U.S. GOVERNMENT PUBLISHING OFFICE

30–347 PDF WASHINGTON : 2018

S. HRG. 115–251 

THE SEMIANNUAL TESTIMONY ON THE FEDERAL 

RESERVE’S SUPERVISION AND REGULATION OF 

THE FINANCIAL SYSTEM 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED FIFTEENTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING THE EFFORTS, ACTIVITIES, OBJECTIVES, AND PLANS OF 

THE FEDERAL RESERVE BOARD WITH RESPECT TO THE CONDUCT, 

SUPERVISION, AND REGULATION OF FINANCIAL FIRMS SUPERVISED 

BY THE FEDERAL RESERVE BOARD 

APRIL 19, 2018 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.govinfo.gov/ 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

MIKE CRAPO, Idaho, Chairman 

RICHARD C. SHELBY, Alabama 

BOB CORKER, Tennessee 

PATRICK J. TOOMEY, Pennsylvania 

DEAN HELLER, Nevada 

TIM SCOTT, South Carolina 

BEN SASSE, Nebraska 

TOM COTTON, Arkansas 

MIKE ROUNDS, South Dakota 

DAVID PERDUE, Georgia 

THOM TILLIS, North Carolina 

JOHN KENNEDY, Louisiana 

JERRY MORAN, Kansas 

SHERROD BROWN, Ohio 

JACK REED, Rhode Island 

ROBERT MENENDEZ, New Jersey 

JON TESTER, Montana 

MARK R. WARNER, Virginia 

ELIZABETH WARREN, Massachusetts 

HEIDI HEITKAMP, North Dakota 

JOE DONNELLY, Indiana 

BRIAN SCHATZ, Hawaii 

CHRIS VAN HOLLEN, Maryland 

CATHERINE CORTEZ MASTO, Nevada 

DOUG JONES, Alabama 

GREGG RICHARD, Staff Director 

MARK POWDEN, Democratic Staff Director 

ELAD ROISMAN, Chief Counsel 

JOE CARAPIET, Senior Counsel 

TRAVIS HILL, Senior Counsel 

ELISHA TUKU, Democratic Chief Counsel 

LAURA SWANSON, Democratic Deputy Staff Director 

AMANDA FISCHER, Democratic Professional Staff Member 

DAWN RATLIFF, Chief Clerk 

CAMERON RICKER, Deputy Clerk 

JAMES GUILIANO, Hearing Clerk 

SHELVIN SIMMONS, IT Director 

JIM CROWELL, Editor 

(II)

C O N T E N T S 

THURSDAY, APRIL 19, 2018 

Page 

Opening statement of Chairman Crapo ................................................................. 1 

Opening statements, comments, or prepared statements of: 

Senator Brown .................................................................................................. 2 

WITNESS 

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

the Federal Reserve System ................................................................................ 4 

Prepared statement .......................................................................................... 36 

Responses to written questions of: 

Senator Brown ........................................................................................... 41 

Senator Sasse ............................................................................................ 52 

Senator Rounds ......................................................................................... 54 

Senator Warner ......................................................................................... 60 

Senator Warren ......................................................................................... 65 

Senator Heitkamp ..................................................................................... 67 

Senator Schatz ........................................................................................... 68 

Senator Cortez Masto ................................................................................ 70 

(III)

(1) 

THE SEMIANNUAL TESTIMONY ON THE FEDERAL RESERVE’S SUPERVISION AND REGULATION OF THE FINANCIAL SYSTEM 

THURSDAY, APRIL 19, 2018 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met at 9:32 a.m., in room SD–538, Dirksen Senate Office Building, Hon. Mike Crapo, Chairman of the Committee, 

presiding. 

OPENING STATEMENT OF CHAIRMAN MIKE CRAPO 

Chairman CRAPO. The Committee will come to order. 

Today we will receive testimony from Federal Reserve Vice 

Chairman of Supervision Randy Quarles regarding the efforts, activities, objectives, and plans of the Federal Reserve Board with respect to the conduct, supervision, and regulation of financial firms 

supervised by the Federal Reserve Board. Welcome, Chairman 

Quarles. 

Vice Chairman Quarles has done an excellent job so far, and I 

urge Congress to confirm him for his full term on the Board as 

soon as possible. 

Promoting economic growth remains a top priority for this Congress, and reducing the rate and cost of excessive and unnecessary 

regulation leads to more jobs and enables a better functioning economy and more consumer choices. 

As Vice Chairman for Supervision, Mr. Quarles plays a key role 

in developing regulatory and supervisory policy for the Federal Reserve System. 

I have been encouraged by the statements by both Federal Reserve Chairman Powell and Vice Chairman for Supervision Quarles 

which they have made about the need to revisit some of the Federal Reserve’s existing regulations. 

I was particularly encouraged by Vice Chairman for Supervision 

Quarles’ statements in January that the overarching objectives of 

his agenda are efficiency, transparency, and simplicity of regulation. 

I agree with those objectives. 

He highlighted the following initiatives as consistent with these 

objectives: revising capital rules applicable to community banks; 

extending the resolution planning cycle for certain banks; enhancing the transparency of stress testing; recalibrating the leverage 

capital ratio requirements; streamlining the Volcker rule; tailoring 

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liquidity requirements to differentiate between large non- G–SIBs 

and G–SIBs; revisiting the ‘‘Advanced Approaches’’ thresholds; and 

reexamining the ‘‘complex and occasionally opaque’’ framework for 

making determinations of ‘‘control’’ under the Bank Holding Company Act. 

Some of these initiatives are already underway, and I hope the 

others will be commenced and completed in the near future. 

I also hope that the Economic Growth, Regulatory Relief, and 

Consumer Protection Act makes it to the President’s desk soon. 

The primary purpose of that bill is to make targeted changes to 

simplify and improve the regulatory regime for community banks, 

credit unions, midsized banks and regional banks to promote economic growth. 

It affords the banking regulators, including the Federal Reserve, 

more flexibility to tailor regulations, and it will fall on your agency 

and others to interpret this bill. 

I look forward to working with the regulators to ensure their interpretations are consistent with Congress’ intent. 

I also welcome any additional color Vice Chairman Quarles can 

provide on areas where the Fed and Congress may act to further 

reduce regulatory burdens. 

Senator Brown. 

OPENING STATEMENT OF SENATOR SHERROD BROWN 

Senator BROWN. Thank you, Mr. Chairman. And, Vice Chairman 

Quarles, nice to see you again. Thank you for joining us. Thank 

you for the access and discussions we are able to have. 

On this very day 10 years ago—April 19th, 2008—the Columbus 

Dispatch, the newspaper of record in the largest city in my State, 

reported that 28,000 Ohioans had lost their jobs just in the previous month. As the economy collapsed during those last months 

and months of the Bush administration, as the economy collapsed 

because of Wall Street’s recklessness, a vice president at the Columbus Chamber of Commerce described Ohio’s economy as ‘‘the 

worst of all possible worlds.’’ 

For those 28,000 Ohioans, and the millions more around the 

country that ultimately lost their jobs, 10 years ago probably does 

not feel so far away. The heartbreak, the fear, and the stress of losing a home to foreclosure, being forced to switch schools, needing 

to postpone buying expensive prescription drugs, all that casts a 

long, long shadow. 

The Fed missed the crisis the last time. It had the power to rein 

in predatory mortgage lending; it did not. It had the power to stop 

banks from operating with too much borrowed money; it did not. 

It had the power to hold bank executives accountable; it did not. 

It failed, even as advocates in communities—and I heard from 

them often in the part of Cleveland I now live in—even as advocates in communities spotted problems and pleaded for the Fed to 

act. 

Because the Fed neglected its mission and the Bush administration, of which you were a part, did not do its job, Congress the next 

year had to pass Wall Street reform over the opposition of so many 

on this Committee and so many members of the Senate. 

3 

Now with legislation coming from this Congress and the backsliding of this Administration, we are on the verge of unraveling 

many of these reforms. In the words of one banking analyst, ‘‘when 

we fast forward 5 years, 10 years from now, the dismantling of the 

financial infrastructure is going to be greater than anyone could 

foresee at the time.’’ 

When Washington dismantles protections, Wall Street always 

cheers. Ultimately, Main Street pays the price. It did 10 years ago. 

It will in the future. 

The decisions being made now may lead us to the next crash. 

When times are good, policymakers, lawmakers, and regulators— 

if they are not vigilant—can get lulled into a sense that ‘‘this time 

it is different.’’ 

The horizon certainly looks clear right now—just as it did during 

the Bush years right before the crisis, when Mr. Quarles was in 

charge of overseeing bank policy at Treasury. 

Just like back then, big banks are raking in record profits. Just 

like back then, they are lining their pockets with stock buybacks. 

Just like back then, the White House looks like an executive retreat for Goldman Sachs and other Wall Street executives. 

The Fed slapped Wells Fargo with a penalty right as Chair 

Yellen’s term ended. Now that bank is about to get a big boost from 

a Fed proposal released last week. Under the new plan, Wells 

Fargo will be allowed to pay out $20 billion in capital to executives 

and shareholders rather than use that money to make loans or prevent bailouts. And, almost inconceivably, the CEO of Wells Fargo 

got a 36-percent raise in 2017, even as he presided over one consumer abuse after another. I cannot imagine anybody in either 

party on this Committee that has sat here and listened to the litany of abuses from Wells Fargo would think that is justified to give 

a CEO of a bank like that a 36-percent raise. Collectively, the country’s biggest banks stand to get a $121 billion windfall from a plan that would let them operate on more borrowed money, with less skin in the game. Really. 

While Mr. Quarles talks about this proposal, and the Fed’s many 

other plans, as a simple ‘‘recalibration’’ or ‘‘tailoring’’ or ‘‘re-evaluation’’—his words—of the rules, we know what it really means. We 

know from last week when we heard from CFPB Acting Director 

Mulvaney what he is doing to consumer protections. The end result? Fewer rules guarding hardworking Americans from taxpayer 

bailouts and financial scammers; more incentives for Wall Street 

greed. 

Somehow ‘‘tailoring’’ only seems to go in one direction these days. 

It happens to be the direction that Wall Street wants. 

History tells us what will happen next. The IMF, an international financial agency, studied financial markets since the 18th 

century. Periods of deregulation usually provoke a crisis. Policymakers ‘‘learn their lessons’’ and re-regulate. Eventually, the collective amnesia sets in—we know a lot about collective amnesia in 

this Committee. The collective amnesia sets in; they deregulate yet 

again. We know that cycle. Unfortunately, the middle class pays for 

that cycle. 

When big banks are flush with profits, as they are now, policymakers should be preparing them for rough times ahead. Instead, 

4 

Washington is repeating a failed pattern of boom and bust. When 

things go bad once again, executives will get golden parachutes. 

Workers, retirees, and consumers will be left holding the bag. 

Shameful. Just shameful. Makes me wonder why we are here. 

Chairman CRAPO. Thank you. 

Now, Chairman Quarles, we will turn to your testimony. As you 

are aware, we ask that you try to keep your remarks to 5 minutes, 

but we want to hear everything you have to say, and then we will 

open it to questions. You may proceed. 

STATEMENT OF RANDAL K. QUARLES, VICE CHAIRMAN FOR 

SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. QUARLES. Thank you. Thank you, Chairman Crapo, Ranking 

Member Brown, Members of the Committee. I very much appreciate the opportunity to testify today 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 systemic 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 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, our 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. 

So in my testimony today, I will review our regulatory and supervisory agenda to improve the effectiveness of the postcrisis framework through these principles of increased 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. 

Beginning with efficiency measures, 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 the G–SIBs. The proposal would calibrate the 

eSLR so that it is less likely to act as a primary constraint—because when it is a primary constraint it can actually encourage excessive risk taking—while still continuing to serve as a meaningful 

backstop. 

5 

Last year, the Board also adopted a rule that eliminated the socalled qualitative objection of the Federal Reserve’s CCAR exercise 

for midsized firms—those 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. I think that approach should also be considered for a broader range of firms. Last 

week, we called for comment on that potential expansion. 

On the subject of tailoring, I support congressional efforts regarding tailoring, as offered here in the Senate and in the House. 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 that we can improve the efficiency of our requirements with regard to living wills. 

The U.S. banking agencies have also taken a number of steps to 

advance more efficient and effective supervisory programs. For example, we recently increased the threshold for requiring an appraisal on commercial real estate loans from $250,000 to $500,000. 

That does not pose a threat to safety and soundness. And the Fed 

has instituted various measures to clarify and streamline its overall approach to the supervision of community and regional banks, 

in particular. All of that is detailed in my written testimony. 

Transparency is central to the Fed’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 the bank’s 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 stress 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 of control 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, we issued 

a proposal that would effectively integrate the results of the supervisory stress test into the Board’s nonstress capital requirements. 

For the largest bank holding companies, the number of loss absorbency ratios would be reduced from 24 to 12, but the proposed 

changes would generally maintain or 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 capital levels are well above the minimums— 

and 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 to reduce burden, particularly 

for firms that do not have large trading operations and do not enVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00009 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
6 

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

trading. 

In conclusion, the reforms we have adopted since the financial 

crisis do 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. We will do everything we can to fulfill the responsibility that has been entrusted to us by the Congress and the American people, and I thank you again for the opportunity to testify before you this morning. I am looking forward to answering your 

questions. 

Chairman CRAPO. Thank you very much, Chairman Quarles. I 

will start out. 

First, last month, as you know, the Senate passed the Economic 

Growth, Regulatory Relief, and Consumer Protection Act. During 

the debate there was an intense attack on that bill with a number 

of allegations. The one I want to refer to and discuss with you is 

the one that by lifting the threshold, the $250 billion threshold, we 

were going to leave a number of major banks completely unregulated and susceptible to high risk. 

Do you believe that if enacted into law that bill will provide significant regulatory relief to community banks and midsized banks 

as well as some of our regional banks, while still giving the Federal 

Reserve the authority it needs to fully supervise and regulate those 

institutions? 

Mr. QUARLES. Yes, Mr. Chairman, both I and the Federal Reserve as an institution are very supportive of efforts to tailor regulation, particularly for community banks, as exemplified in S. 2155. 

And I do think that the measures that are in that bill would still 

leave the Federal Reserve with full ability to protect the safety and 

soundness of the system. 

Chairman CRAPO. All right. Thank you. I want to switch now to 

a question on firearms, which has become much, much more topical 

these days. According to press reports, the New York State Department of Financial Services is planning to send letters that warn 

banks and insurers of the reputational risk they incur by doing 

business with the National Rifle Association and the gun industry. 

As a prudential regulator, your job is to ensure the safety and 

soundness of banks. A bank’s reputation might be relevant to the 

bank’s safety and soundness, but reputational risk should not be 

used as an excuse for a regulator to scrutinize any behavior it does 

not like. 

Do you believe that doing business with the NRA or with firearms manufacturers or others in the firearms industry threatens 

the safety and soundness of banks under the Fed’s supervision? 

Mr. QUARLES. Well, let me begin, Chairman, by acknowledging 

the importance and significance of the tragedy in Florida and other 

tragedies that have resulted in some of these concerns. 

That said, I do not believe that lending to the NRA or to a lawabiding gun firm in the gun industry raises safety and soundness 

questions. I do not believe that the decision not to lend raises safety and soundness questions, and as a consequence, those issues are 

really outside of our remit as regulators of the system at the Federal Reserve. 

7 

Chairman CRAPO. All right. Thank you. 

Mr. QUARLES. If I could perhaps amplify. 

Chairman CRAPO. Yes. 

Mr. QUARLES. One of the principles that I have tried to stress as 

a supervisor is that we should not substitute our personal judgments as supervisors for the business judgments of bank management and directors, and that is a principle that applies across a 

broad range of issues, again, that I am trying to stress throughout 

the supervisory system. And so I think that would apply here as 

well. 

Chairman CRAPO. Well, thank you, and I appreciate the approach you have taken in your career to regulation. You said in 

your introductory statement something similar to the fact that if 

we can eliminate complexity, if we can eliminate opaqueness and 

get more transparency, there are benefits that flow from that. 

Could you just discuss what benefits flow from having a regulatory system that is less complex, more transparent, and, frankly, 

less excessive when we see excessive burdens being applied to any 

industry, but in this case the financial industry? 

Mr. QUARLES. Well, I think the benefits of transparency and simplicity in regulation, actually they flow both ways, right? So there 

is a significant benefit in reducing burden, not just in the cost of 

complying with regulation, but there is an improvement in compliance and achieving the objectives of regulation, as well when the 

measures that are proposed are understandable by the industry, 

they are then capable of complying with them, that the public can 

see the consequences better of regulation, understand more what 

the particular provisions are. 

So, I think that you have a significant reduction in cost and an 

increase in the efficiency of the system at the same time as you 

have, a greater ability to achieve the objectives of regulation 

through transparent processes and simple measures. 

Chairman CRAPO. And doesn’t that all ultimately result in more 

capital being available to individuals and small businesses? 

Mr. QUARLES. It results in an increased ability of the financial 

sector to support the real economy, the source of job creation, real 

economic growth, growing living standards; and it also supports the 

ability of the public to engage with regulation if it is more understandable. 

Chairman CRAPO. Thank you. 

Senator Brown. 

Senator BROWN. Thank you, Mr. Chairman. 

The FDIC joined the Fed and the OCC in 2014 to establish the 

enhanced supplemental leverage ratio, as you know, in part to ensure that not just the parent company has capital but that families’ 

savings in depository institutions are also protected. But last week, 

FDIC dissented from the Fed’s proposed changes to the leverage 

ratio which would allow the eight largest banks to drain away $120 

billion in capital to fund more stock buybacks and dividends and 

executive bonuses. The leverage ratio proposal also received a no 

vote from one of the three members of the Fed’s Board. 

To put that in perspective, Chair Yellen went her entire 4-year 

term developing consensus without a single dissent from any member of the Fed Board. 

8 

Are you concerned the agency tasked with protecting families’ deposits opposes your plan and that the Fed is moving away from the 

consensus-based approach that characterized all the Dodd–Frank 

rulemakings? Or are you just waiting until the whole entire Trump 

deregulatory deregulation regulators get put in place? 

Mr. QUARLES. We have had a full discussion on the eSLR regulatory proposal, both among the members of the Board and with 

the other regulatory agencies. I think the issue there is that when 

the eSLR or any leverage-based capital measure becomes the binding capital constraint on a firm’s decision, then that means that it 

is making its decisions not on a risk-based basis. It has an incentive to take more risk than it otherwise would if it is going to incur 

the same capital cost. 

The FDIC put out a statement expressing its concern that at this 

point in the cycle this was a modest release of capital. It is quite 

a small amount given the overall level of capital that would actually be released. It is about $400 million actual change given the 

role of the eSLR and the overall capital framework. And in the 

judgment of the majority of the regulators, removing that perverse 

incentive was something that was important to do quickly. 

Senator BROWN. Thank you. I would point out that Chair Yellen 

had some very conservative regulators, regulators that came out of 

your administration, with regulators that came later, and she 

found a way to get consensus. I think your proposals are radical 

enough that you have not. 

A couple other questions. The Fed released a second plan last 

week proposing changes to CCAR. The Fed’s press release said capital requirements would be maintained or would somewhat increase for the eight largest U.S. banks. Analysts at Goldman Sachs 

estimate that the biggest banks, however, would see a windfall of 

$54 billion in dividends, buybacks, and bonuses. 

Is Goldman’s analysis wrong? Did the Fed conduct a comprehensive analysis like Goldman did? 

Mr. QUARLES. We have done an analysis on the basis of our 2017 

information as to what the capital consequences of the measures 

that we proposed last week would be, and, as I have indicated, 

while it varies modestly from firm to firm, for the G–SIBs, capital 

is basically modestly increased, for the non- G–SIBs modestly decreased. The overall level of capital in the system remains effectively flat. 

Senator BROWN. I guess Goldman’s analysis would not use, as 

you did a couple of times, the word ‘‘modestly’’ there. My concern 

about the Chairman’s bank deregulation bill and all of these Fed 

proposals, it is like a game of Jenga. You are pulling out piece after 

piece, and soon enough the entire foundation is going to collapse, 

and you probably will have moved on from your job. Maybe the 

Chairman and I will have moved on. But it is a concern that I hope 

this Fed addresses more acutely than you have. 

Last question. Last month, Chairman Powell provided a carefully 

worded answer that obscured the fact that large foreign banks may 

very well face weaker rules in the U.S. under the Chairman’s bank 

deregulation bill, even if not outright exemption from Section 165. 

