areas are included in these programs, such as banks' 

performance under the CRA; consumer compliance in bank holding company matters; 

compliance with and enforcement of a wide range of consumer protection laws and regulations 

including those related to fair lending, unfair or deceptive acts or practices, and flood insurance; 

analysis of bank and bank holding company applications related to consumer protection, 

convenience and needs, and the CRA; and processing of consumer complaints. We also monitor 

trends in consumer products to inform the risk-based and enterprise-wide supervision. 

(t) Was it important to impose enhanced prudential standards on the nation's 

largest banks, including requiring more capital, more liquidity and less leverage? 

Yes. As I noted above, I consider these to be among the most valuable post-crisis reforms. 

Stronger risk-based capital and liquidity regulations for large banking organizations, together 

with our stress testing program, have helped to ensure that banking organizations are better 

positioned to continue lending through periods of economic stress and market turbulence. 

(g) Has the Financial Stability Oversight Council, or FSOC, helped to eliminate 

regulatory gaps in our financial regulatory system? Should FSOC maintain broad 

tools to deal with the next crisis? 

Prior to the creation of the Financial Stability Oversight Council (FSOC), the U.S. financial 

regulatory framework focused narrowly on individual institutions and markets, and no single 

regulator had the responsibility for monitoring and assessing overall risks to financial stability, 

which could involve different types of financial firms operating across multiple markets. 

Importantly, the FSOC established a venue to facilitate regulatory information sharing and 

coordination to help minimize potential regulatory gaps and weaknesses. A key component of 

this is the FSOC's annual financial stability report, signed by the voting members. Past reports 

have highlighted vulnerabilities such as prime money market mutual funds that benefit investors 

who withdraw their funds first -with the potential for destabilizing runs of the kind that stressed 

the financial system in September 2008. Subsequent reports have noted that the Securities and 

Exchange Commission's (SEC) regulatory reforms, which took effect in late 2016, were 

instituted to mitigate the risk of runs on money funds, and led to significant structural changes in, 

the industry, with assets flowing to funds that held only assets guaranteed by the federal 

government. 

The creation ofFSOC was valuable and necessary to fill the regulatory gaps that contributed to 

the financial crisis. Of course, the regulatory community has learned from the experiences of the 

past several years, and there may be ways to improve the processes currently followed by the 

FSOC. However, we learned from the experience of the financial crisis that an excessively 

narrow focus can lead to regulatory gaps, and that it is necessary to deal with vulnerabilities 

before they grow sufficiently material to leave the financial system too weak to handle bad 

financial shocks. 
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(h) What has Dodd-Frank's new derivatives oversight framework provided to 

FSOC? Since the Fed serves on FSOC, does this oversight of the derivatives market 

help the FSOC to better monitor and mitigate potential threats to financial 

stability? 

The Financial Stability Oversight Council (FSOC) designates systemically important financial 

market utilities (FMUs) and, when needed, facilitates coordination among the regulatory 

agencies involved in overseeing the designated FMUs (DFMUs). 13 To date, the FSOC has 

designated three derivatives-clearing organizations -the Chicago Mercantile Exchange, ICE 

Clear Credit, and the Options Clearing Corporation as systemically important. 

Prior to the creation ofthe FSOC, the U.S. financial supervisory framework focused largely on 

individual institutions and markets, and no single regulator had the responsibility for monitoring 

and assessing overall risks to financial stability. The FSOC provides a forum for members to 

share information and analysis related to a broad range of financial institutions and markets, 

including over the counter derivatives markets. In our experience, this information-sharing and 

coordination helps members to identify and address potential gaps and weaknesses. 

At various times since the FSOC's inception, FSOC working groups and committees have 

received presentations on developments in derivatives markets and the use of derivatives by 

classes of institutions. Typically, these presentations have been developed internally by 

individual FSOC member agencies or the Office of Financial Research and shared with other 

FSOC members after supporting confidential data have been appropriately aggregated and 

anonymized. For example, the FSOC Financial Market Utilities and Payment, Clearing, and 

Settlement Activities Committee (FMU Committee) supports the FSOC in fulfilling its 

responsibilities related to FMUs and payment, clearing and settlement (PCS) activities under 

Title VIII of the Dodd-Frank Act. The FMU Committee has focused primarily on conducting 

analyses and providing recommendations to the FSOC related to designations ofFMUs, 

consulting with supervisory agencies regarding risk management standards applicable to DFMUs 

pursuant to Dodd-Frank Act section 805, educating members on FMUs, and discussing products 

and risks relevant to clearing. 

Further, section 809 of the Dodd-Frank Act authorizes broad information-sharing between the 

FSOC and Title VIII Supervisory Agencies, and, if necessary, authorizes the FSOC and the 

Board to collect reports or data from a DFMU to assess the safety and soundness of the DFMU 

and the systemic risk the DFMU's operations pose to the financial system. To date, FSOC has 

not requested any information using this authority. 

(i) Do you support the Volcker Rule's prohibition on proprietary trading so that 

banks that benefit from the federal safety net do not gamble with deposits? 

The objective of the Volcker Rule is simple: banks with access to the federal safety net should 

not engage in risky, speculative trading for their own account. 

13 Dodd-Frank Act section 804 requires the FSOC to designate FMUs or PCS activities that the FSOC determines 

are, or are likely to become, systemically important such that "a disruption to the[ir] functioning ... could create, or 

increase, the risk of significant liquidity or credit problems spreading among financial institutions or markets and 

thereby threaten the stability of the financial system in the United States." 
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However, we are now at a point where it is both relevant and timely to examine the post-crisis 

reforms and identity areas where we can achieve our regulatory objectives with improved 

efficiency, transparency, and simplicity. The recently issued proposal by the Board and the other 

Volcker Rule agencies, which I support, includes best first efforts to further tailor the regulatory 

requirements and reduce burdens and costs, all in a manner consistent with the statute. That 

proposal is an important step in comprehensive Volcker Rule reform, and the Board looks 

forward to receiving comments from the public. 

5. Stronger Regulations and Enforcement 

(a) As you lead the Fed's efforts to revisit the post-crisis financial rulebook, what 

regulatory areas do you think need to be strengthened instead of rolled back? 

After spending almost a decade building the post-crisis regulatory regime, the bulk of the work 

of post -crisis regulation is complete. We and the other banking agencies have recently 

implemented orare in the process of implementing the final outstanding post-crisis measures to 

strengthen the regulatory framework. 

The Board voted on June 14 to adopt a final rule to establish single-counterparty credit 

limits. This rule applies to the largest banking organizations, placing limits on a firm's credit 

exposures to a single counterparty, with exposures between systemically important firms subject 

to the most stringent limitations. These limits address risks to the economy that are created when 

large banking organizations have significant exposures to one another. The Board believes that 

this rule will improve the stability of the financial system by limiting exposures between 

financial firms. 

The banking agencies are also working to finalize the net stable funding ratio (NSFR) rule. As a 

longer-term, standardized quantitative liquidity metric and requirement, the NSFR rule provides 

an important complement to the liquidity coverage ratio (LCR) rule and the internal liquidity 

stress testing and liquidity risk management requirements the Board established starting in 2012 

and 2014. By improving banking organizations' ability to prepare for and absorb shocks arising 

from financial and economic stress, these measures will help to promote a more resilient banking 

sector and financial system. 

(b) The Treasury Department, as you know, has released several extensive reports 

that include dozens and dozens of recommendations to revise financial regulations. 14 

o Do you support the recommendations Treasury made that the Fed take that 

were included in its first report focused on banks and credit unions? Which, 

if any, recommendations did you disagree with? 

o Are you concerned that few to no recommendations made by Treasury would 

result in stronger oversight of the largest, most complex financial firms? 

The Treasury Department's regulatory report acknowledged that regulatory policies 

implemented since the financial crisis have improved the safety and soundness of the financial 

system and noted that the U.S. banking system is significantly better-capitalized as a result of 

14 https:/lhome.treasury .gov/top-priorities/regulatory-reform. 
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post-crisis regulatory capital requirements and stress testing. The report also made a series of 

recommendations for the U.S. regulatory agencies to consider in order to reduce regulatory costs 

for the banking system. 

As I said in my testimony to the Committee, I am committed to maintaining the core elements of 

the post-crisis framework that have been put in place to protect the financial system's strength 

and resiliency, while also seeking ways to enhance its effectiveness. We will continue to 

evaluate the effects of regulation on financial stability and on the broader economy and where 

appropriate make adjustments. I am also committed to enhancing the simplicity, transparency 

and efficiency with which the Federal Reserve supervises and regulates firms under our 

jurisdiction. 

o {c) While there was some discussion of insurance savings and loan holding 

companies {SLHCs) and the Federal Reserve's approach to regulating them during 

the hearing, it is worth noting the Office of Thrift Supervision (OTS) was roundly 

criticized for its weak oversight, including of AIG, leading up to the 2008 financial 

crisis. Given that the supervision of SLHCs were transferred from the OTS to the 

Federal Reserve Board, what steps is the Federal Reserve Board taking to improve 

oversight of all SLHCs and not repeat past mistakes? 