Since that testimony, your former colleagues at your firm, Davis 

Polk, whose clients have included Deutsche Bank and Barclays, 

9 

seem to disagree. Davis Polk lawyers about a month ago said they 

‘‘saw no reason to expect that the Federal Reserve would deviate 

from their approach in implementing Dodd–Frank when implementing the new $250 billion threshold. It likely means that the 

toughest Dodd–Frank rules and the requirement to establish an intermediate holding company would not apply unless the foreign 

bank had $250 billion in assets in the U.S. We attempted to 

amend. We were unsuccessful.’’ 

My question is: Will you commit, absolutely commit, contrary to Secretary Mnuchin, that the Fed will not raise the $50 billion intermediate holding company threshold above which the toughest 

Dodd–Frank rules apply? 

Mr. QUARLES. Well, there is certainly nothing in S. 2155 that 

would require us to change our approach with respect to the foreign banks, either on the level of establishment of an IHC or on 

the application of enhanced standards to them. The issue is that 

the threshold being raised from $50 to $250 billion that is contained in the Senate bill, does not have a practical effect for any 

foreign bank operating in the United States because you look at 

their global assets and the global assets of all of them, there is not 

a bank that is sort of in that range that would be affected by a 

move from 50 to 250. 

So there is nothing in the bill that requires us to change our approach. The overall IHC framework I think has been working fairly 

well. 

Senator BROWN. So I guess—and I’m closing, Mr. Chairman. I 

guess I can only see that you are leaving your options open to deregulate these foreign banks that have assets above 50 and under 

250 assets in the U.S. 

Mr. QUARLES. That was not the purpose of my response. 

Senator BROWN. But is that the outcome? I mean, are you leaving that option open to deregulate? 

Mr. QUARLES. No. As one member of a Board that I hope is soon 

not just three people, but as one member of a Board of Governors, 

I obviously cannot commit on what the final outcome will be. But 

I can assure you we do not have a sort of secret plan in my satchel 

here as to what we are going to do as soon as the bill passes. 

Chairman CRAPO. Senator Corker. 

Senator CORKER. Thank you, Mr. Chairman. I appreciate you 

calling this hearing. Vice Chair, thank you for being here and being 

accessible, as the Ranking Member mentioned. I will say chairing 

another committee and thinking about the bland opening comments I make, Senator Brown, I admired the cadence and rhetorical flair of your opening comment. I noticed the repetition. It was 

really something. I am actually going to go chastise my staff for 

me—— 

Senator BROWN. I can help you come to some of your new political positions, too, if you would like. 

[Laughter.] 

Senator CORKER. All right. Thank you so much. 

Mr. Vice Chair, you are not confirmed for the longer term, and 

that has not happened just because it takes so much floor time to 

make that happen. I have had some conversations with you, and 

I can tell that there is a little tentativeness as you talk with people 

10 

like me and others because you have got to depend on Republican 

votes to be confirmed. 

I would say to the my Democratic counterparts that I think the 

Vice Chair would actually push back more against Republicans if 

he was actually confirmed. It is just something to think about. I 

know I called him about something the other day, and he knew 

Chairman Crapo was in a different place, and he was tentative 

about talking to me about it. I would just say that to have a guy 

who is sort of on the bubble really means that even when he disagrees with Crapo or myself or someone else, he is going to be tentative about that until he is confirmed. It is just something to think 

about. So that is my belief. It really is. And I think it is affecting 

his ability to push back on some of the large institutions and others 

and work with them and them rely on guidance. So that is just my 

observation. He is shaking his head up and down, actually, agreeing with me. 

Mr. QUARLES. You might say that, Senator. I could not possibly 

comment. 

[Laughter.] 

Senator CORKER. It is something for, I think, people on both 

sides of the aisle to think about. 

During this last bill passage, there was a Section 402—it is actually the issue I was talking about. You know, Senators here try to 

take care of their constituents back home sometimes, and so we 

have these custodial banks that are located in only a few States, 

and so we had some Senators write a bill that did away with certain types of investments on the denominator side of the equation, 

right? And so everybody around here is enterprising, and so other 

Senators figured out, hey, you know, there is a way for me to get 

some other institutions in under the hood if I can just change the 

language here just a little bit. And so that occurred during the 

process. 

Would we not be better off on technical decisions like that relative to what should and should not be counted, wouldn’t we be 

much better off if people like you were making those decisions? 

And doesn’t the 402 section that we actually have in the bill, 

doesn’t it complicate your life as far as setting ratios in an appropriate way? I would like for you to be really honest with me. 

Mr. QUARLES. I appreciate the question and—— 

Senator CORKER. And I probably will vote for your confirmation 

regardless, OK? 

Mr. QUARLES. And I think I can be pretty candid. You know, I 

do think that the issue of the fact that the current calibration of 

the eSLR is a binding constraint, and particularly for the custody 

banks, but it is not just an issue for the custody banks. You know, 

it creates those perverse incentives that I—— 

Senator CORKER. You are saying what is in the bill. 

Mr. QUARLES. And so I think that a solution to it is important. 

The solution that is in the bill, you know, is one solution. 

Senator CORKER. Not the preferred solution. 

Mr. QUARLES. Well, it is a solution for a limited number of institutions. The concern that I would have as a regulator in pursuing 

that solution—and, you know, there are regulatory arguments for 

that solution, but the concern I would have as a regulator is that 

11 

I do not know where one would turn off the dial, where one would 

stop on this slippery slope. So if one excludes a certain class of assets—in this case central bank reserves—should one also include 

Treasury securities, et cetera? As a regulator, the strong arguments that would be made against me would sort of push me down 

that slope. 

I do think that a legislature is in a better position to resist the 

slipper slope for that solution. But I also think that there is a 

broader response—— 

Senator CORKER. You are saying the regulators are not good at 

resisting pushback from—— 

Mr. QUARLES. Well, I think it depends on the specific issue, and 

on this specific issue you have got sort of a series of arguments, 

you know, that at least from my perspective I was worried would 

lead to a slippery slope. I do not think that that applies, however, 

to the provision in S. 2155. I do think that there is a broader solution that is required. That is why last week we proposed to recalibrate the eSLR to address this same issue. I think that that has 

broad applicability across a range of firms. 

If the provision in S. 2155 does become law, then we will need 

to think as regulators about how we adjust the calibration to ensure that we are not sort of double counting in some places. 

Senator CORKER. So I know my time is up. I would just say to 

the Chairman, I think 402 is a damaging section to this bill. In 

some ways it helps lend credence to some of the arguments that 

Ranking Member Brown was laying out on the front end—just a 

little bit, not much. Just a little credence, not much. And I would 

think that we would be better off in your negotiations with Hensarling, we would be better off dropping 402 and letting the regulators do their job. And I think left to their own accord, most of my 

Democratic colleagues would agree with that. Many Republicans 

colleagues I know already agree with that, and so I hope we will 

strike that entire section with that. 

Thank you for the time. 

Chairman CRAPO. Senator Menendez. 

Senator MENENDEZ. Thank you, Mr. Chairman. 

Vice Chair Quarles, do you agree with the conclusion of the Financial Crisis Inquiry Commission that in the years leading up to 

the crisis compensation and bonus practices at big banks too often 

rewarded short-term gains, big bets, and encouraged senior executives to green-light irresponsible risk taking? 

Mr. QUARLES. Yes. I do not have sort of in my immediate shortterm memory all of the reasoning behind that, but I agree with 

that statement. I do. 

Senator MENENDEZ. OK. In a speech last month, New York Fed 

President Dudley said, ‘‘ . . . an effective regulatory regime and 

comprehensive supervision are not sufficient. We also need to focus 

on the incentives facing banks and their employees. After all, misaligned incentives contributed greatly to the financial crisis and 

continue to affect bank conduct and behavior.’’ 

Most recently we saw this very problem exposed at Wells Fargo. 

The former CEO and the head of the Community Bank Division 

were raking in bonuses while their employees were churning out 

millions of unauthorized accounts. 

12 

Section 956 of Dodd–Frank requires bank regulators to prohibit 

incentive-based compensation practices that reward senior executives for irresponsible risk taking. Regulators issued a proposal in 

May of 2016, but nearly 2 years later, nothing has been finalized. 

In the meantime, Wall Street bonuses jumped 17 percent in 2017 

to an estimated $184,220,000, the most since 2006. 

When you were asked about this rulemaking in January, you 

said, ‘‘I do not have any updates on that for you. It is not something that I have talked to the other regulators about yet.’’ 

So today I am asking you: How is it that you have had time to 

revisit capital rules, revisit leverage rules, revisit the Volcker rule, 

all of which were finalized after years of deliberation, public comments, and input from other regulators, and you have not had time 

to finish the incentive-based compensation rulemaking for the first 

time? 

Mr. QUARLES. That is something that is on the agenda, but it is 

not something that I have a timeframe for you on today. 

Senator MENENDEZ. Well, you revisited a whole host of already 

existing rules, but a rule that is actually part of a requirement of 

the law has not even been visited. And it is on the agenda, you tell 

me, but you cannot give me a timeframe. Well, I think that is pretty outrageous. Can you give me some sense of a timeframe? 

Mr. QUARLES. Not a specific timeframe, but I can tell you that 

I do think that that is an important issue, and it is something that 

we will be discussing. 

Senator MENENDEZ. President Dudley thought a key way of addressing a big bank culture of recidivism was through changing 

compensation arrangements. In contrast, when you were asked 

about bank culture, you said it is ‘‘perhaps not impossible but very 

difficult for a financial supervisor to come up with useful, predictable interventions.’’ 

Isn’t changing compensation precisely how you can address bank 

culture? 

Mr. QUARLES. Addressing the culture of an organization is one 

of the most important things for an organization, but an extremely 

complex matter that involves a variety of different incentives. It is 

something that is most appropriate and ought to be a very high 

priority for the management of an institution. It is something that 

is a very high priority for me at the Federal Reserve with our own 

culture. 

Senator MENENDEZ. It is a very high priority for the Congress. 

They put it into law. And I do not see how you all are seeking to 

follow the law. 

Mr. QUARLES. Well, we are working on implementing that. It has 

not fallen behind the refrigerator and been forgotten about. 

Senator MENENDEZ. Well, I can assure you it will not be going 

behind the refrigerator because I am going to remind you of it, and 

others about it as we go ahead. 

Finally, I know there is significant interest by this Administration in offering a proposal to make changes to the Community Reinvestment Act. I am not opposed to modernization. When 97 percent of banks receive satisfactory or outstanding ratings, but yet 

African American and Latino families continue to be disproportionVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
13 

ately denied mortgage loans, even when controlling for income loan 

amount and location, we have got a real problem on our hands. 

Now, I have, however, real concerns that new proposals will lead 

to weakened enforcement by regulators and discounted importance 

on physical bank branches. Do you expect the Federal Reserve will 

join the OCC’s forthcoming proposed rulemaking? 

Mr. QUARLES. We are working on that as a joint matter, so I expect that that will be issued as a joint proposal. 

Senator MENENDEZ. If I may, Mr. Chairman, the Treasury report 

issued earlier this month recommends that the Federal Reserve 

adopt the OCC’s new policy allowing banks with failing CRA ratings to merge or expand so long as they can demonstrate a potential benefit. Do you anticipate the Federal Reserve will adopt this 

policy? 

Mr. QUARLES. We have not considered that policy as a Board, so 

I do not want to prejudge the judgment of my fellow Governors. 

But I think that it is important to note that what the Treasury is 

saying there is that if a benefit in that particular area, in the service of middle-income and lower-income communities can be demonstrated from a particular application, that the whole picture 

should be taken into account, and that seems reasonable to me. 

Senator MENENDEZ. I have other questions, but I will submit 

them for the record. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Kennedy. 

Senator KENNEDY. Thank you, Mr. Chairman. Good morning, Mr. 

Chairman. 

First, I want to join Senator Corker in his observation that our 

Ranking Member has a silver tongue, and I mean that as a compliment. A silver-tongued devil. 

Number two, this is an observation. I am not looking for a comment. We have not had a recession since 2008, so from one point 

of view, our too-big-to-fail banks have not really been tested. And 

I would strongly encourage, for what my opinion is worth, that we 

tread very carefully before we lower capital and liquidity ratios and 

start fooling with the leverage ratio until we see how our banks do 

in a real full-blown recession. But that is not what I really wanted 

to ask you questions about. 

Would Citigroup have survived the meltdown in 2008 had the 

U.S. Congress not provided it capital? 

Mr. QUARLES. I do not know the answer to that question, Senator, but, obviously, it was under extreme financial stress. 

Senator KENNEDY. How about the Bank of America? 

Mr. QUARLES. I would have to take the same position. 

Senator KENNEDY. OK. Did any person in senior management at 

Citigroup go to jail as a result of the meltdown in 2008? 

Mr. QUARLES. I am not aware of anyone. 

Senator KENNEDY. OK. And I believe the American taxpayer provided Citigroup somewhere in the neighborhood of $475 billion in 

capital and loan guarantees. Does that sound about right? 

Mr. QUARLES. That sounds about right. 

Senator KENNEDY. Let us suppose that a senior member of management at Citigroup had been investigated in 2008 and an FBI 

agent showed up at his or her house and said, ‘‘Hey, I want to come 

14 

in and look around, but I do not have a warrant,’’ and that 

Citigroup senior manager said, ‘‘Well, look, man, you know, I have 

got a Fourth Amendment right. You cannot come in here without 

a warrant.’’ Do you think other banks should not do business with 

that senior manager at Citigroup because he exercised his Fourth 

Amendment right? 

Mr. QUARLES. No, I do not. 

Senator KENNEDY. OK. Let us suppose that senior manager had 

been subpoenaed to testify in court, and the senior manager took 

the stand, was sworn in, and said, ‘‘You know, I have got a right 

under the Fifth Amendment of the United States Constitution not 

to answer questions, and I do not mean to upset anybody, but I 

think I am going to use that right.’’ Would that have been legal? 

Mr. QUARLES. No. 

Senator KENNEDY. For him to take the Fifth Amendment? 

Mr. QUARLES. I am not speaking as a lawyer here, but I cannot 

imagine that it would have been illegal. 

Senator KENNEDY. Well, trust me. It would have been. OK? Do 

you think that other banks ought not to do business with that senior manager at Citigroup because he exercised his right under the 

Fifth Amendment to the United States Constitution? 

Mr. QUARLES. That would not be my personal decision, no. 

Senator KENNEDY. OK. Let us suppose that a customer wants to 

exercise his First Amendment right to speak out against abortion. 

Do you think banks ought not to do business with him? 

Mr. QUARLES. On that basis alone, that would not be my personal view. As a supervisor, I am not sure it would be my role to 

direct the bank on that question. 

Senator KENNEDY. OK. 

Mr. QUARLES. But that would not be my personal view. 

Senator KENNEDY. Let us suppose that a customer wants to 

speak out in favor of a woman’s right to choose. Do you think a 

bank ought not to do business with him? 

Mr. QUARLES. I would have the same view. I would not think 

that the bank should refuse to do business. As a supervisor, given 

my stress that we should not be second judging managements and 

directors on what business lines they choose to go into, I am not 

sure it would be my role to second guess it, but I personally would 

not do it. 

Senator KENNEDY. Would your answers be the same if the subject were climate change as opposed to abortion? 

Mr. QUARLES. Completely. 

Senator KENNEDY. OK. Well, as you know, Citigroup and Bank 

of America have decided to make gun policy for the American people, supplanting the U.S. Congress. Citigroup in particular says it 

will not do business with anybody that sells guns to people who 

have not passed a background check. It will not do business with 

anybody who sells guns to someone under 21, who sells bump 

stocks, high-capacity magazines, all of which are permissible under 

the United States Constitution. Would that position violate State 

and local age discrimination laws? 

Mr. QUARLES. I do not know the answer to that. 

15 

Senator KENNEDY. Well, if it did and a federally regulated bank 

was in violation of State and local law, would you do something 

about it? 

Mr. QUARLES. If a bank is violating local law, we have a responsibility as a supervisor to—— 

Senator KENNEDY. OK. Citigroup says that it will not do business with anybody that sells guns to someone who does not have 

a background check. Under the NICS data base system, you can actually buy a gun without a data base if your name—if the FBI does 

not give you an answer within 3 days, you get to buy the gun, and 

then they keep checking, and later on if they find out you are not 

entitled to the gun, they come get it. So if Citigroup’s position violates Federal law, would you have something to say about that? 

Mr. QUARLES. If there were a violation of Federal law, yes, that 

is part of our role as supervisors. 

Senator KENNEDY. All right. I have only got a couple more, Mr. 

Chairman. 

In Arizona, in Alaska, in Wyoming, you can carry a handgun 

without a permit, concealed or unconcealed, under the United 

States Constitution. Do you think Citigroup ought to stop doing 

business in Arizona, Alaska, and Wyoming? 

Mr. QUARLES. Well, that is a pretty fraught question because, as 

a supervisor, I think that their decision—— 

Senator KENNEDY. All right. Let me interrupt you because I am 

going to get cutoff. 

Mr. QUARLES. OK. 

Senator KENNEDY. But I do not mean to be rude. 

Mr. QUARLES. I understand. Of course I understand. 

Senator KENNEDY. I think you are doing a swell job. In Kansas— 

in Vermont, you only need to be 16 years old to purchase certain 

guns. Do you think all banks ought to pull out of Vermont? What 

do you think Senator Sanders would say? 

Mr. QUARLES. I know what Senator Sanders would say, but those 

are issues, I think, that, again, as supervisors, I am trying to stress 

that we should not substitute our judgment as to what geographies 

and business lines banks go into. 

Senator KENNEDY. I understand. Well, what I am trying to stress 

is we do not need red banks and blue banks. We do not need banks 

that will only do business with people who voted for President 

Trump. We do not need banks who will only do business for people 

who voted for Secretary Clinton. We need banks that are safe and 

sound and honest and that appreciate it when the American taxpayer puts up billions and billions of dollars of their hard-earned 

money to keep these banks from going belly up. That is what we 

need. 

Thank you, Mr. Chairman. 

Mr. QUARLES. Thank you, Senator. 

Chairman CRAPO. Thank you. And I have let one Senator on each 

side take a couple extra minutes. I would like all the other Senators to know that it is balanced and you are back to 5 minutes. 

[Laughter.] 

Senator KENNEDY. I just did it because Senator Brown did it. 

Chairman CRAPO. OK, so it is balanced. But, please, honor the 

time. Senator Schatz. 

16 

Senator SCHATZ. Thank you, Mr. Chairman. Vice Chairman, 

thank you for your service. thank you for being here. 

I want to ask you about the evidence of a regulatory burden. In 

a recent speech, Chairman Jerome Powell stated, ‘‘As you look 

around the world, U.S. banks are competing very, very successfully. 

They are very profitable. They are earning good returns on capital. 

Their stock prices are doing well.’’ 

So I am looking for the case for some kind of evidence that—and 

I am open to this—some kind of evidence that regulation is holding 

them back, and I am not really seeing that case as made at this 

point. And the data back up his comment. Bank of America announced a profit of $6.9 billion in the first 3 months of this year, 

the biggest quarterly profit in history. The facts show that banks 

are thriving. The FDIC shows that banks had record-breaking profits in 2016, and 2017 would have broken that record again if it 

were not for one-time charges from the new tax law. JPMorgan 

Chase and Company analysts predict record increases in bank dividends of 38 percent in 2018 and 26 percent in 2019, and the Bank 

of America, for example, is expected to increase dividends by 126 

percent through 2019. Demand for credit, such as home loans, car 

loans, credit cards, has surpassed pre-recession highs, and lending 

is up. These are the most profitable financial institutions in history. 

And so the question is quite simple: What problem are we trying 

to solve with deregulation? 

Mr. QUARLES. In the first instance, I would say at least as I look 

at the regulatory reform effort, it is not an effort to deregulate. It 

is an effort to ensure that we achieve our regulatory objectives in 

an efficient way. So of the proposals that we made last week, there 

is in the capital reduction under the stress capital buffer proposal—— 

Senator SCHATZ. OK, I understand. I mean, I do not want to 

quibble about how we characterize this thing. I want you to answer 

the question. If these banks are experiencing record profits, that is 

one sort of—I think we can agree upon that. Can we? 

Mr. QUARLES. Yes, absolutely. 

Senator SCHATZ. OK. And then we can also agree that sort of 

generally the reason you might want to loosen up restrictions or 

what you call ‘‘tailor’’ is to allow more capital to be deployed to 

small businesses and individuals who may want loans so they can 

grow the economy and pursue the American Dream, not so that all 

of those additional profits can be plowed back into dividends and 

stock buybacks. 

So I ask you again: What problem is being solved by what I call 

‘‘deregulation’’ and what you may name differently, but what problem are you solving? 

Mr. QUARLES. Well, if we want to get sort of at the very specific 

level, there has been sort of a shortage, a restriction of small business credit. We have found that at the Federal Reserve. That is the 

type of credit that has historically in this country been provided by 

community and regional banks. There are a variety of reasons for 

that restriction, but I do think that one of those reasons is regulatory burden, and that we can improve the efficiency of the reguVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
17 

latory system without in any way undermining its safety and 

soundness and address that problem, among a number of others. 

Senator SCHATZ. Is there any evidence that when they become 

more profitable, either as a result of the tax law or as a result of 

a loosening of the constraints from Dodd–Frank, that they actually 

make more capital available to small businesses? Because what I 

see is record stock buybacks and dividends. And so I get the argument you are making, but you are a data-driven person, I assume, 

and this is a data-driven industry. So I want to understand. Do you 

have any research that demonstrates that, to the extent that we 

give tax relief to the most profitable financial institutions in 

human history and we give regulatory relief to these same institutions, is there any evidence that this actually helps the people that 

you are describing? 

Mr. QUARLES. I certainly know that on the regulatory front—and 

I am pretty sure, although I cannot think of specific studies on the 

tax front, but I am pretty sure that in general they exist—that 

there are economic studies that show that in both of those areas, 

the benefits will be spread among a number of constituencies, and 

that will include both—— 

Senator SCHATZ. But you are just repeating your claim. I am asking you for evidence, and you just kind of go around and around 

sort of repeating the rhetoric that supports this claim. But I am 

asking for evidence, and you are saying there is evidence. I am asking you what it is. 

Mr. QUARLES. I will be happy to forward that to you. 

Senator SCHATZ. OK. I will be waiting. 

Thank you. 

Senator BROWN [presiding]. Senator Toomey. 

Senator TOOMEY. Thank you, Mr. Chairman. Welcome, Mr. 

Quarles. Thank you for testifying here. Two things I wanted to 

touch on. 

First, it is my understanding that the Board of Governors of the 

Fed consists of three members right now. There are only three of 

the seven members. And I wonder if from your perspective that 

poses any challenges to the day-to-day operations and functioning 

of the Fed and how important it is in your mind that we confirm 

individuals to these vacancies. 

Mr. QUARLES. It is very obviously welcome but also important to 

confirm the people who have been nominated to open seats on the 

Federal Reserve Board. We can do our work, but it is clearly a 

strain on the organization. And the organization functions better 

when we have a broader range of viewpoints, more diverse backgrounds, you know, a full complement of people. 

Senator TOOMEY. Thank you, and I am hoping soon we will be 

able to confirm you to the full term that I would suspect and hope 

would follow the big overwhelming vote I think you got previously. 

Mr. QUARLES. Thank you, Senator. 

Senator TOOMEY. Let me move on to another one. As you know, 

the Senate passed by a substantial bipartisan margin a banking 

regulatory reform bill with mostly modest regulations, regulatory 

reforms. One of the most important items in that legislation, in my 

opinion, was raising the threshold for the automatic SIFI designation from $50 billion to $250 billion, so I think that is very conVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
18 

structive because the banks otherwise captured by this are, in fact, 

not systemically important to the country and they, therefore, do 

not deserve to be subject to this added cost and regulatory burden. 

However, I still think that even in the case of $250 or $300 or 

$500 billion banks, this whole category, it would still be more appropriate to have a regulatory framework that is based primarily 

on the activities of the institution rather than an arbitrary asset 

designation. As you know, there is nothing meaningfully different 

from an asset threshold point of view about a bank that is $251 

billion versus one that is $249 billion. 

So, number one, do you agree with that point, with the idea that 

this regulatory framework ought to be more based on activities certainly for these banks that are in the lower end of this range? And 

then I have one other question for you. 

Mr. QUARLES. On the question of asset thresholds versus activities if I had my druthers, probably you would set an asset threshold below which there was an exemption, below which you were 

perfectly confident that firms of that size were going to be of a complexity and nature that they would not pose systemic risk. And 

then above that, you would take a variety of factors into account 

in determining the application of enhanced standards. Ultimately, 

as you all know better than I, it is up to the Congress to decide 

how that balance will be struck. But once it is struck, I think that 

we as regulators ought to take into account those full range of factors in determining how to tailor regulation in the realm where 

regulation remains to be applied. 

Senator TOOMEY. So one specific area where it is my understanding that you have the discretion to modify this is the application of the LCR, and especially for large regional banks that are 

not G–SIBs. Smaller banks, under $250 billion, my understanding 

is there is—the sort of default setting is a different regime, a modified LCR, and that you have the authority to apply a modified 

version of the LCR for larger banks if their activities warrant that. 

Are you making progress on making changes to how the LCR 

would be applied to banks that might be bigger than $250 billion? 

Mr. QUARLES. We are, Senator, and I agree with you that that 

would be an appropriate differentiation. I have said that publicly, 

and that is something that we are working on to determine exactly 

how to appropriately tailor that regulation. 

Senator TOOMEY. Do you have a timeframe in mind that you 

could estimate for us when we would see something? 

Mr. QUARLES. Well, without wanting to toss this back, we are 

waiting to see what the legislative framework settles down to be, 

and when we see what that is, then we will know how to respond 

on the tailoring front. I suppose certainly at least right now, if that 

were to extend for a longer period, we might move forward on a 

different schedule, but at least right now we are waiting to see sort 

of what the legislative framework we are given is. 

Senator TOOMEY. I am sorry for going—I will wrap up, but I 

would just urge you to—we do not know the timeframe by which 

we are going to—I assume you are referring to the disposition of 

the Senate-passed bill. 

Mr. QUARLES. Correct. 

19 

Senator TOOMEY. It is an open question as to how that is going 

to proceed, and when is very much an open question. So I would 

really urge you to move ahead as quickly as you reasonably can. 

Mr. QUARLES. I appreciate that, Senator. 

Senator TOOMEY. Thank you. 

Senator BROWN. Senator Cortez Masto. 

Senator CORTEZ MASTO. Thank you, and thank you, Vice Chair, 

for being here. 

Let me switch topics a little to cost-benefit analysis. I understand 

that the Federal Reserve has a new Policy Effectiveness and Assessment Unit. Is that correct? 

Mr. QUARLES. That is correct. 

Senator CORTEZ MASTO. And so how many people are working in 

the unit and what is the core mission of the unit? 

Mr. QUARLES. It is a small group of economists. I will have to 

get you the exact number so that I do not misstate, but the core 

mission of the unit is to look at the body of postcrisis regulation 

and to kind of do a deep dive into an analysis of the effectiveness 

in areas of capital liquidity and resolvability. 

Senator CORTEZ MASTO. And do they engage in a cost-benefit 

analysis? I have heard this topic quite often. 

Mr. QUARLES. In the broadest sense of the term, yes. I mean, 

they are looking at overall effectiveness, and obviously, costs, 

broadly considered, are part of that. 

Senator CORTEZ MASTO. Do you think cost-benefit analysis is a 

key function for what you are supposed to be doing? 

Mr. QUARLES. I think that it is a very important element of what 

we are supposed to be doing. 

Senator CORTEZ MASTO. And I agree. I think sound data is critically important in informing the policies and decisions that you will 

be making. But one of the things I do have concerns about—and 

I have seen this over and over again—that such analysis actually 

fails to capture the human and economic costs of massive financial 

system failure. Would you agree? 

Mr. QUARLES. I would agree with that, yeah. 

Senator CORTEZ MASTO. Thank you. Let me ask you this: Would 

you agree that the Fed underestimated the human costs of a potential financial crisis prior to 2008? 

Mr. QUARLES. Yes, I would, because we underestimated the likelihood of it, yes. 

Senator CORTEZ MASTO. All right. And, thus, the concern that we 

are hearing and that I have about rolling back some of these regulations and giving the Fed the authority over safety and soundness. 

I will tell you, in Nevada, from 2007 to 2014, there was no Federal 

oversight predicting what was going to happen and then there 

helping us address the issue. So that is the concern I have with S. 

2155 and the rollback of the regulations over the largest banks. So 

I appreciate your agreeing with me with those concerns. 

Let me jump to another topic on fair lending. The Center for Investigative Reporting recently published several articles on modern-day redlining after its year-long investigation based on 31 million records publicly available under the Home Mortgage Disclosure Act to identify lending disparities. The studies found numerous fair lending violations. African Americans and Latinos are 

20 

charged higher fees and interest on a mortgage than white borrowers with similar credit histories. African Americans, Asians, 

Latinos, and Native Americans are denied mortgages at higher 

rates even with similar credit and income. And single women pay 

higher interest rates for mortgages even when they have higher 

credit scores and bigger downpayments than single men. 

Now, you have said that you oppose discrimination in lending. 

The Federal Reserve has examination and supervisory authority of 

banks with fewer than $10 billion in assets. How does the Federal 

Reserve discover discrimination in lending? Does it involve using 

the HMDA data? 

Mr. QUARLES. We do use HMDA data, but where there is additional data that we believe is necessary, we have the supervisory 

ability to get that. So the HMDA data at issue here, it is principally a question of public disclosure. We have the ability to get 

the data that we need to perform that supervisory assessment irrespective of those particular HMDA provisions, and we do. 

Senator CORTEZ MASTO. So let me ask you this: If S. 2155, which 

excludes 85 percent of banks and credit unions from reporting 

HMDA, becomes law, can you ensure that banks making fewer 

than 500 mortgage loans a year are not engaged in redlining or 

other types of discrimination? 

Mr. QUARLES. We would have the information that we need, 

again, through our ability to require it to be provided to us as a 

supervisory matter to take those actions, yes. 

Senator CORTEZ MASTO. And how can we in the public sphere ensure that you are doing that? Because prior to 2007, we know the 

Feds were not there, and so how do we, without having that public 

information transparent, so you have independent watchdogs looking and assessing to make sure that redlining is not occurring, how 

do we ensure that you are doing your job if we do not have that 

information? 

Mr. QUARLES. Transparency and accountability is important, particularly for an institution such as the Federal Reserve. Ultimately, 

however, the balance between public disclosure and the cost on institutions is one that the Congress will have to make. I can assure 

you, though, that however you ultimately choose to strike that balance, we will have the ability as supervisors to get the information 

that we need. 

Senator CORTEZ MASTO. But there is no independent verification 

that you are actually doing it, correct? 

Mr. QUARLES. Well, as I understand the provision in 2155, there 

is quite a bit still of public disclosure. But, the balance that you 

strike is up to you to strike. 

Senator CORTEZ MASTO. Thank you. I know my time is up. 

Thank you very much. 

Senator BROWN. Senator Cotton. 

Senator COTTON. Thank you, Mr. Quarles, for your appearance 

here today. I want to speak to you about FINRA Rule 4210. 

Two years ago, I sent a letter to the SEC expressing concern 

about this rule, which established margin requirements on to-beannounced securities such as mortgage-backed bonds. The key 

problem here is that Rule 4210 applies to broker-dealers but not 

to banks. Thus, broker-dealers can use their banking arm to evade 

21 

the requirement, which can create an unfair and uneven playing 

field. 

Earlier this week, Federal Reserve staff confirmed with my adviser that this is a potential inequity, and I would say that there 

are Arkansas firms that will simply exit the market if this uneven 

playing field comes to pass. Do you share my concern about this 

matter? 

Mr. QUARLES. I would say that certainly as a general principle, 

a level playing field is important, and that is across a range of 

issues, whether it is banks and broker-dealers, big banks and small 

banks, domestic banks and international banks. So it is a pretty 

high priority for us as regulators to try to ensure that our regulatory system creates a level playing field. 

On the specific issue of the FINRA rule you are citing, I am only 

now becoming familiar with it but am very engaged in understanding how it is affecting that level playing field. 

Senator COTTON. OK. Rule 4210 is one of those final rules not 

yet in effect which both the SEC and the Federal Reserve have the 

ability to alter. Can I get your commitment to take a review of it 

and to ensure that it does not create an unequal playing field between smaller broker-dealers and larger bank-affiliated firms? 

Mr. QUARLES. We will certainly review it through that lens, yes. 

Senator COTTON. Thank you. Let us look now to the international 

system, specifically the Financial Stability Board, or FSB. In January, I sent a letter, along with several other members of this Committee, to President Trump raising my concerns that went to many 

other members of the Administration, including yourself. I am sure 

it is right at the top of your mind. 

Mr. QUARLES. Actually, it is. 

Senator COTTON. Just in case it is not, I will say that I am worried that the FSB has morphed from an advisory organization into 

a global regulatory body and using quasi-enforcement tools. A couple months ago, Secretary Mnuchin testified that FSB is, in fact, 

an advisory organization and that its rules are voluntary, not binding. Do you agree that the FSB rules are voluntary? 

Mr. QUARLES. Yes. Yes, I do. 

Senator COTTON. In 2015, four Chinese banks sought an exemption from an FSB rule related to how much capital they hold. Can 

you imagine a scenario in which a United States firm would ever 

have to seek an exemption from an advisory rule of the FSB? 

Mr. QUARLES. No. 

Senator COTTON. In 2013, the FSB determined that two large 

American insurers were globally systemically important insurers. 

Those two insurers, though, had not yet been designated as systemically important financial institutions in the United States. 

That creates an unusual circumstance in which the FSB, which operates by consensus to include U.S. Government officials, had determined that U.S. firms were globally systemic, yet those same 

U.S. officials had not determined that they were systemic in our 

Nation itself. I suspect the Trump administration would have a 

slightly different approach to this matter, but what can we do to 

ensure that future Administrations do not take such strange steps 

in which they are acting through the FSB to achieve results on regulating U.S. firms that they have not yet taken under U.S. law? 

22 

Mr. QUARLES. The FSB designations are purely advisory. It is up 

to national authorities in any particular country to implement 

them, and we have our FSOC process through which that would be 

done, and the FSB advisory stance does not really affect the FSOC 

process. 

I think the larger question, though, that you are raising is an important one, which is I do think that we in our engagement in 

these international fora, the FSB, the Basel Committee, I think is 

very important because I think trying to ensure a level playing 

field for our globally active institutions is in their interest. It is in 

our national interest. But we need to ensure that we are fully engaged with all of the various stakeholders in our country as we go 

into those national fora and represent, you know, a broad range of 

views as opposed to a narrow range of views. 

Senator COTTON. Thank you. I agree with that. It is important 

to stay engaged to ensure that we have fair and equal playing 

fields overseas. It is also important to ensure that U.S. sovereignty 

prevails in the regulation of our financial institutions, to include 

large financial institutions which have—— 

Mr. QUARLES. I completely agree. 

Senator COTTON. ——not just rich bankers at their top but lots 

of clerks and secretaries and delivery personnel and tellers and everything else spread around the country whose jobs may depend on 

the United States getting a fair and level playing field overseas as 

well as not having overseas advisory institutions stretch their regulatory hands inside of our borders. 

Thank you, Mr. Quarles. 

Mr. QUARLES. Thank you, Senator. 

Chairman CRAPO [presiding]. Senator Jones. 

Senator JONES. Thank you, Mr. Chairman, and thank you, Vice 

Chairman Quarles, for your attendance here today. I really appreciate your being here. 

I want to go back just a moment to an area that Senator Menendez discussed with you, and that is with the Community Reinvestment Act. Frankly, from my State’s perspective, that is one of the 

most important things that the Fed will do, and I think modernizing the CRA is going to be one of the most important things that 

you may do in your term. 

What gives me a little bit of concern right now is that coming 

out of the OCC I see comments that as part of the modernization 

effort, they would like to see a universal measurement system, I 

think the comment was, for $100 million banks in Iowa the same 

as JPMorgan. That gives me a little bit of concern because of the 

obvious disparities in communities around the country, and I would 

like to kind of get your views on what you think. I am not tying 

you to specifics. I understand that. But I would like to kind of get 

your views on whether or not the CRA rules should appropriately 

reflect the individual needs of specific communities across the country. 

Mr. QUARLES. I want to make sure that I do not sort of frontrun the joint process that is going on—— 

Senator JONES. Yes. 

Mr. QUARLES. ——in discussing exactly these issues among the 

regulator, because we do want to come out with a joint proposal, 

23 

and we are still talking about how some of these issues will be handled. 

As a general matter, though, I think that the purpose of CRA 

modernization, CRA reform, however one wants to describe it, is 

precisely to—I think there is a lot of consensus and desire on the 

part of community development organizations and players themselves, not just the banks and the regulators, in order to have that 

process really be broader, directed toward a broader range of community development activities than has happened in the past. And 

I think that under the principles of transparency and simplicity, I 

think that we can improve the regulation in a way that creates incentives to do that and creates incentives for compliance—really 

more than compliance—engagement by the banks that really does 

help revitalize the moderate- and lower-income sections of communities. And that is the lens through which the Fed is participating 

in these discussions. 

Senator JONES. All right. Thank you, sir. And going back to Senator Cortez Masto’s questions, I was a cosponsor and voted for the 

bank regulatory bill, S. 2155, but the concerns that she raised are 

still a concern of mine as well. Again, we have a lot of minority 

communities, and I want to make sure that those folks are not discriminated against. I want to make sure that they are not redlined. 

Can you just simply—and I heard your answer, and I appreciate 

that. But will discrimination in housing and lending still be—will 

it be a priority with you and the Fed? 

Mr. QUARLES. A very high priority for me personally and for the 

Federal Reserve as an institution. 

Senator JONES. All right. Thank you, sir. 

You have also talked about—I know one of the other priorities 

has been cybersecurity, and I think that that is a very—that is 

something that also gives me a lot of pause in today’s world. And, 

particularly, I know there are a lot of efforts going on right now 

to beef up cybersecurity within our own system, but we are so globally connected now that I worry about our connectivity with other 

global markets and other banks. 

Can you give me a sense of what you are doing in working with 

international banking regulators to make sure that those banks are 

as secure and as up-to-date in working with the cybersecurity? Because if it happens somewhere else, it could very well affect folks 

in Alabama. 

Mr. QUARLES. Yeah, that is obviously one of the most significant, 

if not the most significant risk that faces the financial sector currently, and you are right to highlight the international aspect of it. 

In our discussions among central banks and among bank regulatory agencies around the world, I would say that that is probably 

the highest priority item that we have, discussing ways to ensure 

that our systems are resilient. Internally, domestically, we look at 

that, including the international component, in sort of a broad 

range of interagency activities. There is the FBIIC, which is focused on tech infrastructure, the FSOC, you know, there are processes within the FSOC to look at this issue, very high priority for 

us. 

All of that said, I would say that we still have to do more. It is 

the issue that I am most concerned about and the one that I think 

24 

that we are probably—that we have most to do on. I do not think 

that we have the best handle on it yet. We are working very hard 

on it. 

Senator JONES. All right, great. Thank you, Vice Chairman 

Quarles. 

Thank you, Mr. Chairman. 

Mr. QUARLES. Thank you, Senator. 

Chairman CRAPO. Senator Scott. 

Senator SCOTT. Thank you, Mr. Chairman. Thank you, Vice 

Chairman, for being here this morning. 

As you may know, I spent about 20-plus years in the insurance 

industry. 

Mr. QUARLES. I knew that. 

Senator SCOTT. I am glad to hear that. And I am a big fan of 

the State-based regulation system for insurance. We have an old 

saying in South Carolina, like many things Georgia thinks it started in Georgia, but it started in South Carolina: ‘‘If it ain’t broke, 

don’t fix it.’’ 

Unfortunately, Congress did some fixing in the Dodd–Frank Act 

as it relates to insurance. Many insurance savings and loan holding 

companies are now supervised at the holding company level by 

both the Federal Reserve and State insurance regulations, creating 

redundant rules of the road that are not proportional to the risk 

profile of these firms. That runs counter to your preference for regulatory efficiency, and it adds costs for policyholders. I will ask you 

just a couple questions. 

Do you support a more streamlined regulatory approach that 

would uphold a State-based system of insurance regulation while 

right-sizing the Fed’s examination authority? And will you ensure 

that the Federal Reserve does not apply bank-centric supervisory 

tools or expectations to insurance savings and loan holding companies? 

Mr. QUARLES. At that level of answer, the answer is definitely 

yes. I have been concerned, as I have talked with these insurance 

savings and loan holding companies, that it does seem as if the 

burden that our regulation of the holding company because of their 

owning what are sometimes relatively small and certainly in the 

context of their organizations relatively small savings and loans is 

out of whack. We are imposing too much burden on them. 

I do think that as long as they have a depository institution subsidiary, I think that there are sort of bank regulatory principles 

that we need to apply. We have not got the balance right. We have 

not worked out how to do that in a way that does not impose excessive burden on the institutions, and it is a high priority for me to 

fix that. 

Senator SCOTT. That is one of the reasons why I used the word 

‘‘right-sizing.’’ 

Mr. QUARLES. Yes. 