The Office of Thrift Supervision's supervisory activities at insurance savings and loan holding 

companies (ISLHCs) focused on assessing the condition of the subsidiary thrift(s) with a 

minimal review of non-banking activities, including insurance. In contrast, the 

Federal Reserve's ISLHC supervisory program focuses on consolidated risk management and an 

overall assessment of the safety and soundness of the ISLHC. The Federal Reserve also employs 

a number of insurance specialists at both the Board and the Reserve Banks who are directly 

responsible for overseeing the ISLHCs. 

The Federal Reserve conducts ISLHC inspections on an annual basis and tailors the supervisory 

program to each firm's size, structure, risk profile, and business model as well as the size and 

scale of banking and other non-insurance activities. Supervisory emphasis is placed on assessing 

an ISLHC's consolidated risk management framework, material non-insurance subsidiaries, and 

the potential impact the firm's activities may have on its subsidiary insured depository institution 

(IDI). The Federal Reserve also seeks to protect the IDI from risks related to nonbanking 

activities, including insurance, as well as intercompany transactions between the parent and IDI 

to ensure that the IDl is not adversely affected. 

In light of the McCarran-Ferguson Act, we rely on the state insurance departments (DO Is) to 

supervise the business of insurance including the DO Is' assessment of risk and the financial 

condition of insurance operations. Discussions with the DOis are held on a regular basis to 

understand the risks associated insurance activities that could affect the bank or the consolidated 

condition of the ISLHC, such as those that led to the developments at AIG. The Federal Reserve 

also meets routinely with the DO Is to share supervisory information and coordinate supervisory 

approaches. 

6. Large Bank Supervision and Enforcement 
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While you are recused from Wells Fargo matters, you play a critical role at the Federal 

Reserve Board with respect to large bank supervision and enforcement. Wells Fargo is a 

repeat offender with a terrible track record of harming consumers, including opening 

millions of fraudulent accounts without their customers' consent. Wells Fargo deserves the 

punishment that former Chair Yellen handed down to cap the bank's size until it cleans up 

its act while several bank directors stepped down. Yellen's action must be vigorously 

implemented, and more should be done by regulators to use existing tools to crack down on 

repeated violations of the law by megabanks. Fines won't cut it any more, they are just the 

cost of doing business. That is why I introduced the Megabank Accountability and 

Consequences Act last year to require the banking regulators to fully utilize existing 

authorities-such as the ability to shut down a megabank and ban culpable executives from 

working again in the industry-to stop megabanks like Wells Fargo that clearly and 

repeatedly engage in practices that harm consumers. 

(a) Would you please review a Democratic Committee staff report issued in 

September 2017,15 and H.R. 3937, the Megabank Accountability and Consequences 

Act, 16 I subsequently introduced, and list the full range of enforcement tools the 

Federal Reserve Board bas to ensure the largest banks are following the law and 

sufficiently deterred from repeatedly breaking the law and harming consumers? 

Congress has conferred on the Federal Reserve and the other bank regulators a broad array of 

both informal and formal enforcement tools to be exercised at appropriate points throughout the 

course of the supervisory process. Enforcement measures may escalate depending on the 

severity or difficulty of the problem. If a problem requires a more detailed resolution than can be 

addressed through the normal examination process or is more pervasive at an institution, the 

Federal Reserve may enter into a memorandum of understanding (MOU) with the financial 

institution in which the board of directors commits to specific actions to correct potentially 

unsafe and unsound banking practices or possible violations oflaws or regulations. These are 

private supervision matters. 

The Federal Reserve also confronts situations where an institution engages in an unsafe or 

unsound practice or alleged violation of law that is more widespread or more serious so that 

MOUs or other informal supervisory methods are not appropriate or sufficient. In these cases, 

the Federal Reserve will begin more formal types of enforcement action against the regulated 

financial institution and its institution-affiliated parties, such as current or former employees. 

As described in the Democratic Committee Report, these more formal remedies include entering 

into formal written agreements or imposing orders directing the financial institution or its 

institution-affiliated parties to cease and desist from engaging in the improper or prohibited 

conduct, directing the firm to take certain actions to return to safe and sound banking practices 

and, where appropriate, requiring the firm to make restitution or provide reimbursement, 

indemnification, or guaranty to third parties harmed by the wrongful conduct. The 

Federal Reserve may also remove an institution-affiliated party from the banking institution and 

prohibit the party from participating in banking at other financial institutions. Finally, we may 

15 https://democrats-financialservices.house.gov/news/documentsingle.aspx?DocumentiD=400807. 16 https://democrats-financialservices.house.gov/news/documentsingle.aspx?Document!D=400815. 
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determine that the assessment of civil money penalties is appropriate against either the offending 

institution or an institution-affiliated party. 

(b) Does the Federal Reserve Board use different enforcement tools depending on 

the size of the bank holding company? 

The enforcement tools available to the Federal Reserve and other federal banking agencies are 

applicable to the institutions we supervise regardless of size. In each case where the 

Federal Reserve assesses whether an enforcement action is warranted, the Federal Reserve 

considers whether the relevant legal standards for seeking the proposed remedy are supported by 

the facts and circumstances. These standards generally do not refer to the size of the institution 

involved. However, when imposing a civil money penalty, the Federal Reserve is required, by 

law, to consider the size and financial resources of the institution, in addition to whether it acted 

in good faith, the gravity of the violation, the history of previous violations, and other matters as 

justice may require. 17 As evidenced by its public enforcement actions, the Federal Reserve has 

used its enforcement tools against institutions of a wide range of asset sizes. 18 

(c) The Federal Reserve Board, under former Chair Yellen, capped Wells Fargo's 

size until it can demonstrate it cleaned up its act. Has the Federal Reserve Board 

taken a similar action against other banks in the past? If so, please list each 

instance the Federal Reserve Board took such an action. 

The Federal Reserve has not previously used its formal enforcement authority to restrict the asset 

growth of an institution until it sufficiently makes required improvements. Before my becoming 

a member of the Board, the Federal Reserve and the Federal Deposit Insurance Corporation 

(FDIC), under their resolution planning authority, imposed restrictions on the growth of 

international and non-bank activities (as opposed to asset size) of one domestic banking 

organization until the firm remedied deficiencies identified in its resolution plan. 

(d) While some of my colleagues suggested the Federal Reserve Board does not have 

the authority to oversee board of directors of a bank holding company, do you agree 

the law is clear that the Federal Reserve Board indeed has such authority, and can 

remove certain directors if not ban them from working again in the industry? 

Please list each instance the Federal Reserve Board has taken snch a step in the last 

20 years, along with the size of the bank holding company when such an action was 

taken? 

As part of its examination of regulated institutions, the Federal Reserve regularly reviews the 

performance of the boards of directors and senior managers of these institutions and may take 

action against an institution-affiliated party under specific circumstances. 19 In determining 

whether to remove or prohibit an institution-affiliated party, the Federal Reserve must consider 

whether each of three statutory criteria are met: misconduct (typically, a violation of law, unsafe 

17 See 12 U.S. C.§ l818(i)(2)(G). 

l& Board of Governors of the Federal Reserve System, https://www.federalreserve.gov/apps/enforcementactions/ 

search.aspx (last visited Jun. 21, 2018). 

'

9 See 12 U.S.C. § 1818(e). 
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and sound practice, or breach of fiduciary duty), culpability (the individual must knowingly or 

recklessly participate in the conduct or the conduct must evidence personal dishonesty) and 

effect (the misconduct caused or is likely to cause financial loss or other damage to the 

institution, prejudiced the interests of depositors, or resulted in financial gain to the individual). 20 

An individual is also prohibited by law from participating in the affairs of any banking 

organization if the individual is convicted of a felony or any criminal offense involving 

dishonesty, breach of trust or money laundering. 

The attachment in Appendix A is a chart that includes the prohibition actions the Federal 

Reserve has taken in the last 20 years, both contested and consent actions, and the asset size of 

the bank holding company or foreign bank parent company of the relevant institution at or 

around the time of the action, where available. The highlighted prohibition actions represent 

instances where an individual was a member of the board of directors of the relevant institution. 

Note that, in these instances, an individual may also have had an additional role at the institution, 

such as a bank officer. 

(e) Will the Fed consider taking similar action- capping their size- if other 

mega banks are found to repeatedly break the law? 

The Federal Reserve takes seriously its responsibility to ensure the safety and soundness of the 

nation's banking and financial system and will continue to use all available tools where 

warranted. 

(I) Will the Fed Board hold a vote before it uncaps Wells Fargo's size constraints? 