Senator SCOTT. Because the reality of it is that the regulatory 

burden that is placed upon really the policyholders through additional cost should be appropriate for the risk profile that those 

firms actually have. 

Mr. QUARLES. Agreed. 

25 

Senator SCOTT. The Fed also regulates insurance through FSOC. 

Secretary Mnuchin told me a revamp of the nonbank SIFI designation process is underway. Can you give me an update on that? And 

is it a rule or guidance that is coming? 

Mr. QUARLES. Well, again, not wanting to front-run a process 

that has a number of agencies involved in it and that we are in 

the middle of, the general direction of the process is pretty clear, 

which is that we are looking at how to—and certainly I support the 

approach of designating on an activities basis as opposed to an entities basis and determining what activities can create systemic 

risk and then finding a way to apply appropriate regulation to 

those activities. I think that while the practical issues that that 

raises are difficult, they are solvable, and I think that intellectually 

that is a superior way to think about the process. 

Senator SCOTT. Another way the Fed regulates insurance is 

through the IAIS. The ICS that you are working on should accommodate our State-based system of insurance regulation, not the 

other way around. Will you make that clear to the IAIS? And 

where are we in the ICS process? 

Mr. QUARLES. Yes, that has our support for an internationally 

agreed capital regime that reflects our U.S.-based approach. It is 

something that we have been pursuing in the international fora 

and are continuing to do so. We are pretty strong about that. 

Senator SCOTT. So I am going to take that as a yes, you will 

make clear to the IAIS—— 

Mr. QUARLES. We will, yes. 

Senator SCOTT. Thank you. Before I close, I want to mention the 

Fed’s recent enforcement actions against Wells Fargo. I am all for 

regulatory relief. I think it is clear that we overcorrected in the 

past and our economy suffered as a result. What I am not for is 

fraud. What I am not for is theft. I hope you and your colleagues 

do not hesitate to pursue similar actions in the future when they 

are warranted. 

Thank you. 

Mr. QUARLES. Thank you, Senator. 

Senator SCOTT. Thank you, Mr. Chairman. 

Chairman CRAPO. Senator Warren. 

Senator WARREN. Thank you, Mr. Chairman. 

So before the financial crisis, regulators treated dangerous mortgage-backed securities the same way they treated safe Treasury 

bonds when establishing capital requirements. The regulators 

badly misjudged the risk of those mortgage-backed securities. The 

result was that taxpayers were left holding the bag when the big 

banks did not have enough capital to withstand losses. 

So after Dodd–Frank Act, too-big-to-fail banks were required to 

have a certain amount of capital for each dollar in assets, regardless of the riskiness of those assets. Last week, the Fed proposed 

weakening this rule. 

So, Governor Quarles, this new rule will allow each and every 

too-big-to-fail bank to satisfy the non- risk-weighted capital requirement while holding less capital than the previous rule, right? 

Mr. QUARLES. That is correct. 

Senator WARREN. OK. So the Fed is rolling back capital requirements for the biggest banks, and it is not just a marginal rollback. 

26 

The FDIC has estimated for this Committee that under the proposed rule, JPMorgan, Citigroup, and Morgan Stanley will be able 

to reduce their capital by more than 20 percent at their bank subsidiaries and still meet their leverage capital requirements. Wells 

Fargo and Bank of America can each reduce their capital by more 

than 15 percent. 

The FDIC, which insures these banks and has to pay out if the 

banks fail, refused to join in this new proposal. Chairman 

Gruenberg said the leverage ratio requirements are ‘‘among the 

most important postcrisis reforms’’ and the existing ‘‘simple approach has served well in addressing the excessive leverage that 

helped depend the financial crisis.’’ And Governor Brainard voted 

no on the proposal, the first dissent since the Fed started making 

its votes public. 

So, Governor Quarles, why did you think it was all right to roll 

back capital requirements given this unprecedented level of opposition from both the FDIC and your fellow Governor at the Fed? 

Mr. QUARLES. A number of reasons. One, our estimate of the actual capital effect of the rule is much smaller. 

Senator WARREN. Do you think the FDIC does not know the 

numbers? 

Mr. QUARLES. Our estimate is much smaller, and the incentive 

that is created when a leverage ratio is actually the binding ratio— 

I completely agree with you, Senator, that the crisis has shown us 

that leverage capital measures are an important element of capital 

regimes, and I have a much greater appreciation of that than I did 

before the crisis, because our risk assessments, there will always 

be idiosyncracies, mistakes in even the most careful and granular 

risk assessment. 

But if we set the leverage ratio so that it becomes the binding 

ratio, which at the level we had set it, it was for a number of institutions, and basically what we are saying to them is you will bear 

the same capital cost if you take on a very risky asset or if you 

take on a less risky asset. 

Senator WARREN. You know, but what troubles me about this 

is—I believe the FDIC on their numbers. I have no reason not to. 

They have been in this business for a very long time, and they are 

the ones that pay out. But even more importantly, under Chair 

Yellen the Fed moved carefully and with consensus to strengthen 

capital requirements. In your first year, you have already started 

rolling back these requirements, despite significant opposition, and, 

you know, this is great for big banks already making record profits. 

But it is the taxpayers that end up on the hook for the risk. 

So I want to ask you a related question to this. The banking bill 

that just passed the Senate also eases capital requirements for institutions ‘‘predominantly engaged in custody, safekeeping, and 

asset servicing activities.’’ Now, this provision clearly applies to the 

so-called custody banks like Bank of New York Mellon. The question is whether JPMorgan and Citi can also cut their capital under 

this provision. The CBO says it is a 50–50 shot whether or not 

JPMorgan and Citi would qualify. You are the guy who will get to 

make that decision. 

27 

So if the bill that just passed the Senate is written into law, will 

you interpret the custody bank provisions to include JPMorgan and 

Citi? 

Mr. QUARLES. So although I am a lawyer, I am not appearing 

here as a lawyer, so I do not want to perform—a surgeon should 

not perform his own appendectomy, but my reading of that provision would be that the word ‘‘predominantly’’ would not include the 

activities of a firm such as Citi or JPMorgan. 

Senator WARREN. So are you saying for certain that the language 

of the legislation cannot be interpreted to allow JPMorgan and Citi 

to reduce their capital by an estimated $30 billion? 

Mr. QUARLES. That would not be my view. 

Senator WARREN. So it will not happen. 

Mr. QUARLES. Well, I am one person on a Board that I hope soon 

has other members. 

Senator WARREN. OK, good. You know, I am worried about this 

because I am worried about the cumulative effect of these 

rollbacks. Taken separately, each of the rollbacks, the rollbacks you 

have already done and the rollbacks under the bill, I believe are 

dangerous. But when they are taken together, they are downright 

reckless. The banking bill gives even more discretion to you, Mr. 

Quarles, so that you can help out giant banks and leave taxpayers 

holding the bag, and I just think that is the wrong direction for us 

to go. 

Thank you, Mr. Chair. 

Chairman CRAPO. Senator Tillis. 

Senator TILLIS. Thank you, Mr. Chairman. Mr. Quarles, thank 

you for being here. 

I believe it was Senator Corker that was talking about why our 

colleagues on the other side of the aisle should be really pounding 

the table for your confirmation to the 14-year term, and I would 

really recommend an article that was published back in October of 

last year titled, ‘‘Does the new Fed Governor serve at the pleasure 

of the President?’’ It was by Peter Conti-Brown, a Democrat who 

thinks that in this particular case we should be removing all the 

hurdles and get you on the agenda as quickly as possible and, like 

you said, get other members appointed so that you all can be independent and get a lot of work done that we need to get done. 

I do not remember the time, but I know you recently—maybe it 

back in January—spoke to the ABA. 

Mr. QUARLES. Yes. 

Senator TILLIS. And you talked about revisiting advanced approaches thresholds for identifying internationally active banks. 

First off, is it still your position that we should revisit the advanced approaches thresholds? Is it still a priority for you? And 

could you discuss your broader position on the issue and what lies 

ahead under your leadership? 

Mr. QUARLES. Absolutely. Yes, that is a priority, and it is on the 

agenda. Because it is significantly related to legislative movement 

on the thresholds, at least for the moment, we have thought that 

the better part of valor has been to hold off until we see what direction the Congress goes there. But I think that wherever the legislative process settles, there will be an ability for us to continue 

to move the thresholds on the advanced approaches. 

28 

Senator TILLIS. I think you also recently talked about the Volcker 

rule and how it has been detrimental to capital markets and it has 

created a great deal of uncertainty. There was a House bill recently 

passed to streamline the Volcker rule. I believe it passed by a very 

big margin, 300–104. We have been working on the bill and trying 

to increase awareness in the Senate to move it forward at some 

point. But can you talk to me a little bit about the consequences 

of having five different regulators enforcing the rule and how the 

bill would be streamlined or how you could streamline it and 

maybe make that a little bit less problematic? 

Mr. QUARLES. There is obviously a lot of coordination work that 

is involved to have five regulators to agree, even when we are all 

pulling in the same direction. I would—— 

Senator TILLIS. What is the rational basis for five of them being 

at the table, though? I mean, I want you to finish your thought, 

but cover that as well. 

Mr. QUARLES. Well, each of them has sort of entity supervisory 

authority over entities that are affected by the Volcker rule. So 

there is a logic to the provision. There are logistical consequences 

to the provision. I would say that the cooperation that we have had 

since the beginning of the year on working on revising the Volcker 

rule has been very productive. The other regulators have worked 

together very closely with us in developing proposals to simplify 

that regulation, and it is actually moving fairly well, but it is moving fairly well for a five-headed process. 

Senator TILLIS. I think you mentioned earlier you were—I know 

you were questioned yesterday over on the House side, and someone else mentioned already the insurance saving and loan holding 

corporations. I will review that for the record, but my staff told me 

you have already covered that question. I tend not to revisit questions already asked. 

So just on a final note in the minute left, you and I have had 

several discussions about regulatory right-sizing on a broader 

basis. Volcker is just one of them. But let us assume we fast forward, you have got your 14-year term. I know that there are certain limits about what you can talk about about precisely what you 

do on regs or reg repeals. But can you give me in broad strokes 

what your top two or three areas would be to look for opportunities 

to right-size regs? 

Mr. QUARLES. I think that some of them—I think probably all of 

these I have talked about—that we have not proposed yet, you will 

see a proposal for, again, a much more transparent and codified 

framework for determining control under the Bank Holding Company Act, which really is not just an issue of interest to the lawyers, but really can be important for capital raising for community 

banks because of control issues that frequently come up in those 

contexts. 

Liquidity regulation for firms below the G–SIB level, kind of continuing to gradate that regulatory regime is something that I think 

that you will see. 

I think that as we finalize some of the transparency proposals 

that we have made, they will go farther than the initial proposals, 

and then as well the Volcker rule that we are working on. 

Senator TILLIS. Thank you. 

29 

Chairman CRAPO. Senator Van Hollen. 

Senator VAN HOLLEN. Thank you, Mr. Chairman. Welcome, Mr. 

Quarles. 

Mr. QUARLES. Thank you. 

Senator VAN HOLLEN. So I know my colleague Senator Schatz 

mentioned this issue, but I do want to emphasize that we all woke 

up to a headline in the Wall Street Journal the other day stating, 

‘‘The biggest U.S. banks made $2.5 billion from the tax law in one 

quarter.’’ It talked about the four biggest banks. That certainly was 

not how the tax reform plan was advertised here on Capitol Hill, 

and I think Americans are waking up to the fact that since January 1st of this year, big corporations have spent $250 billion on 

stock buybacks. Apparently, they could not think of a good investment for the money within their corporation or did not want to use 

it to give the promised $4,000 pay increases to their employees, so 

they passed it on to the shareholders. And it is worth noting that 

35 percent of their shareholders are foreigners—35 percent of the 

stock out there is owned by foreigners. So out of the pockets of 

many middle-class American families into the bank accounts of foreigners. As someone at the Fed, I hope you will continue to monitor 

the impact of this tax bill in many different ways. 

I want to follow up with some of the questions that my colleague 

Senator Cortez Masto raised. I know in the House yesterday, or 

whenever you testified, you were asked about a recent Center for 

Investigative Reporting findings that redlining, discrimination in 

mortgage lending continues in a very real way. They looked at 31 

million mortgage records and found evidence of discrimination in 

mortgage lending in 61 metropolitan areas. And this, as you know, 

is not a new story. It goes back decades. 

In the lead-up to the financial crisis, there was a very big scandal in Baltimore City. The city of Baltimore sued Wells Fargo. 

Wells Fargo settled. Very clear documentation that many African 

Americans and people of color who had good credit ratings were 

being charged higher interest rates than their peers. And also 

predatory lending where people who had no documentation about 

income were granted loans that people knew that they would fail, 

they knew they could pass those loans up and not have to be held 

responsible. 

So this is an ongoing pattern, and we have a recent report here, 

and I was listening to your testimony and your answers with respect to Senator Catherine Cortez Masto, and here is what I would 

ask: Can you take a look at the report from the Center for Investigative Reporting—I do not know if you had a chance to look at 

it since your House—— 

Mr. QUARLES. To look at it, but certainly not to study it, and I 

can obviously commit to do so. 

Senator VAN HOLLEN. Because I would like for you to take a look 

at it, and your colleagues, because you mentioned in your response 

that at the Fed you have lots of tools to get information. I mean 

you mentioned the publicly available HMDA information, but you 

went on to say you actually get a lot of additional information, correct? 

Mr. QUARLES. That is correct. 

30 

Senator VAN HOLLEN. So the obvious question here is: Where is 

the breakdown in the system? If these reports are accurate—and 

you have not looked at it, but it is a very well documented study. 

I have taken a look. If these reports are accurate, where is the system failing? Because we all, everyone on this Committee is committed to making sure we do not have discrimination in lending. 

But it is clearly still going on out there in the real world. 

So where is the breakdown? And I am going to ask you today, 

since you do have a lot of data beyond HMDA, I do not think we 

should have to wait for studies like that from the Center for Investigative Reporting to catch what is happening. We need you and 

the Fed and the OCC to be on the front lines. 

So can you take a deep dive into this report and get back to me 

and this Committee and let us know what your assessment is and 

what is broken in the system? 

Mr. QUARLES. Absolutely. Very reasonable request. Of course we 

can. 

Senator VAN HOLLEN. Because, you know, we keep hearing, 

again, that folks have the tools, but the tools do not seem to be 

working because we keep getting these reports. And it is very disturbing to see the continuing wealth gap, right? We have big income gaps—— 

Mr. QUARLES. Yes. 

Senator VAN HOLLEN. ——we have big wealth gaps between the 

African American community and communities of color and others. 

And as you know, for most Americans that wealth is in their home. 

Mr. QUARLES. Right. 

Senator VAN HOLLEN. So if you cannot get a loan to get a home 

and build that wealth, that gap grows. So I just want your commitment to work with us to get to the bottom of this. There are these 

studies out there. We need your help. 

Mr. QUARLES. You have that commitment. 

Senator VAN HOLLEN. Thank you. 

Chairman CRAPO. Senator Perdue. 

Senator PERDUE. Thank you, Vice Chair, for being here today. I 

just have two quick questions. 

In your role as Vice Chair, you have a seat on the Financial Stability Board, I believe, as well as the Basel Committee on Banking 

Supervision. In those roles, give us your opinion about how well 

capitalized U.S. banks are in your opinion today. 

Mr. QUARLES. Relative to sort of peer banks around the world, 

U.S. banks are extremely well capitalized. 

Senator PERDUE. Given that and given the accelerated activity of 

our implementation of Basel III, particularly in relative terms to 

what the rest of the signatories have been doing, what are your 

thoughts about any further implementation of the Basel III agreement relative to what other people—shouldn’t we see further implementation or acceleration of implementation before we entertain 

further rules? 

Mr. QUARLES. Well, I think that, assuring that we have that 

level playing field internationally is one of the reasons for 

those—— 

Senator PERDUE. Do we have that today? 

31 

Mr. QUARLES. I would say that we are ahead of many other jurisdictions. 

Senator PERDUE. Yes, sir. 

Mr. QUARLES. That is definitely something that we take into account, assuring that we maintain a level playing field both in encouraging others to come up to standard and as we think about the 

role of our own regulations. 

Senator PERDUE. Under Senate bill 2155 that we just passed in 

Committee and passed in the Senate, the banking regulatory relief 

bill, if it becomes law, the Federal Reserve will have the responsibility to determine which banks between $100 and $250 billion in 

assets will be given relief for enhanced supervision. Senator 

McCaskill and I actually have a bill, Senate bill 1983, that would 

require the Federal Reserve to actually use the Basel five-part test 

in designating G–SIBs. Can you give us your opinion on that? And 

how do you feel about the current activity level or the current asset 

size-based approach versus the activity-based approach in determining risk for banks of this size? 

Mr. QUARLES. I think that making those determinations is something that we should take a range of factors into account for. Size 

is one, but it is only one, and complexity and interconnectedness 

and, you know, the character of bank portfolios, I think all of that 

goes into an assessment of systemic significance. And so I definitely 

think that that is something that we ought to do. 

Senator PERDUE. You do support moving more to a multi-based 

approach, multi-factor approach in terms of evaluating the risk of 

those banks? 

Mr. QUARLES. Yes. I think we do that now. I certainly think we 

should. 

Senator PERDUE. Good. 

Mr. QUARLES. Yes. 

Senator PERDUE. In your role, you evaluate emerging threats and 

so forth. Can you give us a brief summary, particularly with the 

size of the central banks in China, Japan, U.S., and Europe, the 

largest balance sheets we have ever seen, and we see the growth 

of debt really in emerging markets again within the $200 trillion 

universe of global debt. Can you give us just your thoughts today 

in your role here on emerging threats that may threaten the global 

financial system? How should we be thinking about that today? 

Mr. QUARLES. For the global financial system generally, I would 

say that we view the risks to financial stability essentially as moderate, which is to say about in the middle of where we would expect them to be over a cycle. 

Senator PERDUE. Is that down from 10 years ago? 

Mr. QUARLES. Ten years before or after the crisis? 

Senator PERDUE. Before. 

Mr. QUARLES. That is probably about where it would have been 

10 years ago, where we would have thought that it would have 

been 10 years ago. There are individual countries where we think 

the risks are elevated. Some of the issues that you have cited are 

issues that we certainly look at. But, in general, the risks to financial stability, both our domestic financial stability and global financial stability, we are in a reason spot right now. I would not say 

that they are low, but they are not excessively elevated either. 

32 

Senator PERDUE. Thank you. 

Thank you, Mr. Chair. 

Chairman CRAPO. Senator Heitkamp. 

Senator HEITKAMP. Thank you, Mr. Chairman. And thank you 

for your patience. I think I might be the last one here unless—oh, 

Jack. We have saved the best for last, and I guess that is not me. 

I want to just follow up on Senator Toomey’s questions. He 

talked about a lack of Federal nominees, and I would just like to 

briefly comment on the lack of Federal Board of Governors’ confirmations. Do you know the number of Board nominees that were 

denied a hearing under President Obama? 

Mr. QUARLES. I do not. 

Senator HEITKAMP. Yeah, well, that never gets talked about, but 

the answer is two. So I think we have to be really careful when 

we are pointing fingers about not having a full contingent, because 

this is not something new. It is something that needs to be addressed desperately here. But let us not paint like this is a brandnew problem that we have here. 

The other thing that I probably want to correct on the record is 

Senator Toomey said, you know, below 250 there is no SIFI designation under 2155. That is not true. Between 100 and 250, the 

Fed has complete authority if you see an institution that presents 

systemic risk for whatever reason, and that is to respond to the 

concern about Countrywide and the risk that they presented. And 

this puts a burden on you, and I want to make sure that the Fed 

understands that this is not—at least this sponsor of 2155 did not 

in any way want to limit your ability to identify those institutions 

under 250 who present systemic risk. So I want to follow up on a 

couple quick questions on 2155. 

As Vice Chair of Supervision, you will have a lot of responsibility 

for implementing the changes in that bill, should it be passed by 

the House and signed by the President, which we very much hope. 

Some of the opponents of the bill have claimed that the legislation 

will take us back to the state of play before the financial crisis. 

Specifically, they have argued that the bill could somehow open up 

widespread risk in the mortgage market and result in the kind of 

foreclosure crisis we saw in 2008. 

Do you agree that one of the main drivers of the 2008 crisis was 

that firms were exporting mortgage credit risk and failing to perform appropriate and basic underwriting duties? 

Mr. QUARLES. That was certainly an element, yes. 

Senator HEITKAMP. Does this legislation do anything to change 

the strict mortgage lending requirements known as QM rule for 

larger institutions? 

Mr. QUARLES. From my review of it, it does not. 

Senator HEITKAMP. Does it change any of the QM requirements 

for community banks that do not keep that loan on portfolio? 