Why or why not? 

As noted in one of your previous questions, I am recused from this matter. As Chairman Powell 

stated in a letter sent in May to Senator Warren, the Board will vote on any decision to terminate 

the asset growth restriction the Federal Reserve imposed on Wells Fargo in the Consent Order 

issued earlier this year. 

(g) The Government Accountability Office (GAO) issued a report last year entitled, 

"Improved Implementation of Federal Reserve Policies Could Help Mitigate 

Threats to Independence."21 GAO made six recommendations to the Federal 

Reserve Board in the report. What are the status of the Federal Reserve Board's 

efforts to address those recommendations? 

Thank you for the opportunity to provide an update regarding the steps taken by the Board to 

address the recommendations related to the Board's Large Institution Supervision Coordinating 

Committee (LISCC) made by the GAO in its report titled: Large Bank Supervision: Improved 

Implementation of Federal Reserve Policies Could Help Mitigate Threats to Independence 

(GA0-18-118). As noted in the Board's prior updates to the GAO regarding these 

recommendations, we believe that we are effectively managing the risks of regulatory capture in 

the supervision of large financial institutions. A summary of the status relating to each of the 

GAO's findings is below. 

20Jd 

21 https://www.gao.gov/products/GA0-18-118. 
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Develop £'RM Framework to Include a Component to IdentifY and Assess Risks of Regulatory 

Capture across the LISCC Program 

With respect to the first recommendation, the enterprise risk management (ERM) framework 

being developed by the Board will not significantly alter the management processes that the 

Board and System have in place under the LISCC program that continue to work effectively. 

Since the report's issuance, the Board has continued to develop the ERM framework by 

establishing a Board Risk Committee comprised of senior leaders, which serves as the central 

forum for Board-wide risk issues and oversight of the ERM program. Additionally, a number of 

strategic components of the ERM framework have begun to be implemented throughout the 

Board. 

Finalize and Implement Program-wide Guidance for the LISCC Reserve Banks on Implementing 

LISCC Policies 

Since the Federal Reserve's last update on the recommendations made in the GAO's report, the 

LISCC supervisory program has continued its efforts to address the GAO's second 

recommendation that the Federal Reserve "finalize and implement program-wide guidance for 

the USCC Reserve Banks on implementing LISCC policies." The Federal Reserve has 

memorialized all aspects of the USCC supervisory program within a comprehensive LISCC 

program manual." The USCC program manual remains in a near-final form pending completion 

of a proposal to revise the Federal Reserve's supervisory ratings system, which the Federal 

Reserve anticipates being finalized by year-end 2018. 23 Despite the manual's near-final status, 

the usee supervisory program has operated under the manual's guidelines since 

January 1, 2018, thereby satisfYing the spirit of the GAO's recommendation to "finalize and 

implement program-wide guidance." 

In addition to the USCC program manual, the LISCC Office of the Operating Committee has 

continued its work with the core programs and Reserve Banks' dedicated supervisory teams to 

refine and develop operating policies, procedures, and guidance for the conduct of supervisory 

activities. When concluded, each core program and dedicated supervisory team will have 

established operating standards that will include (l) documentation and deliverable requirements, 

including for the vetting of supervisory findings, assessments, and ratings; (2) automated storage 

requirements for horizontal and firm-specific documentation; and (3) supervisory cycle timing, 

planning, and deliverable requirements. 

22 The usee core programs are (I) capital, (2) liquidity, (3) recovery and resolution, (4) governance and controls, 

and (5) monitoring and analysis. The usee program manual provides detailed guidance on the core programs' 

(I) governance strncture and roles and responsibilities; (2) focus for the year-round horizontal activities and 

ongoing firm-specific supervisory work; (3) expected role that the dedicated supervisory teams have in relation 

to the execution of the core program work; (4) documentation and deliverable requirements for activities and 

supervisory work, including electronic storage requirements; (5) vetting, divergent views, and decision-making 

process; (6) ratings process; and (7) external communication requirements. 2' Large Financial Institution Rating System; Regulations K and LL, 82 Fed. Reg. !58, 39049 (proposed Aug. 17, 

2017) (to be codified at 12 C.F.R. pts. 211 and 238). 
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It is the Federal Reserve's expectation that the usee program manual, as well as the core 

program and dedicated supervisory teams' operating manuals, will be completed by fall2019. 

This additional time will help to ensure we are able to incorporate lessons learned from the 

usee supervisory program's first year of operations under the usee core program model. 

Once completed, this program-wide guidance will help to ensure the consistent and effective 

implementation of USee program requirements and will aid in mitigating threats to 

independence by ensuring the Federal Reserve's supervisory conclusions remain transparent and 

based on sound evidence. 

Monitor and Assess Implementation of LISCC Policies and Procedures 

The GAO's report acknowledged that internal reviews have been effective in identifYing some 

issues regarding implementation of the usee program and recommended that the 

Federal Reserve finalize and implement a mechanism to monitor and regularly assess 

Reserve Banks' implementation of LISee policies and procedures. The Federal Reserve 

currently assesses the effectiveness of Reserve Bank supervision functions, including their 

adherence to System guidance, through a continuous oversight program. The Federal Reserve 

has recognized that the GAO recommendation to formalize the monitoring and assessment of the 

usee program would provide greater assurance regarding the implementation of USee 

guidance. As noted in the GAO's report, the Federal Reserve has implemented changes to 

augment the oversight program through the development in the first half of2018 of a useespecific oversight framework that encompasses all Board and Reserve Bank USee activities 

and provides for a comprehensive assessment of program effectiveness. In the second half of 

2018, staff have identified further targeted review and oversight activities employing and testing 

the usee-specific oversight framework. 

Streamline Conflicts of Interest Reviews 

The GAO's report recommended that the Federal Reserve streamline its conflict-of-interest 

disclosure review process for participants in the usee program by, for example, storing 

disclosure information in compatible electronic systems. The report indicated that different 

parties involved in the conflicts review process have different means of collecting and storing 

information, which may hinder how efficiently and effectively this information is used in the 

review process. 

As described in the report, our objective is to effectively identifY and manage conflicts of interest 

when supervisory staff join the Federal Reserve, dirring their tenure as supervisors, and when 

they leave the organization. We appreciate the observations provided in the report and are 

exploring options for streamlining our approach, including, among other things, assessing the 

feasibility of integrating existing systems. We have drafted guidance that develops a useespecific conflicts-of-interest and examiner credential program that will seek to ensure 

consistency in the interpretation and application of conflicts-of-interest rules for all staff, both at 

the Board and the Reserve Banks, that participate in the LISee supervisory program. We plan 

to issue this guidance and begin implementation of a more consistent and centralized disclosure 

review approach in 2018. In addition, we have begun collecting and storing conflicts-of-interest 

disclosure information for all USee participants, including Board usee staff, in one electronic 
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system. We have also provided initial training to Board usee staff on the disclosure review 

process and the electronic system to ensure consistent collection of conflicts-of-interest data for 

all usee participants. 

Systematically Collect Pre- and Post-Employment Data 

The Federal Reserve has implemented policies intended to mitigate the risk that an employee 

may be influenced by prior employment or the prospect of future employment and place his or 

her private interests ahead of the organization's supervisory mission. For instance, the 

Federal Reserve recently broadened the scope of post-employment restrictions applicable to 

senior examiners. According to the GAO's report, the Federal Reserve could do more to 

mitigate this risk, specifically by systematically collecting pre-and post-employment information 

from supervisory employees. We agree that "revolving door" risk can pose a threat to 

supervisory objectivity and have begun discussions to develop a more systematic approach to 

collect and monitor pre- and post-employment data through the use of an electronic system. The 

updated electronic system is scheduled to be released, for both Board and Reserve Banks' use, in 

2019. With respect to the collection of post-employment information, it is important to note that 

departing employees have no obligation to identifY their future employer. 

Conduct a Periodic Self-assessment of Ethics Programs, Policies, and Procedures That Apply to 

LISCC Program Participants 

Board Ethics Program staff and Supervision and Regulation division staff are jointly assessing 

the current programs, policies, and procedures applicable to usee program 

participants. Within the next year, we expect to finalize and implement new conflicts-of-interest 

policies and procedures applicable to usee participants. 

(h) The New York Fed is relocating its bank examination staff so it is not prone to 

regulatory capture. Do you agree this is the right approach? Do you disagree with 

Comptroller Otting's decision to leave OCC examiners permanently on-site at 

national banks? Why or why not? 

The Federal Reserve is constantly looking for ways to improve the effectiveness of our 

supervision. To that end, we are in the midst of a change that enhances our ability to look at the 

largest banking organizations from a cross-firm perspective. To further facilitate that, the 

Federal Reserve Bank of New York (FRBNY) has moved their dedicated teams of examiners 

back to FRBNY headquarters where they can more readily interact with colleagues from other 

teams and compare and contrast firm practices, processes, and risks. 

Examiners will continue to have regular and consistent interactions with firms, including with 

their senior management and directors, and access to relevant data facilitated by technology. 

Additionally, the FRBNY will maintain space at the firms for at least six months as we evaluate 

what arrangement will be most productive over time for purposes that include accommodating 

examiners' needs during on-site exams, interacting with the firms, and other supervisory work. 
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(i) What other priorities do you have as the Vice Chair of Supervision to strengthen 

oversight and enforcement relating to the largest bank holding companies? 

I am very supportive of the steps that the Federal Reserve has taken since the financial crisis to 

strengthen its supervision, particularly at the largest firms. Notably, our supervision of these 

firms is aimed at ensuring that they have sufficient capital and liquidity, and we have 

substantially raised our expectations for how well these firms manage their risks, maintain 

internal controls, and exercise governance. In addition, to improve our supervision of the largest 

systemically important firms, we have created the usee, which helps us look at firms both 

individually and collectively. 

Going forward, we are looking for ways to potentially make our supervision of firms of all sizes 

more efficient, transparent, and simple. In doing so, however, I believe that we should not 

weaken the stringency of our supervisory programs. Moreover, I strongly support continued 

tailoring of our supervisory programs relative to the size, complexity, and risk profile of the 

firms we supervise, with the highest expectations for the most systemically important firms. 

G) Unlike the Savings and Loan crisis when more than 1,000 bank executives were 

prosecuted, there was no similar accountability following the worst financial crisis 

since the Great Depression. 

o Do you believe such a result was a just outcome? 

o Do you believe any bank holding company is "too big to jail"'? 

o What steps can the Federal Reserve Board take to ensure full accountability 

for individuals who work at entities you regulate that break the law? 

o Do deferred prosecution agreements (DPA) with bank holding companies 

weaken individual accountability? Why or why not? 

The decision to file criminal charges in a particular case is solely within the discretion of the 

Department of Justice (DOJ) and state prosecutors who alone have the authority to press criminal 

charges. As I have said before, no institution or individual is above the Jaw. 

The Federal Reserve has exercised its civil enforcement authority where warranted to address 

unsafe or unsound conduct or illegal activity that occurred during the recent financial crisis. 

Since the start of the financial crisis in 2008, the Federal Reserve has assessed civil money 

penalties and restitution payments against institutions under the Federal Deposit Insurance Act 

totaling more than $5.7 billion. In addition, our investigations of persons employed by or 

affiliated with supervised institutions have Jed the Federal Reserve to seek the permanent ban or 

suspension of more than 72 individuals from the banking industry, including senior officers and 

directors who failed to protect consumers and those who engaged in irresponsible banking 

practices that Jed to the crisis. 24 

Because the Federal Reserve does not have authority with respect to criminal prosecutions, we 

are not in a position to comment on whether the tools available to the DOJ to address corporate 

misconduct, including the use of deferred prosecution agreements, are effective. 

7. Capital and Leverage Rules for the Largest Banks 

24 See Appendix A. 
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Chair Powell recently said that the Fed's requirements for the largest banks are "very high 

and they're going to remain very high."25 He continued, "As you look around the world, 

U.S. banks are competing very, very successfully. They're very profitable. They're earning 

good returns on capital. Their stock prices are doing well. So I'm looking for the case, for 

some kind of evidence that- and I'm open to this-some kind of evidence that regulation 

is holding them back, and I'm not really seeing that case as made at this point."26 I agree, 

which is why I'm confused why the Fed, along with the OCC, proposed to slash the 

leverage ratio and reduce tier 1 capital for our largest banks by more than $120 billion, 

according to the FDIC. JPMorgan, Citigroup, Bank of America, Goldman Sachs, Morgan 

Stanley, State Street and Bank of New York Mellon would all benefit, and while it varies, 

they could see their capital reduced by as much as $34 billion, or a reduction as high as 

37.5 percent of their current tier 1 capital. This would likely result in more stock 

buybacks, not more loans. Wells Fargo, the recidivist megabauk whose size has been 

capped by the Fed, could see their tier 1 capital requirements reduced by more than $20 

billion. 

Instead of lowering the leverage ratio so it not a binding constraint, the Fed could raise 

risk-based capital levels to achieve this objective. In fact, the Fed's own research notes 

current capital levels are too low, and should be raised to somewhere be.tween 13 and 26 

percent. 27 And the Minnesota Fed has proposed an even more aggressive risk-based 

capital ratio of 23.5 percent and a leverage ratio of 15 percent as a first step to end too big 

to fail. 28 

(a) Mr. Quarles, do you disagree with Chair Powell that there is no evidence that 

regulation is holding big banks back? Why or why not? 

Maintaining the safety and soundness of the largest banking firms is fundamental to maintaining 

the stability of the U.S. financial system and tbe broader economy. To be safe and sound 

financial institutions, these firms must be well-capitalized. The Board and the other federal 

banking agencies have substantially strengthened regulatory capital requirements for large 

banking firms, improving the quality and increasing the amount of capital in the banking 

system. Indeed, large banking firms have roughly doubled their capital positions from before the 

crisis to today, making them significantly more resilient, as well as better able to support lending 

and financial intermediation in times of financial stress. These improvements have helped to 

build a more resilient financial system, one that is well-positioned to meet American consumers', 

businesses' and communities' credit needs, even under challenging economic conditions. 

At tbe same time, I am mindful that, just as there is a strong public interest in the safety and 

25 https://www .federalreserve.gov/newsevents!speechlpowell20 l80406a.htm. 26 Politico Pro, "Powell doesn't see need to loosen rules on biggest banks," April6, 2018, 

https://www.politicopro.com/financial·services/whiteboard/2018/04/powell·doesnt·see·need·to·loosen-rules...,nbiggest-banks-967593. 27 Simon Firestone, Amy Lorenc and Ben Ranish (2017), "An Empirical Economic Assessment of the Costs and 

Benefits of Bank Capital in the U.S. (PDF)," Finance and Economic Discussion Series 2017-034 (Washington: 

Board of Governors of the Federal Reserve System), available at: 

https://www.federalreserve.gov/econres/feds/files/2017034pap.pdf. 2' https:!/www.minneapolisfed.org/publications/special-studies!endingtbtf/final-proposal. 
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soundness of the financial system, there is a strong public interest in the efficiency of the 

financial system. Thus, the Board is assessing the effects on the economy and large banking 

firms of our recent regulatory efforts, including whether they are having any unintended results 

and whether they can be revised to accomplish the same goals in a more efficient manner. 

(b) Why did the Fed issue a proposal last week that would revise the enhanced 

Supplementary Leverage Ratio ( eSLR) and, according to the FDIC, would reduce 

bank capital by more than $120 billion at the nation's largest banks? 

I do not believe that the enhanced supplementary leverage ratio ( eSLR) proposal would 

materially change the amount of capital held by U.S. global systemically important bank holding 

companies (GSIBs). The $121 billion figure noted in the eSLR proposal represents the potential 

reduction in tier 1 capital required across the lead insured depository institution subsidiaries of 

the GSIBs; howeve.r, these entities all are wholly-owned by their parent holding companies. On 

a consolidated basis, GSIBs would continue to be subject to risk-based capital requirements, 

supervisory stress testing constraints, and other limitations applicable at the holding company 

level that would restrict the amount of capital that such firms may distribute to third-party 

investors. Due to these limitations at the holding company level, the GSIBs would be required to 

retain nearly all of the $121 billion amount and would not be able to distribute it to third 

parties. Indeed, the Board estimates that the eSLR proposal would reduce the amount of tier I 

capital required across the GSIBs on a consolidated basis by only approximately 

$400 million. That amount is approximately 0.04 percent of the amount of tier 1 capital held by 

the GSIBs as of the first quarter of2018. 

(c) With banks doing so well, why would the Fed propose to reduce capital in a 

significant way that diminishes protections for taxpayers and the economy? What 

research does the Federal Reserve Board have that any reduction in capital 

requirements will result in more lending as opposed to more stock buy backs, 

dividend payments, or bonuses for executives? 

As noted above, I do not believe that the eSLR proposal would materially change the amount of 

capital required to be held by U.S. GSIBs. As noted, any capital released at the depository 

institution level would be nearly all unavailable for distribution to third-party investors. 

(d) Will you provide the Federal Reserve Board's estimate for how your proposed 

changes to the eSLR and stress capital buffer would impact each U.S. global 

systemically important banks (G-SIBs), both at the holding company level and at 

the primary insured depository institution subsidiary? 