Mr. QUARLES. I do not see that it does, no. 

Senator HEITKAMP. Does the legislation do anything to change 

the risk retention rules put in place after the crisis? 

Mr. QUARLES. I do not believe so. 

Senator HEITKAMP. So in your view, would 2155 preserve the 

critical tools that were put in place after the crisis to prevent another mortgage foreclosure crisis? 

33 

Mr. QUARLES. I believe that it would, Senator. 

Senator HEITKAMP. OK. During your time at Treasury, you 

worked quite a bit on housing reform, and obviously that is a topic 

that we are very interested in here, kind of that next turn the page 

after some of the credit union and small community bank reform 

that we did in 2155. So I am going to ask you some quick questions 

on mortgage reform. 

Mr. QUARLES. Sure. 

Senator HEITKAMP. With respect to Fannie and Freddie, do you 

think it is likely that one or both could fail again? That is probably 

not a quick question. 

Mr. QUARLES. Exactly. I guess that would be a very difficult 

question to answer. I would have to dig deeper to—— 

Senator HEITKAMP. But is there a possibility that they could fail 

again? 

Mr. QUARLES. I would think that there is a possibility. 

Senator HEITKAMP. Do you think it is likely that one or both 

could take a substantial draw from their line of credit from Treasury in the near future? 

Mr. QUARLES. Well, I know that when I was at the Treasury, we 

proposed strict controls on that, and the Treasury does have the 

ability to limit that. So a lot of that would depend on the Treasury. 

Senator HEITKAMP. But you are saying—you cannot give a sense 

of likelihood, but there is a possibility, correct? 

Mr. QUARLES. I think there is the legal possibility. 

Senator HEITKAMP. So if Congress fails to take action, what longterm risk do you see in our financial system if our GSEs remain 

in conservatorship? 

Mr. QUARLES. Well, you know, I think certainty is a benefit to 

the economy in general, and so for me, the principal benefit is to 

create certainty around what our system of housing finance is 

going to be going forward and to have that be sort of as private sector driven as possible. 

Senator HEITKAMP. Do you believe that a Government backstop 

is essential to retaining the 30-year fixed-rate mortgage? 

Mr. QUARLES. I would want to analyze that question more deeply 

before giving you a yes or no answer. My belief today is probably 

not, but I would really want to get back to you with a more considered—— 

Senator HEITKAMP. We would have to have a long conversation 

about that because I think that there are a number of people certainly in smaller and midsized institutions who believe that it 

would be very difficult to take a 30-year interest rate risk without 

some kind of assurance that they could offload that risk. 

Mr. QUARLES. Fair enough. 

Senator HEITKAMP. Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you. 

Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. And welcome, Chairman Quarles. 

Last time when Chairman Powell was here, we talked about the 

impact of technology on employment, which is increasingly both 

problematic and beneficial, so let us talk about the problems first. 

There is a real concern, I think, about people—and not just ecoVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00037 Fmt 6633 Sfmt 6633 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
34 

nomic analysts, but people who are Main Street—who fear that 

their job will be automated away. That I think contributes to kind 

of the real concern that is out there despite fairly good economic 

news. And that raises the issue of, well, how do we respond to multiple ways? First, you know, technology is coming, we know that. 

Can education and training and more resources in that regard 

allow us to make the transition so that people can still work, they 

will not be sort of left behind? 

Mr. QUARLES. I think that those are important factors. We need 

to put a lot of resources into education and training in a society 

that is innovating like ours, particularly innovating through technology. 

Senator REED. I appreciate that. One of the battles we have perennially is putting resources into education. One could always be 

more efficient or aspire to be more efficient, but I think given this 

technological challenge, this automation challenge, the emphasis on 

training actually beginning in pre-K and STEM, et cetera, requires 

a huge investment. And this year we have done OK, but in the future we are going to look at some very difficult choices. 

The other issue this raises would be in terms of the full employment mandate, Mr. Vice Chairman, of the Fed, which is as technology displaces workers, do you factor that in as sort of the new 

norm, that, you know, our full employment is not X because those 

jobs do not exist anymore, and that creates kind of a dynamic 

where there are literally millions of Americans who have a job and 

we are at full employment? 

Mr. QUARLES. We obviously look closely at the relationship between the unemployment rate and the labor participation rate and 

how that is passing through to inflation, and there have been 

changes in that relationship over the course of the last 10, 15, 20 

years that we do not understand well, that we are doing a lot of 

research in. Technology clearly has to be an element. I do not think 

it is the only element. How big of a driver it is, you know, I could 

not tell you. We really are still trying to figure out exactly why 

those relationships are changing relative to what they have been 

in the past. 

Senator REED. And I think you would concur, this is a very important analysis because—— 

Mr. QUARLES. Incredibly important. 

Senator REED. This phenomenon, you know, it is not something 

that 10 years from now we will deal with it. It seems with every 

week we are seeing more and more amazing applications of technology that just basically takes jobs away or changes them so dramatically. 

Mr. QUARLES. Certainly changes the nature of the economy. Now, 

you know, our experience up to now in this country, globally, with 

technological advance, has been that jobs are created as jobs are 

removed. You know, and so I think the historical evidence would 

give us reason to think that we will see some of that effect here. 

But this is a pretty dramatic—some of the advances that we are 

seeing are pretty dramatic and could have significant effects. We 

are looking at that. 

Senator REED. Just a final point. It is my understanding that in 

26 States, the number one occupation is driving a vehicle of some 

35 

kind, and every day we hear more and more—some good, but some 

bad, but mostly good—about autonomous vehicles and sophisticated 

AI systems in which driving will be something like blacksmithing, 

and that will have a huge impact. And it is years away. It is not 

decades away. 

Just a final topic, and I only have a few remaining seconds, and 

the Chairman and the Vice Chair have been very kind. There is an 

Advanced Notice of Proposed Rulemaking from the Fed, OCC, and 

FDIC on cyber, and this is another issue which cannot wait. So can 

you give us an update on where we are? I think we have got to get 

the rule out. 

One of the components of the rule is that at least raising the 

question whether board members of publicly held companies—at 

least one member has to have some type of cybertraining or some 

arrangement in the company to include cybersensitivity. Can you 

comment? 

Mr. QUARLES. I completely agree with you. Cyber is not only an 

important risk, it is probably the most important risk that is faced 

by the financial sector. I think that as regulators we need to step 

up the pace with which we are taking measures to help support the 

resiliency of the system. 

The ANPR that we put out is an example. The idea of having a 

board member with cyberexpertise, when I have been on boards 

that have had a board member with that kind of expertise, that 

has been extremely useful. That has not just been a nice thing to 

have. It has been extremely useful. 

But I also think that even beyond some of the issues that are in 

the ANPR, we really need to step up our work not just as regulatory agencies but across the Government in really thinking how 

we can support the resiliency of the financial sector to cyberrisk in 

ways that we are not yet. And I think that that needs to be a priority for us beyond even some of these regulatory measures, and 

that requires not just the banking agencies, but work, you know, 

across the various agencies of the Government because it is a serious issue for all of us. 

Senator REED. Thank you, Mr. Vice Chairman. 

Thank you, Mr. Chairman. 

Chairman CRAPO. Thank you, Senator Reed. And thank you, 

Governor Quarles, for being here today and the service you give us 

at the Federal Reserve Board. 

For Senators who wish to submit questions for the record, those 

questions are due on Thursday, April 26th, and I encourage you, 

Vice Chairman Quarles, if you receive questions, to please respond 

very promptly. 

Mr. QUARLES. I will do so. 

Chairman CRAPO. And with that, this hearing is adjourned. 

Mr. QUARLES. Thank you very much. 

Chairman CRAPO. Thank you. 

[Whereupon, at 11:25 a.m., the hearing was adjourned.] 

[Prepared statements and responses to written questions supplied for the record follow:] 

36 

PREPARED STATEMENT OF RANDAL K. QUARLES 

VICE CHAIRMAN FOR SUPERVISION, BOARD OF GOVERNORS OF THE FEDERAL RESERVE

SYSTEM

APRIL 19, 2018 

Chairman Crapo, Ranking Member Brown, 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 turn, 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 are 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 postcrisis framework that have been put in place to protect 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 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 of 7.7 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 

37 

1See 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, www.federalreserve.gov/newsevents/speech/quarles20180226b.htm. 2 Board of Governors of the Federal Reserve System, ‘‘Rule Proposed To Tailor ‘Enhanced Supplementary Leverage Ratio’ Requirements’’, news release, April 11, 2018, 

www.federalreserve.gov/newsevents/pressreleases/bcreg20180411a.htm. 

than 8 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 turn 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. 

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 cyberresiliency of the financial sector. 1 Cyberrisk 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 cybervulnerabilities are rooted in the basic challenges of managing large IT infrastructures. We continue to collaborate with other governmental agencies, and 

Federal 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 turn now to highlighting some of the ways we have sought to improve 

the effectiveness of the postcrisis 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 

38 

3 Board of Governors of the Federal Reserve System, ‘‘Federal Reserve Board Announces Finalized Stress Testing Rules Removing Noncomplex Firms From Qualitative Aspect of CCAR Effective for 2017’’, news release, January 30, 2017, www.federalreserve.gov/newsevents/ 

pressreleases/bcreg20170130a.htm. 4 Board of Governors of the Federal Reserve System, ‘‘Federal Banking Agencies Issue Final 

Rule to Exempt Commercial Real Estate Transactions of $500,000 or Less From Appraisal Requirements’’, news release, April 2, 2017, www.federalreserve.gov/newsevents/pressreleases/ 

bcreg20180402a.htm. 

assets. The eSLR’s current calibration has made it the primary capital 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–SIBs 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 the institutions 

being regulated. Liquidity regulation, for example, does not have a G–SIB versus 

non- G–SIB 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 to G–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 2 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 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. 

39 

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 Testing Program’’, news release, December 7, 2017, www.federalreserve.gov/newsevents/pressreleases/ 

bcreg20171207a.htm. 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, April 

10, 2018, www.federalreserve.gov/newsevents/pressreleases/bcreg20180410a.htm. 

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. 

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 

year. 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 are 

generally more prevalent, and noncontrolling investments by banking organizations 

in nonbanking 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 the goal of a safe financial system. The Federal Reserve 

has worked to simplify the vast and often complex postcrisis regulatory framework 

in several different ways. The most recent example was the issuance of the proposed 

stress capital buffer rulemaking just last week. 6 The proposal would effectively integrate the results of the supervisory stress test into the Board’s nonstress 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 G-SIBs (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 nonG–SIBs. Note, however, that a firm’s stressed capital requirement is expected to 

vary in size throughout the economic cycle. 

Let me turn 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 regulators are 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. 

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 

40 

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, 2017, www.federalreserve.gov/newsevents/pressreleases/ 

bcreg20170803a.htm. 8Federal Financial Institutions Examination Council (FFIEC), ‘‘FFIEC Finalizes June 2017 

Proposed Revisions To Streamline the Call Report’’, news release, January 3, 2018, 

www.ffiec.gov/press/pr010318.htm. 

postcrisis 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 2017. 8 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 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 postcrisis 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 I 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. 

Thank you again for the opportunity to testify before you this morning, and I look 

forward to answering your questions. 

41 

1https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20180410a2.pdf 

2See 83 FR 18160, 18166-7 (April 25, 2018). 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR BROWN 

FROM RANDAL K. QUARLES 

Q.1. Would removing the Supplemental Leverage Ratio (SLR) from 

the Comprehensive Capital Analysis and Review (CCAR), as proposed in the Board of Governors of the Federal Reserve System’s 

(Fed) Stress Capital Buffer (SCB) proposal, 1 shift the binding constraint on capital distributions from leverage capital to risk-based 

capital for any of the domestic Global Systemically Important 

Banks (G–SIBs)? 

If so, which ones? 

A.1. As a general matter, leverage capital 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 Federal Reserve Board’s (Board) stress capital buffer 

(SCB) proposal would currently extend the proposed stress buffer 

concept to the tier I leverage ratio, but not to the supplementary 

leverage ratio (SLR). The Board is seeking public comment on the 

advantages and disadvantages of both of these specific aspects of 

the proposal (i.e., the elimination of the post stress SLR but retention of the tier 1 leverage ratio; see questions 1 and 3 in the preamble of the proposed rulemaking). 2

The Board included an impact analysis as part of the proposal. 

Due to the confidential nature of certain data (e.g., firms’ future 

capital distribution plans) that were used to develop the impact 

analysis, the proposal only describes the aggregate impact. The impact of the proposal on individual firms would vary based on each 

firm’s individual risk profile and planned distributions, as well as 

across time based on the severely adverse stress scenario used in 

the supervisory stress test. 

Q.2. How would common equity tier 1 (CET1) capital and total distributable capital change for each of the domestic G–SIBs under 

the Fed’s proposed SCB rule? Please provide firm by firm numbers. 

A.2. As noted in the response to Question 1 above, due to the confidential nature of the supervisory data included in the projected 

impact of the proposal on individual firms, the Board is not in a 

position to provide firm-specific estimates. 

The proposal would generally maintain or in some cases increase 

common equity tier 1 (CET1) capital requirements for global systemically important banks (G–SIBs). The estimated increase for G– 

SIBs would occur because the capital conservation buffer requirement under the proposal—which, for a G–SIB, includes both the 

SCB requirement and the G–SIB surcharge—would be greater than 

the capital required under the current supervisory poststress capital assessment. 

Based on data from Comprehensive Analysis and Reviews 

(CCAR) in 2015, 2016, and 2017, CET1 capital requirements for G– 

SIBs are projected to increase by approximately $10 billion to $50 

billion in aggregate. Had the proposal been in effect during recent 

CCAR exercises, analysis of those CCAR results and the current 

level of capital at the G–SIBs indicates that no such firm would 

42 

have needed to raise additional capital in order to avoid the proposal’s limitations on capital distributions. 

Q.3. Please review the attached analysis from Goldman Sachs equity research. Does the Fed agree that the SCB proposal would 

lead to an excess capital increase of $54 billion across the large 

banks the research report considered? 

A.3. For firms with over $50 billion in assets that are not G–SIBs, 

the Board estimates that the proposal would generally result in a 

reduction in the required level of capital to avoid capital distribution limitations relative to what is required today. This estimated 

reduction is attributable to the proposal’s modified assumptions regarding balance sheet growth and capital distributions. While these 

assumptions would more appropriately reflect the expected performance of bank portfolios under stress, they would be somewhat 

less stringent than the assumptions currently used in the supervisory stress test. As noted above, for G–SIBs, the proposal would 

generally maintain or in some cases increase CET1 capital requirements. 

The impact of the proposal would vary through the economic and 

credit cycle based on the risk profile and planned capital distributions of individual firms, as well as on the specific severely adverse 

stress scenario used in the supervisory stress test. Based on data 

from CCAR 2015, 2016, and 2017, the impact of the proposal would 

range from an aggregate reduction in CET1 capital requirements 

of about $35 billion (based on 2017 data) to an aggregate increase 

in CET1 capital requirements of about $40 billion (based on 2015 

data). More specifically, G–SIBs would have experienced an increase in CET1 capital requirements ranging from $10 billion to 

$50 billion, while non- G–SIBs would have experienced a decrease 

in CET1 capital requirements ranging from $10 billion to $45 billion. Had the proposal been in effect during recent CCAR exercises, 

analysis of those CCAR results indicates that participating firms 

would not have needed to raise additional capital in order to avoid 

limitations on capital distributions. 

The analysis from Goldman Sachs seems to make additional assumptions about how banks might respond to the SCB proposal. 

Our estimates describe the changes in the actual level of capital 

that would be required under the proposal. 

Q.4. If the goal of the Fed’s SCB proposal is to integrate CCAR 

with ongoing capital requirements, please provide the Fed’s rationale for excluding the SLR as a binding constraint in the SCB proposal. 

A.4. Leverage capital measures work best when they serve as a 

backstop to risk-based capital measures in the context of a comprehensive capital regime. When leverage measures are binding 

constraints, they serve as an incentive for regulated institutions to 

increase the risk in their portfolios (because the capital cost for 

each additional asset will be the same whether the asset is risky 

or safe—institutions will thus have an incentive to add high risk/ 

high return assets because the capital cost of those assets is the 

same as that of lower return but safer assets). We should try to ensure that the capital regime does not only result in the retention 

of a robust amount of capital, but also that the structure of the reVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00046 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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3https://www.gpo.gov/fdsys/pkg/FR-2018-04-19/pdf/2018-08066.pdf 

gime does not create unintended incentives for firms to take on 

risk. 

The SCB proposal currently proposes to introduce a stress leverage buffer requirement on top of the 4 percent minimum tier 1 leverage ratio requirement but not extend the stress buffer requirement to the SLR. As noted in the response to question 1 above, the 

Board is seeking comment on the advantages and disadvantages of 

these specific aspects of the proposal. 

Q.5. Why did the Fed choose not to include the enhanced SLR 

(eSLR) in the SCB proposal? 

A.5. The enhanced supplementary leverage ratio (eSLR) standards 

apply in the Board’s regulatory capital rule to G–SIBs and their insured depository institution (IDI) subsidiaries. Under the current 

CCAR program, the Board evaluates the ability of each of the largest bank holding companies to maintain capital above minimum 

regulatory capital requirements under expected and stressful conditions, assuming that a firm makes all planned capital actions that 

are in its capital plan. As it is a buffer concept, the eSLR standards 

are not, and have never been, included in the Federal Reserve’s 

stress testing framework. 

With regard to the Board’s SCB proposal not extending the stress 

buffer concept to the supplementary leverage ratio, please see the 

response to Question 4 above. 

Q.6. The Fed’s eSLR proposal would reduce the amount of tier 1 

capital required across the lead insured depository institution (IDI) 

subsidiaries of the G–SIBs by approximately $121 billion. 3

How would that $121 billion be deployed by bank holding companies if this proposal were enacted? 

A.6. The Board estimates that, taking into account the capital constraints imposed by the supervisory stress tests and the Board’s 

regulatory capital rules, the proposed changes to the eSLR standards would reduce the amount of tier 1 capital required across the 

U.S. G–SIBs on a consolidated basis by approximately $400 million. Thus, nearly all of the $121 billion would be required to remain within the consolidated banking organization, as the G–SIBs 

would not be able to distribute the capital released at the IDI level. 

Each individual G–SIB would be able to determine how to reallocate capital, based on its business model or needs within the organization. For example, each G–SIB could continue to hold the capital at the IDI, deploy that capital to nonbank subsidiaries, or hold 

that capital at the holding company level to use as needed. 

Q.7. The proposed rulemaking for the Fed’s eSLR proposal asks 

commenters for their views on excluding central bank deposits from 

the denominator of the SLR, but unlike section 402 of S. 2155, does 

not narrow the question strictly to custody banks. 

Is the Fed considering excluding central bank deposits from the 

denominator of the SLR for all banks (custody and noncustody)? 

A.7. The Board and the Office of the Comptroller of the Currency’s 

(OCC) eSLR proposal is based on the current definitions of tier 1 

capital and total leverage exposure, which include central bank deVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00047 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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4 Response to a question from Congressman Hollingsworth. House Financial Services Committee Hearing. ‘‘Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation 

of the Financial System’’. April 17, 2017. 5https://www.federalreserve.gov/newsevents/pressreleases/bcreg20171219a.htm 

posits in the denominator of the SLR. However, the Board and the 

OCC thought it appropriate generally to seek commenters’ views on 

alternatives to the proposal, including the exclusion of central bank 

deposits from the denominator. The Board will consider all comments received in connection with the proposal. 

Q.8. Please provide firm-by-firm analysis for each domestic G–SIB 

on the combined impact on total distributable capital related to 

both the SCB and eSLR proposals. 

A.8. As noted in the response to question I above, due to the confidential nature of the supervisory data included in the projected 

impact of the proposals on individual firms, the Board has made 

only aggregate impact data publicly available. The estimated impacts of the SCB proposal and of the eSLR proposal across G–SIBs 

are described above in the response to Question 2 and Question 6, 

respectively. 

While the discussion in each of 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 G– 

SIBs under the eSLR proposal ($400 million, as noted above in response to Question 6) into the estimated impact of the SCB proposal across G–SIBs does not meaningfully affect the estimates. 

Q.9. During your testimony before the House Financial Services 

Committee, you indicated a desire to change the G–SIB surcharge 

methodology, perhaps based on the result of a bank holding company’s living will submission. 