As a general matter, the Federal Reserve believes that leverage requirements should serve as a 

backstop to risk -based capital requirements in order to reduce incentives for firms to increase 

their exposure to riskier assets. The Board's stress capital buffer (SCB) proposal would extend 

the proposed stress buffer concept to the leverage ratio, but not to the supplementary leverage 

ratio. The Board is seeking comment on the advantages and disadvantages of this specific aspect 

of the SCB proposal (see question 3 in the preamble of the proposed SCB rulemaking). 

Due to the sensitive nature of the supervisory data and assumptions included in the impact 
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assessment of the eSLR proposal, the Board has made only aggregate impact data publicly 

available. The impact of the eSLR proposal would vary across firms based on their individual 

risk profiles and planned distributions and would vary across time based on the severely adverse 

stress scenario used in the supervisory stress test While the discussion in the SCB proposal and 

the eSLR proposal reflects the estimated impact of those individual proposals relative to current 

requirements, in developing the proposals, the combined impact was also considered. Factoring 

the relatively immaterial estimated reduction in required tier 1 capital across GSIBs under the 

eSLR proposal ($400 million, as noted above in response to question 4b) into the estimated 

impact of the SCB proposal across GSIBs does not meaningfully affect the estimates provided in 

the proposals. 

(e) Do you disavow the Federal Reserve Board's own research on the need to raise 

capital requirements for the nation's largest banks? Why or why not? 

As noted above, U.S. banking firms have roughly doubled their capital positions from before the 

crisis to today, making them significantly more resilient, as well as able to support lending and 

financial intermediation in times of financial stress. A number of studies have examined the 

relative costs and benefits of bank capital requirements. 

• These studies use data and assumptions on the cost and severity of financial crises and 

the costs of increasing capital requirements to estimate the level of capital requirements 

that results in the largest net benefit to the economy. 

• Such studies have been conducted by economists affiliated with the Basel Committee on 

Banking Supervision (20 1 0), The Bank of England (2015), the Federal Reserve Bank of 

Minneapolis (2016), as well as economists at the Federal Reserve Board (2017). 

• Some of these studies produce results that are consistent with current levels of capital for 

the GSIBs, while others call for more capitaL This range in capital levels among the 

different studies reflects varying assumptions and data sources. 

A different and perhaps preferable way to assess capital adequacy is through stress testing. All 

U.S. GSIBs demonstrated their ability to survive a shock more severe than the most recent global 

financial crisis while still continuing to supply credit and maintaining their recent 

dividends. Firms whose proposed additional capital payouts were not supported by their current 

capital bases were required to scale back their requests or take steps to reduce risk; in addition, 

they are expected to improve their capital positions this year. 

(f) What is your view of the Federal Reserve Bank of Minneapolis's work on too big 

to fail, and their set of recommendations included in their plan? Do you agree or 

disagree with their recommendations? Why or why not? 

As Vice Chairman for Supervision, I believe that it is beneficial to have a robust public debate on 

how to best ensure and maintain the strength and resiliency of the financial sector. In that 

regard, I welcome all contributions to this ongoing debate. 

With regard to the question of the optimal capital in the banking system, this issue has been 

addressed in a number of studies, including the paper from the Federal Reserve Bank of 
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Minneapolis. These studies aim to quantify the costs and benefits of bank capitaL The studies 

generally find that higher bank capital requirements (up to a point) are good for long-term credit 

availability and economic growth, but that with levels of capital beyond that point, social welfare 

is reduced. While the optimal level of capital varies between studies, in part because the studies 

use different underlying assumptions, the basic framework is the same. I believe the overall level 

of risk -based capital in the banking system is appropriate at the present time. 

(g) During your testimony, you focused on the fact that the SLR has become the 

binding constraint for many banks, and how that produces perverse outcomes. 

Would not raising risk-based capital levels while maintaining the current leverage 

ratios produce the same outcome, while also being responsive to research from the 

Federal Reserve Board and other organizations that capital requirements should be 

increased? 

The purpose of the eSLR proposal is to recalibrate the Board's capital standards for banking 

organizations such that the ratio generally serves as a backstop to risk-based capital requirements 

and not as a binding constraint. At this time, I believe that the substantial gains to the overall 

resilience of the financial system, as well as the minimal capital release that is likely to occur if 

the eSLR proposal were to be finalized, support the Board and the OCC's narrow approach to 

recalibrating the eSLR standards. 

(h) Why should Wells Fargo be rewarded after harming millions of consumers by 

reducing their capital requirements by 17 percent at a time while at the same time, 

the Federal Reserve Board capped the bank's size in light of their misdeeds? 

As you know, I am recused from issues related specifically to Weils Fargo. In general, the 

Federal Reserve Board's (Board) proposal to modify the enhanced supplementary leverage ratio 

( eSLR) requirement (proposal) would apply to a number of large financial firms, including all 

U.S. global systemically important banks (GSIBs). The proposal is based on the principle that 

leverage capital requirements, such as the eSLR, generally should serve as a backstop to riskbased capital requirements, rather than as a binding constraint. As noted, if a leverage ratio 

becomes a binding constraint, it can create incentives for banking organizations to engage in 

riskier activities. As indicated in the proposal, Federal Reserve analysis suggests that the 

proposal would reduce the amount of consolidated capital required across all U.S. GSIBs, 

including Wells Fargo, by approximately $400 million. That figure is approximately 

0.04 percent of the amount of consolidated capital held by all U.S. GSIBs as of the third quarter 

of2017. 

(i) What impact will the Federal Reserve Board's efforts to weaken capital and 

leverage rules, or other prudential rules, for the nation's largest banks mean for 

community banks? Won't this accelerate consolidation trends in the industry? 

Community banks benefit from the financial stability that results from increased standards that 

apply to the U.S. GSIBs. The eSLR proposal would not materially change the amount of capital 

held by U.S. GSIBs, therefore I do not believe this will have an appreciable effect on financial 

stability, the overall composition of the banking industry in the United States, or on competition 

among community banks and GSIBs. Taking into account the capital constraints imposed by the 
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Board's supervisory stress testing requirements, as well as the Board's regulatory capital rules, 

we estimate that the eSLR proposal would reduce the amount of tier l capital required across the 

GSIBs by approximately $400 million. That figure is approximately 0.04 percent of the amount 

of tier 1 capital held by the GSIBs as of third quarter of2017. The Board's recent eSLR and 

SCB proposals would only apply to relatively large banking organizations and would not directly 

impact community banks. 

8. Custodial Assets 

Congress bas proposed exempting custodial assets from the denominator of the leverage 

ratio rules, in part, to deal with the concern that the leverage rules could inadvertently 

make it harder for custodial banks, like Bank of New York Mellon, to accept a rapid 

increase in such deposits when there is a flight to safe assets in a crisis, and make it harder · 

for central banks, like the Federal Reserve, to respond. Notably, the Basel Committee on 

Banking Supervision (Basel Committee) suggested a more targeted proposal than the one 

Congress is considering that would provide for a temporary exemption of central bank 

reserves from a country's leverage ratio to the extent the amount of reserves is disclosed 

and that the bank would have to make offsetting changes to its balance sheet to remain safe 

and sound. 

(a) The Fed serves on the Basel Committee and was a party to the December 2017 

Basel III end game agreement29 that included that recommendation. Do you 

support the proposed narrower adjustment over a more sweeping exemption that 

has been proposed by Congress? 

Since this question was posed, Congress passed, and the President signed into law the Economic 

Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA). The EGRRCPA 

requires the Board, for purposes of calculating total leverage exposure, to exclude the funds of a 

custodial bank that are deposited with a central bank. 

(b) What would the effect of the Federal Reserve's proposed changes to eSLR be if 

they occurred in addition to Section 402 of S. 2155 to fully exempt central bank 

deposits from the leverage ratio for custodial banks was signed into law? Does the 

Federal Reserve Board have the flexibility to implement these proposals in a 

manner that is more akin to the more targeted proposal put forward by the Basel 

Committee? 

The proposed recalibration to the eSLR standards assumed that the components of the 

supplementary leverage ratio use the capital rule's current definitions of tier I capital and total 

leverage exposure. If the changes to total leverage exposure in the EGRRCPA were taken 

together with the Board's proposal, the removal of central bank reserves from total leverage 

exposure would generally increase supplementary leverage ratios for firms that are 

predominantly engaged in custodial services. The Board is considering the proposed 

recalibration in light of the statutory mandate to exclude central bank deposits from total 

leverage exposure for certain firms, taking into account safety and soundness of these firms as 

well as the resilience of the financial system. 

29 https://www.bis.org/bcbs/publ/d424_hlsummary.pdf. 
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9. "Too Big to Fail" 

Mr. Quarles, last November, Chairman Powell responded to a question from Senator 

Kennedy about whether any U.S. bank was still "too big to fail." 30 He initially responded 

by saying, "We've made a great deal of progress on that." When the Senator pressed for an 

answer, Chairman Powell said, "I would say no to that." 

(a) Do you agree that no U.S. bank is "too big to fail"? Why or why not? 

U.S. regulators have indeed made a great deal of progress in our work to address the issue of 

"too big to fail." Notably, the statutory framework established by Congress and the efforts of the 

U.S. regulators have made the largest banking firms more resilient and have significantly 

improved their resolvability. In particular, for the largest, most systemically important firms, we 

have increased the quantity and quality of capital that they maintain, have established capital 

surcharges that are scaled to each firm's systemic risk footprint, have required our largest banks 

have more stable liquidity risk profiles, and have required them to carry long-term debt that can 

be converted to equity as part of a resolution. 

In this regard, I believe it is much more likely than before that the failure of one of our most 

systemically important financial institutions, while undoubtedly posing a severe shock to the 

economy, could be resolved without critically undermining the financial stability of the United 

States. Moreover, more of the losses from such a failure would fall on the firm's shareholders 

and bondholders, not the FDIC or taxpayers. Investors have recognized this progress and the 

major rating agencies have removed the government support rating benefit that they once 

ascribed to the largest bank holding companies. Financial institutions and markets are always 

evolving, however, so it is important to remain vigilant regarding changing systemic risks. 

(b) Do you support the Treasury Department's report recommending the 

preservation of Dodd-Frank's Orderly Liquidation Authority?31 Will "too big to 

fail" return if Dodd-Frank's tools are rolled back or eliminated, including DoddFrank's Orderly Liquidation Authority as the Chairman and other Republicans 

have advocated? 

The Treasury Report on Orderly Liquidation Authority (OLA) and Bankruptcy Reform is 

thoughtful about the strengths and weaknesses of the current regimes for handling the resolution 

of a failing financial firm. While I believe that bankruptcy should be the preferred resolution 

framework for a failing firm, given the uncertainties around how financial crises unfold, I 

understand the argument presented in the Treasury Report that it remains prudent to keep OLA 

as a backstop resolution framework. As the Treasury Report recognizes, OLA provides an 

alternative to bankruptcy in those circumstances where bankruptcy may not be feasible due to 

current limitations of the bankruptcy code. 

30 https://www .bloomberg.com/news/articles/20 17-11-29/trump-s-pick -to-run-the-fed-says-no-u-s-banks-are-stilltoo-big-to-faiL 31 https://home.treasury.gov/news/press-release/sm0295. 
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(c) The Dodd-Frank Act gives financial regulators, especially the Fed, a number of 

authorities to address this issue. This includes enhanced capital requirements, and 

authorities that are activated -- including breaking up the largest banks - if living 

wills cannot credibly demonstrate a firm can be safely resolved through the 

Bankruptcy Code, or ifthe Fed determines a megabank poses a grave threat to 

financial stability. Will you commit to fully utilizing these and other Dodd-Frank 

tools to end too big to fail? 

We have made great strides with the FDIC through the living wills process to make our largest 

banking firms easier to resolve under the current Bankruptcy Code. In addition, we have 

increased the quantity and quality of capital maintained by the largest banks and imposed 

requirements to help ensure that our largest banks have more stable liquidity risk profiles. As 

stated previously, financial institutions and markets are always evolving, however, so it is 

important to remain vigilant regarding changing systemic risks. I will continue to consider all of 

the Board's authorities in response. 

10. Restrictions on Bank Activities 

(a) In the last election, the Republican party platform called to reimpose the GlassSteagall firewall between commercial and investment banking. Has the Trump 

Administration given up on pursuing reimposing Glass-Steagall? Do you support 

reimposing Glass-Steagall? Why or why not? 

The central provisions of the Glass Steagall Act- section 16 which prohibits a bank from 

engaging in the securities business and section 21 which prohibits securities firms from taking 

deposits- have never been repealed and remain the law of the land. The Gramm-Leach-Bliley 

Act of 1999 rescinded two ancillary provisions dealing with the activities of some affiliates and 

certain restrictions on directors, but in addition to leaving in place the core Glass Steagall 

provisions also left in place the provisions of the Federal Reserve Act and other fundamental 

provisions of banking law that limit the ability of such affiliates to interact with insured banks. 

am not aware that the Administration has proposed to re-impose these ancillary provisions, andbecause of the retention of the core provisions of Glass Steagall and the limitations on interaction 

between banks and their affiliates I am not convinced that the repeal of these ancillary 

provisions contributed materially to the financial crisis of2008-2009. In the crisis, the most 

notable failures were of specialized financial firms that did not materially combine investment 

banking and commercial banking, such as AIG, Washington Mutual, Countrywide, Bear Stearns 

and Lehman Brothers. I think that the fundamental lesson from the crisis is that the largest, most 

interconnected financial firms need to hold substantially more capital, take substantially less 

liquidity risk, and face an effective orderly resolution regime if they fail. Consistent with its 

statutory authorities, the Board has endeavored to implement a regulatory framework that 

accomplishes these objectives. 

(b) Should banks be in the business of owning warehouses full of copper or other 

commodities? The Federal Reserve has a pending rule that would curb the strange 

bank business of owning, trading and moving commodities. Do you support that 

proposal and when shonld we expect it to be finalized? 
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The Board began its review of the physical commodities activities of financial holding 

companies after a substantial increase in these activities among financial holding companies 

during the financial crisis. In January 2014, the Board invited public comment on a range of 

issues related to these activities through an advance notice of proposed rulemaking. In response, 

the Board received a large number of comments from a variety of perspectives. The Board 

considered those comments in developing the proposed rulemaking that was issued in September 

2016. After providing an extended comment period (150 days) to allow commenters time to 

understand and address the important and complex issues raised by the proposal, the Board again 

received a large number of comments from a variety of perspectives, including Members of 

Congress, academics, users and producers of physical commodities, and banking organizations. 

The Board continues to consider the proposal in light of the many comments received and to 

monitor the physical commodities activities of financial holding companies. 

(c) The Federal Reserve has previously proposed, pursuant to the Dodd-Frank 

Section 620 report, several legislative changes regarding banks.32 They proposed 

that Congress: 

o repeal the authority of Financial Holding Companies (FHCs) to engage in 

merchant banking activities; 

o repeal the grandfather authority for certain FHCs to engage in commodities 

activities under section 4(o) oftbe BHC Act; 

o repeal the exemption that permits corporate owners of industrial loan 

companies (ILC) to operate outside of the regulatory and supervisory 

framework applicable to other corporate owners of insured depository 

institutions; and 

o repeal the exemption for grandfathered unitary SLHCs from the activities 

restrictions applicable to all other SLHCs. 

With respect to the merchant banking and section 4( o) grandfather authorities of the Bank 

Holding Company Act, the Board has issued an advance notice of proposed rulemaking in 2014 

and a notice of proposed rulemaking in 20 16 to consider appropriate actions that the Board may 

take to address these matters. The Board continues to consider the proposals in light of the many 

comments received and to monitor activities under these authorities. 

Unlike merchant banking and section 4(o) grandfather authorities, the exemptions for 

grandfathered unitary savings and loan holding companies and owners of industrial loan 

companies (ILCs) place institutions under these exemptions outside of the Board's supervision 

and regulation. Therefore, the Board may not directly address the concerns with these 

exemptions that the 620 Report describes (e.g., affiliation of commercial and financial entities, 

lack of consolidated supervision and regulation, competitive advantage). 

(d) Do you support any of these recommendations? Why or why not? 

The Board's report to Congress and the FSOC pursuant to section 620 of the Dodd-Frank Act 

raises a number of complex issues that I believe merit further consideration. I have the report 

under review and look forward to completing that consideration. 

32 https:/lwww.federalreserve.gov/newseventslpressreleases/hcreg20!60908ahtm. 
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11. Foreign Banks 

There has been much discussion about how foreign banks would be treated under S. 2155, 

the Senate financial deregulatory bill pending in the House. Under current rules, the 

enhanced prudential regime applies to foreign banking organizations that have more than 

$50 billion in global assets and operate in the United States. However, the Fed's 

implementing regulations have imposed significantly lower requirements on foreign banks 

with less than $50 billion in U.S. non-branch assets compared to those with more than $50 

billion in U.S. non-branch assets. 

(a) What assurances can you give this Committee that stringent rules for large 

foreign banks that operate in the U.S. that are applied in the exact same manner, 

and at the exact same threshold, as they are today will not be changed, even if S. 

2155 becomes law? 

Section !65 of the Dodd-Frank Wall Street Reform and Consumer Protection Act 

(Dodd-Frank Act) directs the Board to establish enhanced prudential standards for large banking 

organizations. In applying section 165 to foreign banks, the Dodd-Frank Act directs the Board to 

take into consideration principles of national treatment, equality of competitive opportunity, and 

the extent to which the foreign bank is subject to prudential regulation by its home 

country. Accordingly, as you note, the Board has tailored the application of the enhanced 

prudential standards to foreign banks based, in part, on size and nature of a foreign bank's 

activities in the United States. The intermediate holding company requirement applies to foreign 

banks with total global consolidated assets that meet the threshold for application of section 165, 

and with at least $50 billion in U.S. non-branch assets. The Economic Growth, Regulatory 

Relief, and Consumer Protection Act (EGRRCP A) raises the threshold for application of section 

165, but does not affect the threshold for the application of the intermediate holding company 

requirement. The existing population of foreign banks that have intermediate holding companies 

in the United States also have total global consolidated assets in excess of $250 billion. 