Can you elaborate on this idea? 4

A.9. The G–SIB surcharge was calibrated so that each G–SIB 

would hold enough capital to lower its probability of failure so that 

the expected impact of its failure would be approximately equal to 

that of a non- G–SIB. The Board monitors the impact of its regulations after implementation to assess whether the regulations continue to function as intended. As I have noted more broadly, such 

a review should have as a goal not only maintaining safety and 

soundness and financial stability, but also efficiency, transparency, 

and simplicity. In the preamble to the G–SIB surcharge final rule, 

the Board indicated that it would be appropriate to reevaluate periodically the fixed coefficients used in the rule. 

Q.10. Has the Fed considered the potential interaction between 

this idea, the proposed rule changing the eSLR, and the Fed’s intention to make living will submissions required every other year, 

rather than annually? 5

A.10. The Board’s capital rules have been designed to significantly 

reduce the likelihood and severity of future financial crises by reducing both the probability of failure of a large banking organization and the consequences of such a failure were it to occur. Capital 

rules and other prudential requirements for large banking organiVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00048 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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6https://www.federalreserve.gov/newsevents/speech/files/quarles20180222a.pdf 

zations should be set at a level that protects financial stability and 

maximizes long-term, through-the-cycle, 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. In this regard, 

the Board is considering additional potential modifications to its 

rules, including both the capital rule and the living will rule, to 

simplify the rules and reduce unnecessary regulatory burden without compromising safety and soundness. 

Q.11. Earlier this year in Tokyo, you gave a speech describing the 

strength of the U.S. economy, noting growing optimism, solid bank 

earnings, the tax bill, and the strong labor market. 6

If the economy is strong, isn’t now the time to impose a Countercyclical Capital Buffer that banks can draw on when the economy 

eventually gets tough? 

A.11. The countercyclical capital buffer (CCyB) is an important element of the system of capital regulation that applies to U.S. bank 

holding companies with more than $250 billion in total assets or 

more than $10 billion in foreign assets, as well as intermediate 

holding companies of foreign banking organizations with more than 

$50 billion in total assets. 

In 2016, the Federal Reserve issued a policy statement on the 

CCyB, in which we spelled out a comprehensive framework for setting its level. The framework incorporates the Board’s judgment of 

not only asset valuations and risk appetite, but also the level of 

three other key financial vulnerabilities—financial leverage, nonfinancial leverage, and maturity and liquidity transformation—and 

how all five of those vulnerabilities interact. In this assessment, 

the Board considers a wide array of economic and financial indicators, as well as a number of statistical models developed by staff. 

Several of those models are cited in the policy statement. As indicated in the policy statement, the CCyB is intended to address elevated risks from activity that is not well-supported by underlying 

economic fundamentals. As such, the Board expects the CCyB to be 

nonzero if overall vulnerabilities were judged to have risen to a 

level that was ‘‘meaningfully above normal.’’ 

Within that framework, the runup in asset prices that we have 

seen in recent years is certainly a key consideration, but we view 

that run up in the context of the levels of other vulnerabilities, importantly including leverage and maturity transformation in the financial system. Bank capital ratios and liquidity buffers are now 

substantially higher than they were a decade ago. The stress tests 

ensure that the largest banks can continue to support economic activity even in the face of a severe recession—importantly, one characterized by extreme declines in asset prices. Outside the banking 

system, leverage of other financial firms does not appear to have 

risen to elevated levels, and the risks associated with maturity 

transformation by money-market mutual funds is much reduced 

from the levels seen a decade ago. Thus, we believe that overall 

vulnerabilities in the financial system remain moderate and near 

their normal range. 

46 

7https://www.wsj.com/articles/financial-deregulation-throws-fuel-on-already-hoteconomy1524654001#commentslsector 

Q.12. Do you agree that procyclical regulation has contributed to 

past downturns in the economy? 

If so, why not make bank regulations more stringent during a 

time when risk appetites in the banking sector are growing? 7

A.12. Procyclical regulation certainly may have contributed to 

boom and bust cycles in the past. For instance, as house prices rose 

from 2000 to 2006, the maximum loan amount of residential mortgages that could be guaranteed by the Government-sponsored 

mortgage enterprises, Fannie Mae and Freddie Mac, increased 

from $252,700 to $417,000. In addition, research by Federal Reserve economists has shown that there is a procyclical pattern in 

the assignment of CAMELS ratings to banks by the Federal banking agencies. Our reforms to bank supervision after the financial 

crisis, such as the establishment of the Large Institution Supervisory Coordinating Committee and the collection of granular data 

on loan and securities portfolios, are designed to better identify and 

push back against such tendencies in the future. 

Further, to guard against the tendency for lenders to become less 

cautious during good economic times, the Federal Reserve and the 

other Federal banking agencies have implemented robust structural capital and liquidity regulation regimes. In addition to requiring higher ratios of capital to total assets and to risk-weighted assets, U.S. capital rules have narrowed the types of instruments 

that qualified as tier 1 capital, in order to increase loss absorbency. 

Likewise, capital rules place caps on volatile assets, like mortgage 

servicing rights and deferred tax assets, above which their amounts 

must be deducted from capital. Further, the postcrisis capital rules 

increased the risk weights on certain assets, such as high-volatility 

commercial real estate, which can be highly procyclical. 

Another feature of the U.S. implementation of the new capital 

and liquidity regimes is that the changes were phased in gradually 

over several years starting in 2013 in order to give banks time to 

adjust to the more-stringent regulations without unduly influencing credit availability while the expansion was still relatively 

weak. Thus, the minimum requirements have indeed been increasing each year, though most U.S. banks have been compliant with 

the fully phased-in requirements for some time. Most of the requirements will be fully phased in by January 1, 2019, providing 

a much stronger structural backstop than previously against any 

excesses that emerge in this and future financial cycles. 

Finally, the annual stress tests (that is, CCAR) are based on 

macroeconomic scenarios that, in line with the Board’s policy statement on scenario design, become more adverse as macroeconomic 

conditions improve. The increased severity of scenarios in the 

stress tests during buoyant times is designed to limit the 

procyclicality of regulation. 

Q.13. Does the Fed have any plans to change the total consolidated 

asset threshold above which CCAR applies to bank holding companies? 

47 

A.13. We are considering a number of potential changes to our regulatory framework in light of the passage of S. 2155, including raising the asset threshold for CCAR. 

Q.14. Will this at all change if S. 2155 is enacted? 

A.14. As noted, we are considering potential changes to our regulatory framework in light of the passage of S. 2155. 

Q.15. How often does the Fed plan to require Dodd–Frank Act supervisory stress tests for banks with total consolidated assets between $100 billion and $250 billion if the change from ‘‘annual’’ to 

‘‘periodic’’ is enacted pursuant to S. 2155? 

A.15. Supervisory stress tests are one of our most valuable tools to 

ensure that large banking firms have sufficient capital to continue 

to lend and operate, even in a severely adverse macroeconomic scenario. Continuing to conduct the supervisory stress tests for institutions with more than $100 billion in assets will provide the Federal Reserve with valuable insight into the state of the American 

economy. 

The dynamic nature of banks and the risks they face could 

render the results of stress tests stale within a short timeframe. 

Accordingly, we believe there are safety and soundness and financial stability benefits in conducting capital stress tests regularly. 

We plan to consider the appropriate timing of stress tests for banks 

with total consolidated assets between $100 billion and $250 billion 

as we consider other potential changes to our regulatory framework 

for the largest and most complex banks. 

Q.16. How often does the Fed plan to require company-run stress 

tests for banks with total consolidated assets of more than $250 billion if the change from ‘‘semi-annual’’ to ‘‘periodic’ is enacted pursuant to S. 2155? 

A.16. Company-run stress tests have served as a useful complement to supervisory stress tests. They are another tool to assess 

whether banks sufficient capital to continue operations throughout 

times of economic and financial stress. In our experience, there are 

safety and soundness and financial stability benefits in conducting 

capital stress tests regularly. 

As with supervisory stress tests, the dynamic nature of banks 

and the risks they face could render the results of stress tests stale 

within a short timeframe. Accordingly, as we implement S. 2155, 

we will consider the appropriate timing of company run stress tests 

for banks with more than $250 billion in consolidated assets. We 

would take into account the tradeoff between firms having less recent information about their risks and their resilience to economic 

stress, and the reduced burden of less frequent stress tests. 

Q.17. In testimony before the House Financial Services Committee, 

you proposed subjecting CCAR stress scenarios to notice and comment, but noted that a formal process under the Administrative 

Procedures Act (APA) may be unworkable. How does the Fed conVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00051 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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8 Response to a question from Congressman Barr. House Financial Services Committee Hearing. ‘‘Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System’’. April 17, 2017. 9https://www.federalreserve.gov/newsevents/speech/quarles20180119a.htm 

10 Response to a question from Senator Tillis. Senate Banking, Housing, and Urban Affairs 

Committee Hearing. ‘‘Semi-Annual Testimony on the Federal Reserve’s Supervision and Regulation of the Financial System’’. April 19, 2017. 

template putting CCAR scenarios out for comment without following a formal APA process? 8

A.17. The Board regularly considers feedback on its stress testing 

process and scenario design, including through the public notice 

and comment process, and we’re currently reviewing comments on 

proposed amendments to the policy statement on scenario design. 

In addition, the Board publishes a summary of its stress testing 

methodologies each year. The methodology has included information about the supervisory scenarios, analytical framework, and information about the models employed in the stress test. The Board 

has sought comment on a policy statement on the overall approach 

to stress testing as well as a description of our model risk management and governance framework. The Federal Reserve is considering how best to publish the CCAR scenarios for public comment 

in a manner that is consistent with the rulemaking procedures in 

the Administrative Procedure Act and the timelines set forth in the 

Federal Reserve’s capital plan and stress testing rules. 

Q.18. What problem would putting CCAR scenarios out for comment solve? 

A.18. The Federal Reserve remains committed to finding ways to 

continue to enhance transparency in a manner that appropriately 

balances the benefits and risks of releasing more information about 

supervisory models and scenarios used in CCAR. 

Putting the CCAR scenarios out for comment would provide an 

opportunity for the Federal Reserve to learn about unintended consequences of the scenarios and ways of improving the overall stress 

testing process. 

Q.19. In a speech, you said that the Fed should ‘‘revisit’’ the socalled advanced approaches threshold, which identifies certain 

large banks whose failure could inflict especially significant damage on the U.S. economy. 9 In the Senate Banking Committee hearing, you told the Committee that you would hold off on revising the 

advanced approaches threshold until Congress moves. 10

How could enactment of S. 2155 affect the Fed’s decision to revise the advanced approaches threshold? 

Is the Fed considering raising the advanced approaches asset threshold to a level that is higher than $250 billion? 

What changes to the foreign exposure threshold is the Fed considering? 

A.19. The advanced approaches threshold was established on an 

interagency basis with the Federal Deposit Insurance Corporation 

(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 reporting requirements. 

The Board believes that capital and other prudential requirements 

for large banking organizations should be set at a level that protects financial stability and maximizes long-term, through-the-cycle 

49 

11https://www.federalreserve.gov/newsevents/pressreleases/bcreg20160923a.htm 

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 burden without compromising safety and soundness. We currently are considering ways to better align the advanced approaches threshold with 

these objectives, which could include changing both the total asset 

and foreign exposure thresholds, and would take S. 2155 into account. Any proposed changes to the threshold would be issued for 

public notice and comment after consultation with the FDIC and 

OCC. 

Q.20. Is it your opinion that the domestic asset threshold above 

which foreign banking organizations (FBOs) must establish an Intermediate Holding Company (IHC) should increase from $50 billion? 

If so, what is the appropriate threshold? 

A.20. The Board monitors the impact of its regulations after implementation to assess whether the regulations continue to function as 

intended. In implementing enhanced prudential standards for foreign banking organizations (FBOs) with a large U.S. presence, the 

Board sought to ensure that FBOs hold capital and liquidity in the 

United States—and have a risk management infrastructure—commensurate with the risks in their U.S. operations. As a result of 

the intermediate holding company requirement with the current 

threshold, these firms have become less fragmented, hold capital 

and liquidity buffers in the United States that align with their U.S. 

footprint, and operate on more equal regulatory footing with their 

domestic counterparts and we should ensure that these results continue. 

Q.21. The Fed in 2016 proposed a rule to limit some of banks’ activities in commodities markets, with the rationale being that 

banks’ owning, trading, and moving commodities might post a safety and soundness risk to individual banks or to the banking system. 11

Does the Fed plan to finalize the 2016 commodities proposal? 

If not, why not? 

If so, when? 

A.21. 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, acaVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00053 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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12https://www.ft.com/content/680953c0-3e2a-11e8-b9f9-de94fa33a81e 13https://www.americanbanker.com/news/feds-quarles-to-seek-more-tailoring-of-large-bankrules 

demics, 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). 

Q.22. S&P Global warned earlier this month that leveraged lending standards were deteriorating, and that underwriting standards 

in this $1 trillion market continue to get weaker and weaker. 12

Previously, guidance was in place to protect banking organizations 

from leveraged lending risks, but while at the OCC, Acting Comptroller Noreika rescinded it. You have also said that this guidance, 

because it was declared a rule by the GAO, is ‘‘not something that 

should be cited in supervisory action or taken into account by examiner.’’ 13

How do you plan to protect banks from systemic risk stemming 

from leveraged lending if you’re telling supervisors to ignore this 

guidance? 

Does the Fed have plans to replace the leveraged lending guidance with a proposed rule? 

A.22. The Board has broad authority to supervise and regulate 

banking organizations to promote their safety and soundness. As 

part of that authority, Federal Reserve supervisors and examiners 

assess credit and other risks to the safe and sound operations of 

firms, including risks that may be posed by leveraged lending, and 

to direct the films to address such risks as appropriate. As part of 

assessing credit and other risks, Federal Reserve examiners routinely evaluated the underwriting of leveraged loans prior to the 

issuance of the most recent leveraged lending guidance, and they 

continue to do so. The guidance was issued to provide clarity regarding safety and soundness issues that may be present in making such loans. The guidance was not issued as a regulation that 

would be enforceable, and therefore the guidance itself should not 

be used as the basis for an enforcement or supervisory action. 

Rather, banking organizations should use it to better understand 

and manage the risks they are taking, and supervisors should assess a bank’s standing under comprehensive principles of safety 

and soundness rather than pursuant to informal guidance. 

Thus, ensuring the guidance is being used in the manner always 

intended is not telling examiners to ‘‘ignore’’ the guidance nor is it 

changing the safety and soundness standard that has always governed the evaluation of a bank’s loan portfolio. To the contrary, we 

continue to expect that examiners will evaluate leveraged loans to 

determine whether they are posing undesirable amounts of risk in 

a bank’s portfolio. 

The Board, FDIC, and OCC are discussing whether it would be 

appropriate to again solicit public comment on the guidance with 

a view to improving the clarity and reducing any unnecessary burden. 

51 

14https://www.marketwatch.com/story/volcker-rule-is-harmful-to-capital-markets-feds-topregulator-says-2018-04-17 15 Bao, Jack, and O’Hara, Maureen, and Zhou, Xing (Alex), ‘‘The Volcker Rule and MarketMaking in Times of Stress’’ (December 8, 2016). Journal of Financial Economics (JFE), Forthcoming; Fourth Annual Conference on Financial Market Regulation. Available at SSRN: 

https://ssrn.corn/abstract=2836714 or http://dx.doi.org/10.2139/ssrn.2836714. 16Dick-Nielsen, J., and M. Rossi (2016), ‘‘The Cost of Immediacy for Corporate Bonds’’, Copenhagen Business School Working Paper; Choi, J., and Y. Huh (2016), ‘‘Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs’’, Bessembinder, H., S. Jacobsen, W. 

Maxwell, and K. Venkataraman (2016), ‘‘Capital Commitment and Illiquidity in Corporate 

Bonds’’, Working Paper, Southern Methodist University; Adrian, T., N. Boyarchenko, and O. 

Shachar (2016), ‘‘Dealer Balance Sheets and Bond Liquidity Provision’’, Federal Reserve Bank 

of New York Staff Report, 803. 

Q.23. Publicly you asserted that you believe the Volcker Rule has 

damaged financial markets. 14

What evidence can you point to that indicates the Volcker Rule 

has had a causal impact on liquidity? 

Is there a range of optimal liquidity? 

A.23. Federal Reserve staff and a variety of other researchers have 

performed substantial analyses of the recent state of financial markets and liquidity in particular. While overall results of these studies are mixed, there are findings suggesting that the Volcker Rule 

has had an impact on liquidity. For example, one recent study finds 

evidence that cost of trading distressed corporate bonds (i.e., bonds 

recently downgraded to below investment-grade ratings) is higher 

since implementation of the Volcker Rule. 15 Furthermore, the 

paper finds that broker dealers subject to the Volcker Rule appear 

less willing to hold inventories of corporate bonds relative to other 

broker dealers. Taken together, these results indicate that the 

Volcker Rule has had an adverse impact on the liquidity of distressed corporate bonds. Other studies indicating a causal relationship between the Volcker Rule and reduced liquidity in some markets or for some instruments include Dick-Nielsen and Rossi 

(2016); Choi and Huh (2016); Bessembinder, Jacobsen, Maxwell, 

and Venkataraman (2016); and Adrian, Boyarchenko, and Shachar 

(2016). 16

The Federal Reserve and the four other Volcker regulatory agencies (OCC, FDIC, the Securities and Exchange Commission and the 

Commodity Futures Trading Commission) recently issued a proposal that would simplify and streamline the rule to further tailor 

and reduce burden for firms. For example, the proposal would simplify compliance for a banking entity engaged in market-making, 

by establishing a presumption that trading activity within appropriately set risk limits is permissible market making. By reducing 

the current compliance burden associated with the rule and improving the availability of key exemptions like market-making, the 

simplified proposal, if finalized, should promote increased market 

liquidity. 

Q.24. Without disclosure of any data regarding the metrics or 

banks’ positions in covered funds, the public, Congress, and the 

markets can do little to confirm that covered banking entities are 

complying with the Volcker Rule. 

Can the Federal Reserve and the other four regulators charged 

with enforcement of the Volcker Rule provide for greater transparency on the implementation and enforcement of the Volcker 

Rule’s prohibitions on proprietary trading by banking institutions? 

52 

A.24. The Federal Reserve, along with the four other Volcker agencies, released rules implementing the statutory requirements of the 

Volcker rule in December 2013. These implementing rules included 

a number of provisions designed to ensure compliance by firms, including specific provisions related to the need for a compliance program, and the requirement that certain firms report metrics information. The agencies recently proposed significant revisions to the 

regulations implementing the Volcker Rule, including simplifying 

the compliance program standards applicable to most banking entities, and refining the requirements for firms with large trading operations to report trade-related metrics to the agencies. 

The quantitative trading metrics are an important component of 

the agencies’ supervisory work to monitor compliance with the 

Volcker Rule. The metrics are intended to aid the staffs of the 

Agencies in designing and conducting their examinations of firms’ 

compliance programs and activities subject to the final rules. The 

metrics do not, on their own, indicate a violation of the Volcker 

Rule. The staffs of the agencies use these metrics as a tool to help 

identify instances that may warrant further investigation to determine whether a violation of the Volcker Rule has occurred or 

whether the activity is within a permitted exemption, such as market making or hedging. 

The final rule does not include a provision for public disclosure 

of metrics data. Nonetheless, we appreciate the value of transparency and public accountability, while striking an appropriate 

balance between public disclosure and protecting confidential information. Toward that end, the Federal Reserve and the four other 

Volcker regulatory agencies proposed a simplified and streamlined 

version of the rule that would further tailor and reduce burden for 

firms. The proposal requested comment regarding the required 

compliance program and metrics, in addition to a general request 

for comment regarding whether certain types of quantitative 

metrics information should be made publicly available. We look forward to considering all comments received on the proposal. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SASSE 

FROM RANDAL K. QUARLES 

Q.1. I’d like to discuss how the Federal Reserve can encourage innovation in the financial system. On October 18, 2017, now-Federal 

Reserve Chairman Powell gave a speech entitled ‘‘Financial Innovation: A World in Transition’’, where he articulated the promise 

and the peril of new financial technologies: 

[T]he challenge is to embrace technology as a means of improving convenience and speed in the delivery of financial 

services, while also assuring the security and privacy necessary to sustain the public’s trust . . . Rapidly changing 

technology is providing a historic opportunity to transform 

our daily lives, including the way we pay. FinTech firms 

and banks are embracing this change, as they strive to address consumer demands for more timely and convenient 

payments. A range of innovative products that seamlessly 

integrate with other services is now available at our fingertips. It is essential, however, that this innovation not 

53 

come at the cost of a safe and secure payment system that 

retains the confidence of its end users. 

To this end, what is the Federal Reserve exploring or doing to 

encourage innovation in the financial system in a responsible but 

effective manner? This is particularly important given new innovations in from FinTech companies in digital currency, the payments 

systems, artificial intelligence, and more. For example, could the 

Federal Reserve increase the use of no action letters or—as the 

SEC has done—authorize limited pilot tests, to gather data on new 

technologies or regulatory innovations? Do any of these changes 

need statutory authorization? 

A.1. The Federal Reserve’s general approach to innovation is that 

first and foremost, we have a responsibility to ensure that the institutions subject to our supervision operate in a safe and sound 

manner, and that they comply with applicable statutes and regulations. Within that framework, we have a strong interest in encouraging socially beneficial innovations to flourish, while ensuring the 

risks that they may present are appropriately managed. We do not 

want to unnecessarily restrict innovations that can benefit consumers and small businesses through expanded access to financial 

services or greater efficiency, convenience, and reduced transaction 

costs. 

The Federal Reserve System (System) has generally not relied on 

authorizing pilot projects for private entities or no-action letters, in 

part due to the necessarily shared nature of many of our regulatory 

authorities and mandates, although I think this is something we 

should give greater consideration to in the future. However, within 

our legal authorities, the System has sought to encourage responsible innovation in the financial sector on a number of fronts. 

For example, with respect to payment innovation, in 2015 we 

issued a call to action for ‘‘Strategies for Improving the U.S. Payment System’’. In the following 21⁄2 years, hundreds of organizations and individuals came together in the Federal Reserve’s Faster 

and Secure Payments Task Forces, to collaborate on strategies for 

bringing about a payment system that features fast, secure, and efficient cross-border payments. System staff also focus on specific 

topic areas in the payment space to help facilitate innovation, such 

as mobile payments or distributed ledger technology. In so doing, 

System groups routinely engage innovators from the private sector 

and, in limited cases, have joined public–private consortia to deepen the potential for learning. 

From an international perspective, the System engages international organizations that have collaborated on FinTech issues, 

such as: the Financial Stability Board (and its Financial Innovation 

Network); the Bank for International Settlements (and related 

work through its Committee on Payments and Market Infrastructures, Markets Committee, Committee on the Global Financial System, and Basel Committee on Banking Supervision’s Task Force on 

Financial Technology); the International Organization of Securities 

Commissions; and the Financial Action Task Force. 

From a domestic bank supervision perspective, the System has 

also convened an Interagency FinTech Discussion Forum to facilitate information sharing between Federal banking regulators on 

54 

FinTech consumer protection issues and supervisory outcomes. System staff have used the Federal Reserve’s publications, such as our 

‘‘Consumer Compliance Outlook’’ bulletin, to offer financial institutions and FinTech firms general guideposts for evaluating risks 

when considering the adoption of new technologies. 

Most recently, the System has organized two Systemwide teams 

of experts tasked with monitoring FinTech and related emerging 

technology trends as they relate to our supervisory and payment 

system mandates, respectively. The new teams include representation from all of the Federal Reserve Banks and has leadership from 

Federal Reserve Board staff. These teams routinely meet with 

banks, large and small nonbank innovators who may partner with 

supervised institutions, and domestic and foreign regulators to 

gather data on new technologies and regulatory innovation. 

These two new Systemwide teams share the goal of ensuring 

that FinTech-related information is disseminated across the System and informs relevant supervisory, policy, and outreach strategies. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR ROUNDS 

FROM RANDAL K. QUARLES 

Q.1. In South Dakota, many farmers, ranchers, and manufacturers 

use the regulated derivatives markets to manage their risk of price 

variations. It is important that they are able to access these derivative markets in a cost effective manner. Many of the service providers for these farmers, ranchers, and manufacturers are banks. 

When an end user accesses the cleared markets through a bank, 

it must provide margin, in the form of highly liquid assets, such 

as cash, that is kept in the name of the client for use in the event 

the client cannot meet its payment obligations. 

Margin collected from the end user for the purpose of clearing 

their derivatives is thus exposure reducing for the banks, yet the 

leverage ratio still does not recognize it as such. 

Do you plan to recognize initial margin as offsetting under the 

leverage ratio? 

A.1. We understand that this offset is proposed for European 

banks. 

Q.2. Won’t a lack of offset potentially put U.S. banks at a disadvantage for the client clearing businesses? 

A.2. Clearing improves safety for end users and has been recognized by policymakers as such. 

Q.3. Wouldn’t recognizing client margin under the leverage ratio 

incentive clearing? 

A.3. Leverage capital requirements, such as the supplementary leverage ratio, require banking organizations to hold a minimum 

amount of capital against all on-balance sheet assets and certain 

off-balance sheet exposures. Many banks hold cash customer margin on their own balance sheet. Leverage capital requirements by 

design cap the debt-to-equity ratio at a bank without regard to the 

risk of individual exposures, and this practice of banks placing initial margin on their own balance sheets results in a capital charge 

against those assets. 

55 

Nevertheless, the purpose of, and protections around, the funds 

used as initial margin does indicate that we should look closely at 

adjusting the treatment of initial margin under the leverage ratio. 

In my view, this is less because those assets are not risky—the 

whole point of the leverage ratio is that it applies regardless of 

risk—but rather because in a number of important ways those assets are not really the bank’s assets at all, notwithstanding being 

placed on the balance sheet. Finally, the Federal Reserve Board 

(Board) believes that it is important for leverage capital requirements generally to act as a backstop to risk-based capital requirements. To help ensure that this relationship is maintained, the 

Board recently issued a proposal to recalibrate its enhanced leverage capital requirements for the largest and most complex banking 

organizations. This should reduce the capital cost of client clearing, 

and thus the disincentives to these businesses, while we continue 

to address the issues identified above. 

The exact way in which to adjust the leverage ratio to reflect this 

status is complex, however, and is one of a number of issues that 

our current capital regime raises for business involving centrally 

cleared products. To address potential unintended consequences of 

the leverage ratio on client clearing, in December 2017, the Basel 

Committee on Banking Supervision, of which the Board is a member, announced that it would monitor the impact of the leverage ratio’s treatment of client cleared derivative transactions and review 

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. 

Q.4. As I wrote to you in my letter dated October 25, 2017, it is 

widely accepted that the Current Exposure Method (CEM) is risk 

insensitive and does not appropriately measure the economic exposure of a listed option contract. 

Not surprisingly, the Treasury Report on Capital Markets recommended both a longer term move to the Standardized Approach 

for Counterparty Credit Risk (SA–CCR), as well as a ‘‘near-term’’ 

solution. At a hearing held by the House Financial Services Committee on April 17, 2018, you indicated that the Federal Reserve 

was working on the longer term solution of a rulemaking to replace 

CEM with SA–CCR. 

Although I believe the Federal Reserve should be working on a 

near-term solution in addition to a rulemaking, can you provide a 

date by which the rulemaking will be proposed and when the move 

to SA–CCR will be effective? 

A.4. The Board is working expeditiously to implement the standardized approach for measuring counterparty credit risk (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 and the Office of the Comptroller of the Currency as soon 

as feasible. SA–CCR has many benefits. SA–CCR, as compared to 

the current exposure method, would allow for increased recognition 

of netting and margin and results in a more risk-sensitive exposure 

amount for listed option contracts. We continue to believe that the 

56 

best way to address these issues is through a proposal to incorporate SA–CCR into the Board’s regulatory capital rule. The rulemaking 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. 

Q.5. During your confirmation hearing last July I asked you 

whether you would support reexamining bank capital standards, 

particularly the Supplementary Leverage Ratio or SLR, so that we 

can simplify and properly calibrate these capital regulations. 

Reading the proposals the Federal Reserve made on these issues 

recently, I want to thank you for taking those concerns to heart. 

The changes the Fed made, particularly the clear message it sent 

that the leverage capital standards should not become a binding 

capital constraint, will help right-size capital regulations and allow 

banks to make loans and service their customers. As you continue 

to examine capital regulations, I want to raise two issues of concern. 

First: The proposed capital framework introduces a new ‘‘stress 

leverage buffer’’ for the tier 1 leverage ratio. Like the SLR, the tier 

1 leverage ratio is not tied to the relative risk of a firm’s assets. 

If the stress leverage buffer becomes a binding constraint, then it 

could create incentives for banks to take on riskier assets and penalize banks with safe balance sheets. 

Second: Currently, stress testing is not subject to public noticeand-comment rulemaking and changes year-to-year, making capital 

planning unpredictable for firms and the market. 

I think we would agree that predictable capital standards and 

tailoring capital regulations to risk increases the stability of the financial system. 

To that end, will you commit to reviewing the role of leverage in 

stress testing and to examine how stress testing transparency 

could make capital regulations more predictable? 

A.5. The proposed Stress Capital Buffer would not include one 

poststress leverage measure (the poststress supplemental leverage 

ratio) but, as you note, would include another (the poststress tier 

1 leverage ratio). This feature of the proposal raises a number of 

questions, and we are eager for public input on them. We are currently seeking comments on the proposal, and will carefully consider any comments we receive, including those on the stress leverage buffer. 

With respect to the publication of the supervisory stress test 

models, stress tests are designed to ensure that banks are holding 

sufficient capital to not only survive a severe recession but also 

continue to lend to creditworthy borrowers during the stressful period. There is a degree of uncertainty in forward-looking capital 

planning. Both the financial system and the public benefit when 

firms’ capital allocation decisions account for the possibility of severe but plausible macroeconomic outcomes. 

The Federal Reserve is committed to further increasing the 

transparency of the stress testing process to improve the public’s 

understanding of the supervisory stress test. 

57 

Q.6. 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 postcrisis capital reforms 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? 

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 process? 

A.6. As you noted, changes to the capital treatment for securities 

financing transactions are included in the Basel Committee on 

Banking Supervision’s document ‘‘Basel III: Finalizing Post-Crisis 

Reforms’’ that was issued in December 2017. This document contains a large number of capital changes that the Basel Committee 

has stated should be implemented by 2022. The Federal Reserve is 

aware of the importance of the changes for securities financing 

transactions for custodian banks, as well as for banking organizations that are active in repo and securities lending markets. The 

revised treatment of securities financing transactions in the December 2017 document is a significant part of the revised framework that would affect many institutions and their customers. 

The Federal Reserve is reviewing the changes with the other 

banking agencies to determine the extent to which implementation 

in the United States would be appropriate. Any regulatory changes 

would occur through the notice and comment process under the Administrative Procedure Act. As part of this process, the Federal Reserve will consider how best to implement any revisions to the 

United States regulatory capital framework, including in the order 

in which changes are made and whether certain changes are most 

appropriate as a package with other changes or separately. 

Q.7. South Dakota has long been a leader in the financial services 

industry. Given this time of innovation in our banking system, with 

many new types of lenders and ‘‘FinTech’’ reducing barriers to 

entry by expanding financial services products, emerging companies may need capital investments from entities that could be impacted by the Volcker rule if those entities were owned by or 

partnered with a bank. 

Based on comments you made during your testimony before the 

House Financial Services Committee on April 17, I understand that 

you agree on the need to limit the potential unintended consequences of the Volcker Rule such that it doesn’t limit private capital’s ability help to expand financial services offerings to consumers. 

As you work to refine and update the scope of the Volcker rule 

through your notice of proposed rulemaking and other regulatory 

efforts, will please you keep new technologies in mind and keep my 

58 

colleagues and I on the Senate Banking Committee updated about 

your efforts? 

A.7. With FinTech, as with any other emerging financial product 

or service, the Federal Reserve is closely watching developments 

and considering its implications for our supervisory approach. The 

Federal Reserve has established a multidisciplinary working group 

that is engaged in a 360-degree analysis of FinTech innovation. We 

are also engaging with various FinTech firms to learn more about 

the industry, its business models, its technologies, and the opportunities that it presents. Through these efforts, we continuously assess the impact of technological development on the Federal Reserve’s responsibilities, including our role as a regulator. 

The Federal Reserve and the four other Volcker regulatory agencies recently issued a Notice of Proposed Rulemaking that would 

simplify and streamline the rule to further tailor and reduce burdens for firms. Throughout that rulemaking process, we will certainly consider developments in FinTech as well as all other financial products and services. 

Q.8. I appreciate you putting increased attention at the Federal 

Reserve on the heightened risk we are facing from potential 

cyberattacks. I am encouraged to hear that you are working with 

the private-sector to help provide solutions that will protect our financial sector as a whole. We must be diligent in protecting our financial institutions and the customers they serve, and I believe 

that the best solutions we can arrive at can be achieved through 

collaboration. 

Can you discuss any steps the Fed has taken to strengthen the 

cyberinfrastructure of the financial sector? 

A.8. The Federal Reserve is responsible for supervising a subset of 

the financial firms that operate the critical infrastructure. Our supervisory program is primarily designed to ensure these firms operate in a safe and sound manner. However, as a member of the Financial and Banking Information Infrastructure Committee 

(FBIIC), the Federal Reserve also evaluates the resiliency of these 

firms to cyber and other operational risks that could negatively impact the resiliency of the financial services sector. The Federal Reserve engages in interagency activities with other FBIIC members 

to improve the cyberresiliency of the financial services sector. The 

FBIIC holds periodic cyberincident response simulations, commonly 

referred to as exercises, with the FBIIC members, law enforcement, 

and industry in order to identify areas of concern and develop the 

appropriate means to address them. The exercises have led to the 

creation of a number of private-sector run and public-sector supplied initiatives to enhance the sector’s cyberresiliency, including 

the development of incident management and information sharing 

protocols that encompass a large percentage of private sector entities. Additionally, through participation in these exercises, the Federal Reserve has improved its ability to respond, in coordination 

with other financial regulators, to potential operational disruption 

in the financial sector’s critical infrastructure. 

The Federal Reserve works with other financial regulators, 

through the Federal Financial Institutions Examination Council 

(FFIEC) and other interagency bodies, to strengthen the resilience 

59 

of the financial sector and reduce the potential impact of a significant cyberincident. The Federal banking agencies have issued supervisory guidance to help the institutions under our supervision to 

become more resilient to cyberthreats. In addition, the member 

agencies of the FFIEC regularly update the FFIEC Information 

Technology Examination Handbook, which includes appropriate 

practices on cyberrisk management and operational resiliency that 

can be tailored to an individual institution’s risk profile. 

Due to the high degree of interconnection between the U.S. financial system and global financial system, the Federal Reserve 

has been an active participant and leader in international forums 

addressing the cyberresiliency of the global financial sector. Most 

recently, the Federal Reserve played a leadership role in the Committee on Payments and Market Infrastructures (CPMI) development of a strategy for reducing the risk of wholesale payments 

fraud related to endpoint security. The CPMI strategy report, ‘‘Reducing the Risk of Wholesale Payments Fraud Related to Endpoint 

Security’’, outlines seven elements that are designed to work holistically to address all areas relevant to preventing, detecting, responding to, and communicating about, fraud. The Federal Reserve 

made significant contributions to the ‘‘Stocktake of Publicly Released Cybersecurity Regulations, Guidance and Supervisory Practices’’ published by Financial Stability Board (FSB) and is leading 

the FSB’s efforts to develop a common cyberlexicon. The Federal 

Reserve also has a leadership role in the efforts underway at the 

Basel Committee on Banking Supervision to improve the 

cyberresiliency at internationally active banks. 

At the G7, the Federal Reserve engaged in an initiative to identify a core set of cyberresilience measures expected across the global financial sector, which led to the publication of the G7 ‘‘Fundamental Elements of Cybersecurity for the Financial Sector’’. The 

publication identifies key elements as the building blocks upon 

which an entity can design and implement its cybersecurity strategy and operating framework. The Federal Reserve also played a 

leadership role in the development of cyberresilience guidance for 

financial market infrastructures (FMIs) by CPMI and the International Organization of Securities Commissions (IOSCO). The 

CPMI–IOSCO ‘‘Guidance on Cyber Resilience for FMIs’’ outlines an 

expectation that FMIs must be prepared for the eventuality of successful attacks and make preparations to respond and recover critical services safely and promptly. 

With regard to the payments infrastructure, the Federal Reserve 

is continuing its efforts to identify and provide information related 

to fraud risks and advance the safety, security, and resiliency of 

the payment system. The Federal Reserve, in partnership with 

Boston Consulting Group, is conducting a study designed to inform 

industry security-improvement efforts. The study analyzes payment 

fraud and payment system security vulnerabilities. In addition, the 

Reserve Banks, as operators of critical financial services such as 

Fed wire, continue to advance initiatives aimed at enhancing the 

resiliency of the payments system. For example, the Reserve Banks 

have implemented risk-mitigating processes, controls, and technology highly aligned with the aforementioned CPMI strategy to 

reduce payments fraud emanating from weak security at the endVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00063 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
60 

point (see https://www.newyorkfed.org/newsevents/speeches/ 

2018/dzi180418). 

Q.9. Are there any areas where Congress can be helpful on this 

front? 

A.9. The Federal Reserve appreciates the heightened focus on this 

issue by Congress and recognizes our strong, mutual interest in the 

cyberresilience of the financial sector. The sector’s resilience and 

cyberincident preparedness is evolving rapidly as more firms join 

information sharing organizations and participate in the sector exercise program, allowing them to develop and test incident protocols and improve their processes and practices. Through the continued work programs of interagency groups like the FFIEC and 

FBIIC, as well as our partnership with the private sector through 

the Financial Services Sector Coordinating Council and the Financial Sector Information and Analysis Center, the Federal Reserve 

continues to advocate for and drive initiatives that strengthen the 

financial sector’s critical infrastructure. Since the financial sector 

has critical dependencies with the energy and telecommunication 

sectors, it would be helpful for Congress to support legislative and 

other effort to strengthen the resiliency of these sectors. It would 

also be helpful for Congress to support collaborative efforts between 

these critical sectors and the intelligence community that are intended to coordinate our resiliency to cyberthreats posed by foreign 

and domestic perpetrators. We would be pleased to discuss with 

you further details of the collaboration that is currently underway 

and these suggestions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER 

FROM RANDAL K. QUARLES 

Q.1. Countercyclical Capital Buffer. The IMF Global Financial Stability Report said that short-term financial stability risks have 

been increasing, including vulnerabilities within banks, funding 

risks, concerns about a trade war, and the risks of a too-sharp 

monetary policy tightening. At the same time, we’re seeing robust 

global growth and strong corporate earnings, and credit continues 

to be widely available. One of the lessons of the crisis is just how 

procyclical credit provision can be. As important as stress testing 

and risk-based capital requirements are, they can underestimate 

weaknesses in underwriting and other cyclical behaviors that are 

revealed during bad economic times. 

Given where we are in the economic cycle, and the significant 

run up in asset prices that we’ve seen in recent years, under what 

circumstances would you support an increase in the countercyclical 

capital buffer from zero? 

A.1. The countercyclical capital buffer (CCyB) is an important element of the system of capital regulation that applies to U.S. bank 

holding companies with more than $250 billion in total assets or 

more than $10 billion in foreign assets, as well as intermediate 

holding companies of foreign banking organizations with more than 

$50 billion in total assets. 

In 2016, the Federal Reserve issued a policy statement on the 

CCyB, in which we spelled out a comprehensive framework for setVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00064 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
61 

ting its level. The framework incorporates the Federal Reserve 

Board’s (Board) judgment of not only asset valuations and risk appetite, but also the level of three other key financial 

vulnerabilities—financial leverage, nonfinancial leverage, and maturity and liquidity transformation—and how all five of those 

vulnerabilities interact. In this assessment, the Board considers a 

wide array of economic and financial indicators, as well as a number of statistical models developed by staff. Several of those models 

are cited in the policy statement. As indicated in the policy statement, the CCyB is intended to address elevated risks from activity 

that is not well-supported by underlying economic fundamentals. 

As such, the Board expects the CCyB to be nonzero if overall 

vulnerabilities were judged to have risen to a level that was ‘‘meaningfully above normal.’’ 

Within that framework, the runup in asset prices that we have 

seen in recent years is certainly a key consideration, but we view 

that runup in the context of the levels of other vulnerabilities, importantly including leverage and maturity transformation in the financial system. Bank capital ratios and liquidity buffers are now 

substantially higher than they were a decade ago. The stress tests 

ensure that the largest banks can continue to support economic activity even in the face of a severe recession—importantly, one characterized by extreme declines in asset prices. Outside the banking 

system, leverage of other financial firms does not appear to have 

risen to elevated levels, and the risks associated with maturity 

transformation by money-market mutual funds is much reduced 

from the levels seen a decade ago. Thus, we believe that overall 

vulnerabilities in the financial system remain moderate and near 

their normal range. 

Q.2. The key criteria for whether to raise the countercyclical capital buffer is an assessment that financial risks are in the upper 

third of their historical distribution. 

What is your assessment of current financial risks versus their 

historical distribution? 