The amendments made by EGRRCPA provide for additional tailoring of section 165 while 

maintaining the authority of the federal banking agencies to ensure the safety and soundness of 

depository institutions and their holding companies and to apply enhanced prudential standards 

to large banking organizations address financial stability. 

12. Executive Compensation 

The Wells Fargo fraudulent account scandal, and its incentive-based cross-selling strategy 

that fueled it, is a stark reminder how important it is for financial regulators to finalize 

executive compensation rules. As you know, Section 956 of the Dodd-Frank Act directed 

regulators, including the Fed, to adopt joint rules aimed at prohibiting incentive 

compensation arrangements that might encourage inappropriate risks at financial 

institutions. The regulators made an initial proposal in 2011, then reworked the proposal 

and issued a new plan in 2016. The proposal increases in stringency based on the financial 

company's asset size with enhanced requirements for senior executive officers and 

significant risk-takers. 
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(a) Given that this is not a discretionary requirement, what steps are you taking to 

implement and enforce this provision of the law? 

After the Board, OCC, FDIC, SEC, NCUA, and Federal Housing Finance Agency (the agencies), 

jointly published and requested comment on the revised proposed rule in June 2016, the agencies 

received over one hundred comments. These comments raised many important and complicated 

questions. The agencies are considering the comments. Compensation practices are, and will 

remain, a core element that we examine as part of our regular supervisory engagement with each 

firm. 

13. International Coordination on Financial Regulations 

Mr. Quarles, there have been news reports suggesting that the Treasury Department is 

pushing for you to be considered as a candidate to lead the Financial Stability Board 

(FSB). 33 

(a) Are you interested in the job leading the FSB? When will such a decision be 

made? 

The FSB is one of the important international bodies created since the crisis that promotes 

financial stability. I am a candidate for the FSB chairmanship because I believe that the global 

reach of the banking industry means that financial stability is necessarily a global undertaking. 

When rightly structured, our participation in these groups makes our financial system 

significantly stronger by ensuring that the U.S. perspective is part of the discussions and 

reflected in agreed-to standards. Further, many financial vulnerabilities arise abroad, so having a 

global forum where those vulnerabilities can be discussed is critical to ensuring that we are 

aware of developments abroad that have the potential to adversely affect the stability of our own 

financial system. U.S. consumers and businesses are more secure and prosperous because the 

FSB helps make sure that all countries are doing their share in promoting financial stability and 

not gaining an unfair advantage. While I cannot speak directly to the conclusion of the decisionmaking process, I would expect a successor would be in place when the current FSB chairman's 

term expires later this year. 

(b) How do you assess FSB's record at promoting global financial stability through 

international coordination? 

The FSB promotes international financial stability by monitoring international developments 

related to financial stability and providing its members a forum to coordinate their work 

developing strong regulatory, supervisory, and other financial sector policies. 

Since the financial crisis, the members of the FSB have emphasized four priorities for reform: 

building the resilience of financial institutions, ending "too big to fail," increasing the safety of 

derivatives markets, and transforming shadow banking to transparent and resilient market-based 

financing. 34 In addition, they regularly review and update a set of Key Standards for Sound 

33 https://www.ft.com/content/846d7b00-27b3-lle8-b27e-cc62a39d57a0. 34 http://www.fsb.org/what-we-do/policy-developmentl. 
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Financial Systems. 35 The key standards currently cover three policy areas: macroeconomic 

policy and data transparency, financial regulation and supervision, and institutional and market 

infrastructure. 

In his most recent letter to the G-20 leaders, FSB Chairman Mark Carney highlighted the 

following improvements in the financial system: 

Banks are stronger, more liquid, and more focused; 

A number of steps have been taken to eliminate "toxic forms of shadow banking and 

transforming it into resilient market -based finance;" and 

Changes to derivatives markets resulted in a more transparent system that reduces 

dangerous exposures. 

With the post-crisis reform era coming to an end, FSB members will shift focus towards 

monitoring the implementation of reforms, beginning with country peer reviews and an annual 

survey of the status of implementation in each member jurisdiction. Of course, the FSB will 

continue to be an important forum for monitoring emerging global risks and coordinating 

discussion on cross-border stability issues. 

(c) What would your priorities be at the FSB? 

In terms of my priorities, monitoring emerging financial stability risks is at the top of my list. 

Given the scope of its membership, the FSB is uniquely positioned to identifY emerging risks. In 

addition, now that the body of post-crisis regulation is largely complete, I would also support the 

FSB examining the effects that reforms and standards are having. Finally, I would support 

improving the transparency of the FSB's operations. 

(d) The largest banks have complained about so-called "gold-plating" of prudential 

rules, like capital or leverage, where U.S. regulators implemented a standard that is 

more stringent than what an international body, like the Basel Committee, agreed 

to. But some observers have suggested "gold-plating" has helped the U.S. push 

other jurisdictions to raise their standards. Do you believe when the U.S. leads by 

example by raising the bar on financial regulation, it makes it harder for other 

countries to ignore that record and lower their standards? 

By design, international standards are a minimum, and countries are expected to implement more 

stringent standards when justified by national circumstances. In some cases, we have 

implemented standards above these minimums. We are cognizant that once standards are 

implemented, there may he effects that are greater than or different from those anticipated. For 

this reason, we believe it is important to monitor the implementation of new standards carefully 

and initiate adjustments where appropriate. Thus, with the revised regulatory framework and a 

more resilient system in place, the Board is assessing the effects of those efforts, and examining 

whether they are having unintended results and whether they can be revised to accomplish the 

same goals in a more efficient manner. 

35 http://www.fsb.org/what-we-do/about-the-compendium-of-standards/key._standards. 
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(e) Last December, the Fed and other U.S. regulators finalized the so-called Basel III 

"end game" with your international counterparts. But based on the Fed and the 

OCC's proposal last week to lower the eSLR, it seems as if you are using the 

international agreement to roll back important U.S. regulations. By changing 

course, is the Fed leading other financial regulators around the world in a new race 

to the bottom, deregulating a global financial industry that caused significant 

damage not only to the U.S. economy, but the global economy? 

The proposed recalibration of the eSLR standards is an example of the Board's efforts to ensure 

that the post-crisis financial regulations are working as intended. Core aspects of post-crisis 

financial regulation have resulted in critical gains to the stability of the financial system, 

including higher and better quality capital, an innovative stress testing regime, new liquidity 

regulation, and improvements in the resolvability of large firms. The financial system is stronger 

and more resilient as a result, helping banks to lend through the business cycle. With the revised 

regulatory framework in place, the Board is assessing the effect of those efforL~. In undertaking 

this review and assessment, the Board is mindful of the need for regulations not only to be 

effective for maintaining safety and soundness and financial stability, but also to be efficient, 

transparent, and simple. 

(t) What, if any, global financial standards currently do not go far enough and need 

to be made more stringent? 

The Board, along with the other U.S. banking agencies, has made substantial progress working 

within the Basel Committee to develop stronger regulatory and supervisory standards since the 

global financial crisis, especially with respect to the largest and most systemic firms. These 

improved standards have helped to build a more resilient financial system, one that is well 

positioned to provide American consumers, businesses and communities access to the credit they 

need, even under challenging economic conditions. In promulgating regulations, the Board 

determined that it was appropriate to impose requirements that are more stringent than the 

standards of the Basel Committee on several occasions when we determined, based on national 

circumstances, it was warranted to ensure the safety and soundness of U.S. banks and of the 

broader financial system. 

14. Cost-Benefit Analysis 

According to the Federal Reserve Board's website and as was discussed at the hearing, 

there is a new "Policy Effectiveness and Assessment section" which "focuses on 

understanding the economics of financial regulation. Section staff work on conducting ex 

ante analysis of the costs and benefits of pending regulations as well as the ex post 

assessment of existing regulations. Section economists also engage in academic research on 

topics related to banking and financial regulation." 

(a) Under what statutory authority did the Federal Reserve Board establish this 

unit? What is the unit's mandate and priorities? 

The Board is committed to evaluating the economic impact of and costs and benefits associated 

with its rulemakings. To the extent possible, the Board attempts to minimize regulatory burden 

in its rulemakings consistent with the effective implementation of the Board's statutory 
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responsibilities. Increasingly, the Board has published discrete quantitative analyses in 

connection with its rulemakings. Recent examples include the analysis conducted in conjunction 

with the Board's GSIB surcharge rule, single-counterparty credit limit rule, and long-term debt 

rule. To further these efforts, the Board established an office and hired economists and 

additional staff to focus on analyzing the costs and benefits associated with its rule makings. 

Section II of the Federal Reserve Act authorizes the Board to "employ such attorneys, experts, 

assistants, clerks, or other employees as may be necessary to conduct the business of the Board." 

12 u.s.c. 248(1). 

(b) As of April 25, 2018, there were three individuals listed as working in the unit. 

How many staff does the Federal Reserve Board expect to hire for this unit? What 

is its budget? How will this unit interact with other divisions and units at the 

Federal Reserve Board? 

Currently, the Policy Effectiveness and Assessment section consists of a manager (an economist 

by training), a small number of Ph.D. economists and support staff. We recently hired additional 

Ph.D. economists to fill out staffing and these individuals will be joining in the coming months. 

The section is funded through the overall budget of the Division of Supervision and Regulation. 

In carrying out its responsibilities, the section staff will collaborate with economists and staff 

with specialized skills in other divisions and sections at the Board as appropriate. 

(c) As you know, predicting the benefits from financial regulations preventing a 

future financial crisis are extremely difficult. How will this unit and the Federal 

Reserve Board include those considerations in any cost-benefit analysis of any 

regulation? 

There exists a significant body of work that examines the benefit of reducing the probability and 

severity of a financial crisis that has been carried out by academic economists and staff at the 

Federal Reserve and other financial regulators. Section staff will incorporate this knowledge into 

the evaluation of the benefits of any regulation. 

(d) There has been a wide range of studies that have attempted to analyze the cost of 

the 2008 financial crisis. Given its significance in any cost-benefit analysis the 

Federal Reserve Board may engage in, I would ask this uuit conduct its own analysis 

of the cost of the financial crisis to the U.S. economy and its citizens, including 

taxpayers, consumers, investors and homeowners. Will you ask this unit to conduct 

such an analysis and provide that analysis to the Committee? 

As shown in the existing literature, the causes and consequences of financial crises in history can 

be varied. A comprehensive reassessment of the underlying causes of the 2008 financial crisis 

and cost-benefit analysis of the entire package of reforms would not be feasible in the near-term 

given the priorities of the section and its planned focus in the near-term. However, section staff 

will take a holistic approach for every topic in the work plan that is informed by past experience 

including, but not limited to, the recent financial crisis. 

15. Racial Disparities in the Labor Market 
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(a) African-Americans in particular continue to suffer from overt employment 

discrimination. Indeed, the unemployment experience for better-educated AfricanAmericans is on average worse than the unemployment rate for less educated 

whites.36 To what extent can and should the Fed take such discrimination into 

account as it sets monetary policy? What policy recommendations can you offer for 

overcoming this persistent discrimination? 

Despite continued improvement in the labor market that has seen the unemployment rate for 

African Americans drop to an historic low of 5.9 percent in May,joblessness for 

African Americans remains well above that for white Americans. This long-term disparity in 

economic outcomes for African Americans is concerning. The best way for the Federal Reserve 

to promote the economic welfare of African Americans is to do our utmost to fulfill our dual 

mandate of maximum employment and price stability. However, even at maximum 

employment, structural disparities will likely remain. Addressing these disparities will require 

policy tools beyond those available to the Federal Reserve. 

16. Wages 

(a) Despite progress in reducing the overall level of unemployment, wage growth has 

largely remained low and stagnant for the vast majority of American families. 

What are the key factors in your view that explain why a tighter labor-market has 

yet to translate into higher pay for most families? Do you believe that the general 

rule in economics that a tight U.S. labor market will produce higher wages for U.S. 

workers will hold, or are there other factors at play that will continue to depress the 

income earned by U.S. workers? 

Most measures of wage growth remain below rates seen in previous strong labor markets. The 

most important factor contributing to this slower wage growth is the slowdown in productivity 

growth over the past decade or so. Since 2007, productivity growth has averaged only a little 

over 1 percent, well below the average of2\4 percent seen since 1950. When productivity 

growth is lower, employers are not able to increase wages by as much as otherwise. I believe 

that tighter labor markets do lead to higher wage growth. Indeed, we have seen most measures 

of wage growth increase modestly over the past few years, as the labor market has continued to 

tighten. 

17. Normalization of the Fed's Balance Sheet 

(a) Last October the Federal Reserve began the process gradually reducing its 

securities holdings in order to normalize the size of its balance sheet. 

Simultaneously policy makers at the Federal Reserve have outlined their intention 

to slowly lift the federal funds rate target. Can you discuss how these two 

normalization strategies are working in tandem? How is the Fed taking into effect 

the contractionary effects of balance sheet normalization in conjunction with its rate 

hikes? 

36 http://financialservices.house.gov/uploadedfiles/hhrg- 1 14-bal9-wstate-wspriggs-20160907 .pdf. 
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The Federal Open Market Committee's (Committee) monetary policy decisions take into account 

that its program of gradual reduction in the Federal Reserve's securities holdings is removing 

policy accommodation. This is because the program's removal of policy accommodation is one 

of the factors affecting the Committee's assessment of the economic outlook, and the 

Committee's decisions regarding the federal funds rate are based on that assessment. 

Since October 2017, the Committee has been implementing a program of gradual reduction in 

the Federal Reserve's securities holdings. Against this backdrop, the Committee remains able to 

respond to economic developments and to adjust monetary policy in light of changes in the 

economic outlook, as it makes decisions at every FOMC meeting on the setting of its primary 

monetary policy tool, the federal funds rate. One of the considerations entering these decisions 

is the Committee's view that changes in its securities holdings affect overall financial conditions 

and U.S. economic activity. Consequently, its assessment of the economic outlook is informed 

by its best estimate of the effect of its balance sheet normalization program on financial 

conditions and the economy. If the economic outlook changes as the balance sheet 

normalization program proceeds, the Committee will be able to make appropriate adjustments to 

the stance of monetary policy by changing the current level and future path of the target range 

for the federal funds rate. 

18. Banks Hoarding Interest Income as the Fed Raises Rates 

(a) Since the Fed began raising interest rates, banks have seen a significant jump in 

net interest income and charged consumers more for loans, all while keeping the 

interest rate paid on customer deposits relatively flat. Can you discuss why 

depositors seem to be getting short changed as the Fed raises the rate it pays banks 

on their reserves? 

The market for bank deposits remains competitive, and consumers have choices on where to 

place their savings, including amongst brick-and-mortar bank branches, online banks, credit 

unions and money market mutual funds. Some banks have been paying higher deposit rates on 

certain types of accounts to maintain those deposit accounts in light of higher short-term interest 

rates, and some banks have been offering higher interest rates and other incentives to depositors 

to open new accounts. Many depositors also receive other services from banks where they 

maintain deposit accounts. Many customers choose to keep their deposits in low-interest-bearing 

accounts for convenience factors, such as check-writing ability, access to ATMs and physical 

branches, as well as access to other financial services. For customers seeking a higher return on 

their savings relative to that paid on deposit accounts, banks and other financial institutions do 

offer higher interest rate products, such as certificates of deposit and money market funds. 

19. GOP Tax Plan 

(a) Would you agree that the amount in compensation companies have provided 

their workers following the enactment of the GOP tax law, is only a small fraction of 

what corporations will return to shareholders and pay corporate executives in 

under the new law? Would you agree that the stimulative economic effects of the 

GOP tax law will be much smaller than had the tax law provided a larger share to 

lower and middle income families? 
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Assessing the net effects of such a large and complicated set of tax policy changes as those in the 

Tax Cut and Jobs Act (TCJA) is very challenging and subject to considerable uncertainty. 

Indeed, a number of analysts have produced estimates of the demand-side and supply-side effects 

of the tax cuts, and there is a wide range of views. While there is a fairly broad view that lower 

corporate taxes can potentially induce greater economic output, wages, and profits, there is no 

consensus on the magnitude of those effects nor the distribution of those potential benefits. For 

example, in the Congressional Budget Office's (CBO) recent April2018 report, The Budget and 

Economic Outlook: 2018 to 2028, the effects of the TCJA on the CBO's economic projections 

and a comparison of those effects to available estimates from other organizations is presented. 37 

Many analysts think that lower-income families are likely to spend more of their tax cut than 

higher-income families, which suggests that the demand-side effects can vary depending on the 

distribution of the tax cut. And I suspect that is true, but the degree of the difference is not well 

understood. Moreover, potential differences between higher- and lower-income households of 

any supply-side response through changes in labor supply and in investment are quite uncertain 

and subject to alternative views. 

37 See Appendix B in the report, pp. 105-130, https://www.cbo.gov/system/files/115th-congress-20!7-

20 18/reports/53651-outlook.pdf.