A.2. As emphasized in our policy statement, a nonzero countercyclical capital buffer is appropriate when risks are judged to be 

meaningfully above normal. As you noted in your previous question, asset valuations across a number of important markets are 

elevated, and if that were the only criterion for activation of the 

CCyB, it would be appropriate to consider increasing the CCyB 

now. However, we also believe that the financial system is quite resilient, with the institutions at the core of the system well-capitalized, run risk well below earlier levels, and central clearing of derivatives limiting the amount of contagion from the distress of an 

institution. Therefore, our comprehensive assessment is that overall vulnerabilities are moderate, or about at the midpoint of their 

historical range, and therefore do not meet the criteria of being 

‘‘meaningfully above normal’’ set in the policy statement. However, 

we are carefully assessing developments. If asset valuation pressures were to continue to build, especially if they were accompanied 

by increased leverage or increased maturity and liquidity transformation, activation of the CCyB could promote additional resilience among the largest U.S. banks. 

62 

Q.3. Recent eSLR and Capital Rule Proposals. The Board recently 

proposed rules on the calibration of the eSLR and the introduction 

of a stress capital buffer. Each proposal includes an analysis of the 

expected changes in required tier 1 capital if the proposal were to 

be adopted as proposed. The eSLR proposal assesses the effect of 

the proposal if it were adopted, assuming no changes to the CCAR 

process; and the stress capital buffer proposal assess the effect of 

the proposal if it were adopted, assuming no changes to the current 

eSLR. Neither proposed rule, however, analyzes the cumulative effect on required tier 1 capital at the holding company level were 

both proposals adopted as proposed. 

Before proposing the two rules, did the Board analyzed the effect 

on tier 1 capital if both proposals were adopted as proposed? 

What would the cumulative effect on required tier 1 capital at 

the holding company level be for G–SIBs if both proposals were 

adopted as proposed? 

A.3. While the discussion in each of the stress capital buffer proposal and the enhanced supplementary leverage ratio (eSLR) proposal reflects the estimated impact of those individual proposals 

relative to current requirements, the Board also considered the potential combined impact in developing the proposals. Factoring the 

relatively immaterial estimated reduction in required tier 1 capital 

across global systemically important banks (G–SIBs) under the 

eSLR proposal (approximately $400 million) into the estimated impact of the stress capital buffer proposal across G–SIBs does not 

meaningfully affect the estimates. 

Q.4. Community Reinvestment Act. You stated before the House Financial Services Committee that the Community Reinvestment Act 

(CRA) is ‘‘a little formulaic and ossified’’ and you advocated for giving banks greater flexibility in helping their communities. The 

Treasury Department recently issued a formal memorandum to 

bank regulators suggesting changes to the CRA and its implementation. I agree that the CRA needs to be modernized—I think 

there’s widespread agreement that that’s the case since the regulations have not been meaningfully updated since 1995. But I am 

concerned that some of the recommendations in the Treasury 

memo, depending on their implementation, could weaken one of the 

stronger tools we have to ensure access to credit for the underserved and investment in communities that have been left behind 

while others prosper. 

One change that seems overdue, and is recommended in the 

Treasury report, is the need to recognize that, in this digital age, 

physical branches do not accurately reflect a bank’s business footprint. 

Do you support reflecting this shift to the age of online banking 

by updating existing assessment areas? 

A.4. The Federal Reserve is deeply committed to the Community 

Reinvestment Act’s (CRA) goal of encouraging banks to meet their 

affirmative obligation to serve their entire community, and in particular, the credit needs of low- and moderate-income communities. 

When banks are inclusive in their lending, it helps low- and moderate-income communities to thrive by providing opportunities for 

63 

community members to buy and improve their homes and to start 

and expand small businesses. 

I agree that it is time to review changes to the definition of ‘‘assessment area,’’ which is the area in which a bank’s CRA performance is evaluated. The banking environment has changed since 

CRA was enacted and the current CRA regulations were 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 through delivery systems other than 

branches. Additional thought and analysis on this matter will be 

needed to determine how best to define such assessment areas and 

how to evaluate performance in those areas. 

Q.5. One Treasury recommendation that concerns me is deemphasizing a bank’s branch network in its CRA assessment. While technology has certainly helped expand access to credit through alternative delivery systems, studies continue to show that physical 

branches still provide a significant boost to access to credit to their 

surrounding community. 

Will you support keeping a bank’s footprint as a critical factor in 

a bank’s service test in its CRA assessment? 

A.5. Yes, we are confident that there are ways to expand the area 

where we evaluate a bank’s CRA performance without losing the 

regulation’s consideration of the role banks play in meeting local 

credit needs and providing services through their branch networks. 

Treasury’s recommendation that the Federal banking agencies revisit the regulations to allow CRA consideration for a bank’s activities in its assessment area, as currently delineated around 

branches and deposit-taking automated teller machines, as well as 

in low- and moderate-income areas outside that branch footprint, 

is a reasonable place to start our interagency discussions. Further, 

CRA provides an incentive to bankers and community stakeholders 

to work together to identify needs, create investment opportunities, 

and improve local communities, particularly low- and moderate-income or underserved rural areas. 

Q.6. Anti–Money Laundering (AML). One criticism I’ve heard about 

anti–money laundering enforcement is that the banking regulators 

view AML-compliance as a check-the-box exercise that encourages 

banks to defensively file SARs that may not truly reflect suspicious 

activity instead of spending resources to catch bad guys. 

Do you believe there is a check-the-box mentality among bank 

examiners regarding AML compliance? If so, do you believe it is a 

problem, and if so what do you plan to do to address it? 

A.6. Under current law and regulations implementing the Bank Secrecy Act (BSA), insured depository institutions and other banking 

organizations must maintain a system for identifying and reporting 

to the Government transactions involving known or suspected illegal activities that generally exceed certain dollar thresholds 

(known as a ‘‘Suspicious Activity Report’’ or ‘‘SAR’’). The Federal 

Reserve and the other Federal banking agencies review an institution’s compliance with this and other anti–money laundering 

(AML) requirements through the examination process. 

64 

1See Anti-Drug Abuse Act of 1986, H.R. 5484, 99th Cong. §1359 (1986). 

The interagency examination manual that was developed jointly 

among the Federal Reserve and the other members of the Federal 

Financial Institutions Examination Council (FFIEC) in consultation with Treasury’s Financial Crimes Enforcement Network 

(FinCEN) describes the regulatory expectations for banking industry compliance with the suspicious activity reporting requirements 

and explains how examinations will be performed. The examination 

manual recognizes that the decision to file a SAR under the reporting requirement is an inherently subjective judgment. The manual 

directs examiners to focus on whether the institution has an effective SAR decision-making process, not individual SAR decisions. 

The Federal Reserve, along with the other Federal banking agencies, provides ongoing training opportunities to its examiners regarding BSA topics and various aspects of the BSA examination 

process. 

The Federal Reserve recognizes that existing regulatory requirements governing the filing of SARs have prompted criticism due to 

the concern that they encourage institutions to report transactions 

that are unlikely to identify unlawful conduct, so-called defensive 

SARs. Recently, the Federal Reserve and the other Federal banking agencies completed a review consistent with the statutory mandate under the Economic Growth and Regulatory Paperwork Reduction Act. As part of this review, several commenters suggested 

regulatory changes to the SAR and other reporting requirements, 

which were referred to FinCEN. FinCEN is the delegated administrator of the BSA, and any changes to the SAR or other reporting 

requirements would require a change in FinCEN’s regulations. 

Q.7. Some have suggested that having FinCEN retake responsibility for some AML compliance reviews is a good way to realign 

the compliance incentives—the agency trying to catch the bad guys 

would be the same agency that’s inspecting a bank’s AML program. 

What do you think about that approach? 

A.7. The Federal Reserve and the other Federal banking agencies 

are required by statute to review the BSA/AML compliance program of the banks we supervise at each examination. 1 Thus, unless this requirement is changed by Congress, banking agencies 

must continue to examine for BSA compliance at banking institutions. 

There are important benefits that arise from these statutorily 

mandated reviews by the banking agencies. A review of an institution’s compliance with the BSA is integrally related to our assessment of an institution’s safety and soundness. The Federal Reserve 

expects the institutions we supervise to identify, measure, monitor, 

and control the risks of an institution’s activities. The inability to 

properly manage legal and compliance risk, for example, can compromise a bank’s safety-and-soundness by reducing the confidence 

of its customers and counterparties and result in loss of capital, 

lower earnings, and weakened financial condition. 

Currently, the Federal Reserve and the other Federal banking 

agencies routinely coordinate with FinCEN on a range of BSA matters. The FFIEC BSA/AML Working Group, which includes representatives of the banking agencies and FinCEN, meets regularly 

65 

to share information among its members about various BSA/AML 

initiatives. This forum can encourage the sharing of information 

developed by FinCEN related to specific types of money laundering 

typologies and other relevant data that would help prioritize the 

ongoing examination efforts by the banking agencies. 

Q.8. It seems another way we can build a more effective compliance regime is to facilitate more information sharing among banks 

and between the Government and banks. 

What role do you think the Federal Reserve should have in facilitating this increased information flow? 

A.8. Effective implementation of the BSA requires coordination 

among the different Government agencies and regulated institutions. The Federal Reserve takes seriously its obligation to coordinate with FinCEN and the Federal banking agencies to ensure that 

banking organizations operate in a safe and sound manner and in 

compliance with the law. In particular, we participate in the Bank 

Secrecy Act Advisory Group, a public–private partnership established by Congress for the purpose of soliciting advice on the administration of the BSA, which facilitates sharing of information on 

regulatory policies and initiatives, industry developments, and 

emerging money-laundering threats. 

As you know, the Federal banking agencies do not have the authority to conduct criminal investigations or to prosecute criminal 

cases. Rather, the Federal banking agencies ensure that suspected 

criminal activity is referred to the appropriate criminal authorities 

for prosecution and the BSA rules are intended to achieve this purpose. Accordingly, the Federal Reserve relies on the Department of 

Justice and other law enforcement agencies to communicate whether the reporting obligations of banks are furthering law enforcement’s objectives. Indeed, communication from law enforcement to 

regulators and the banking industry is vitally important. 

Finally, in terms of information sharing between financial institutions, the primary means of communication related to BSA is 

governed by Section 314(b) of the USA PATRIOT Act, which encourages financial institutions and associations of financial institutions located in the United States to share information in order to 

identify and report activities that may involve terrorist activity or 

money laundering. FinCEN is the agency with the responsibility 

and authority to facilitate information sharing under the regulation. As part of the ongoing initiatives with FinCEN and the other 

Federal banking agencies described above, the Federal Reserve has 

encouraged FinCEN to further consider ways to facilitate financial 

institutions’ ability to share information. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARREN 

FROM RANDAL K. QUARLES 

Q.1. During our exchange, you referenced an analysis that the Fed 

conducted about how much the less capital each G–SIB would be 

required to hold under the new Enhanced Supplementary Leverage 

Ratio rule recently proposed by the Fed. You noted that the Fed’s 

calculations differed from the FDIC’s analysis, which I cited. 

66 

Could you please provide the Fed’s analysis that you referenced 

and an explanation of the divergence between the Fed and the 

FDIC? 

A.1. The Federal Reserve Board (Board) estimated that, taking into 

account the capital constraints imposed by the supervisory stress 

tests and the Board’s regulatory capital rules, the proposed 

changes to the enhanced supplementary leverage ratio (eSLR) 

standards would reduce the amount of tier 1 capital required 

across the U.S. global systemically important bank holding companies (G–SIBs) by approximately $400 million. That figure is approximately 0.04 percent of the amount of tier 1 capital held by the 

G–SIBs as of the third quarter of 2017. The Federal Deposit Insurance Corporation’s analysis of April 11, 2018, cites the Board’s and 

the Office of the Comptroller of the Currency’s estimate that the 

proposal would reduce the amount of tier 1 capital required across 

the lead bank subsidiaries of the G–SIBs by approximately $121 

billion. The $121 billion figure represents the potential reduction in 

tier 1 capital required across the lead insured depository institution subsidiaries of the G–SIBs; however, these firms are wholly 

owned by their parent holding companies. On a consolidated basis, 

G–SIBs 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 investors. 

Thus, due to these limitations at the holding company level, the G– 

SIBs would be required to retain nearly all of the $121 billion 

amount and would not be able to distribute it to third parties. 

Q.2. During the hearing, you told me that in your view, Section 

402 of S. 2155, which recently passed the Senate and allows banks 

‘‘predominantly engaged in custody, safekeeping, and asset servicing activities’’ to have less capital, could not be interpreted to include JPMorgan Chase and Citigroup. 

Would that analysis hold if those banks created intermediate 

holding companies to house their custody services? 

A.2. Because an intermediate holding company would be disregarded in financial consolidation, the creation of an intermediate 

holding company to house custody services would not affect the 

analysis of whether the consolidated organization was ‘‘predominantly engaged in custody, safekeeping, and asset servicing activities.’’ 

Q.3. Will the Fed alter the Enhanced Supplementary Leverage 

Ratio proposal if S. 2155 passes? 

In what way? 

A.3. The proposal is based on the current regulatory definitions of 

tier 1 capital (the numerator of the ratio) and total leverage exposure (the denominator of the ratio), which include central bank deposits in the denominator. As noted in the preamble to the proposed rule, significant changes to either of the components of the 

supplementary leverage ratio would likely necessitate reconsideration of the proposal so that the eSLR standards continue to require an appropriate level of capital. We are considering potential 

ways that the regulation could be adjusted to account for the 

changes to the eSLR due to the enactment of S. 2155 into law. 

67 

Q.4. Why is a reduction in capital requirements necessary at this 

point in the business cycle? 

A.4. The proposal would not represent a material reduction in the 

amount of capital held by firms subject to the eSLR. Taking into 

account the capital constraints imposed by the Board’s supervisory 

stress testing requirements, as well as the Board’s regulatory capital rules, we estimate that the proposal would reduce the amount 

of tier 1 capital required across the G–SIBs by approximately $400 

million. That figure is approximately 0.04 percent of the amount of 

tier 1 capital held by the G–SIBs as of the third quarter of 2017. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR HEITKAMP 

FROM RANDAL K. QUARLES 

Q.1. In response to my question about whether a Government 

backstop is essential to retaining the 30-year fixed-rate mortgage, 

you responded, ‘‘probably not’’ but added that you would need more 

time to analyze the question. 

Can you elaborate on your views regarding the connection between a Government guarantee and the availability of the 30-year 

fixed-rate mortgage in all credit cycles? 

Do you believe that Government guarantees promote or detract 

from housing market stability? 

During the 2000s, as private-label securitization grew to dominate the U.S. housing finance system, we saw very clearly the 

tendency of nonguaranteed mortgage financing to shun the 30-year 

fixed-rate mortgage. Indeed, during the period from 2001–2008, 

private-label securitization displayed a remarkable bias toward adjustable-rate products. Do you believe that nonguaranteed financing and its tendency towards adjustable rates would provide affordable access to credit for American families? In a housing downturn, 

do you believe that nonguaranteed mortgage financing could provide consumers with similar access to affordable, long-term housing 

credit? 

A.1. The 30-year fixed-rate mortgage is a very popular product in 

this country and for decades has been associated with a credit 

guarantee. Without a guarantee, it is still likely to be available 

throughout the credit cycle. However, the cost and availability of 

the product could vary significantly. 

The jumbo-conforming spread, which measures the price difference between private mortgage financing and Government-guaranteed mortgage financing, has varied greatly over time and has 

tended to increase sharply during times of financial stress. For instance, the jumbo-conforming spread averaged about 10 basis 

points prior to the financial crisis (2005 through mid-2007), 30–40 

basis points during the early stages of the crisis (mid-2007 through 

mid-2008), and over 75 basis points during the depths of the crisis 

(mid-2008 through mid-2009). The jumbo-conforming spread has 

since declined to about 10–15 basis points during the 2016–2017 

time period. 

A 30-year horizon for a financial asset is a long horizon, particularly an asset with credit risk. Households with such mortgages are 

likely to encounter periods of financial turmoil over this horizon, 

sometimes with little equity in their home. In addition, the 30-year 

68 

fixed-rate mortgage is usually prepayable and thus a household can 

refinance and withdraw any home equity it has accumulated from 

the house. As a result of these two factors, managing the credit 

risk for this mortgage product can be difficult for certain mortgage 

investors. 

Secondary market traders of financial assets usually manage interest-rate risk and avoid assets with credit risks. Thus, the 30- 

year fixed-rate mortgage can be difficult to trade without a substantial financial premium for traders if it has credit risk. A Government guarantee for the credit risk allows the 30-year fixed-rate 

mortgage to be more easily used in secondary market trading. 

Ultimately, the question of the Government’s role in housing finance is an issue for Congress. If Congress does choose to provide 

a guarantee for mortgages, I would urge that the guarantee be explicit and transparent, done in a manner that protects taxpayers, 

and apply to securities not institutions. 

RESPONSES TO WRITTEN QUESTIONS OF SENATOR SCHATZ 

FROM RANDAL K. QUARLES 

Q.1. During the March meeting of the Federal Open Market Committee, the Fed discussed the expected impacts of the recent tax 

cuts: according to the minutes, ‘‘participants generally regarded the 

magnitude and timing of the economic effects of the fiscal policy 

changes as uncertain, partly because there have been few historical 

examples of expansionary fiscal policy being implemented when the 

economy was operating at a high level of resource utilization.’’ 

There are few historical examples of expansionary fiscal policy 

being implemented when the economy is so strong because it is bad 

economics. Mainstream economists agree that it is harmful for an 

economy to enact fiscal stimulus when the economy is operating at 

or near maximum capacity because it creates strong inflationary 

pressure. 

Do you agree? 

Is it good economy policy to enact massive fiscal stimulus when 

the economy is operating at a high level of resource utilization? 

A.1. As noted in the March Minutes, because there have been few 

historical examples of expansionary fiscal policy being implemented 

when the economy was operating at a high level of resource utilization, the magnitude and timing of the economic effects of recent 

changes in fiscal policy are uncertain. While the Congress and the 

President are solely responsible for determining the timing and 

contours of fiscal policy changes, I will note that Federal fiscal policy is not currently on a sustainable trajectory. Over the coming 

decades, a large and growing Federal Government debt, relative to 

the size of the economy, would have negative effects on the economy. In particular, a rising Federal debt burden would reduce national saving, all else equal, and put upward pressure on longerterm rates. 

Q.2. Bank holding companies under the Fed’s supervision have 

been fined more than $174 billion since the financial crisis for deceptive practices, anti–money laundering violations, and glaring 

consumer abuses. The egregious practices at Wells Fargo led the 

69 

Fed to cap the bank’s growth and resulted in hundreds of millions 

in fines, with more to come. 

What these fines demonstrate is that our largest financial institutions are either intentionally and repeatedly breaking the law, or 

they are too large to be properly managed. 

Which do you think it is? 

A.2. Since 2008, the Federal Reserve has assessed civil money pen- alties totaling approximately $5.7 billion against 35 institutions of 

varying asset sizes. Most commonly, these fines were focused on an 

institution’s unsafe or unsound practices that resulted from breakdowns in the institution’s oversight, controls, and risk management 

related to particular regulatory frameworks, for example the Bank 

Secrecy Act, U.S. sanctions requirements, the application of antitrust law to individual financial markets, such as foreign exchange 

trading, and servicing and foreclosing on residential mortgage 

loans. 

The enforcement actions taken by the Federal Reserve invariably 

supplemented the monetary penalty by also requiring the institutions to develop and implement acceptable plans, policies, and programs to remedy the managerial, operational, or compliance deficiencies that were the basis for the actions. Before the remedial requirements of such an enforcement action can be terminated, the 

Federal Reserve must be assured that the institution has implemented a sustainable, long-term solution to the problem that led to 

the enforcement action. To that end, the relevant Federal Reserve 

Bank reviews the plans and programs and the progress reports developed in response to the enforcement action, and provides feedback to senior management. The Federal Reserve also conducts a 

broader annual supervisory assessment of the institution that includes a review of the institution’s compliance with any outstanding enforcement action to ensure the institution addresses the 

underlying issues. 

Q.3. Why should we think about lightening prudential requirements on institutions that have such serious legal compliance problems? 

A.3. The institutions subject to enforcement actions described 

above were required as part of the actions to fully correct these defective programs. The improvements in regulatory effectiveness, efficiency, and transparency currently being considered by the Federal Reserve should not in any way detract from the obligation of 

all regulated institutions to maintain comprehensive and effective 

compliance programs. 

Q.4. Does the fact that banks have paid record fines at a time 

when they have made record profits mean that banks have just 

baked the cost of fines into their business plan? 

Are these fines accomplishing anything? 

A.4. It is the experience of the Federal Reserve that, enforcement 

actions that impose substantial penalties also tend to serve a deterrent purpose. In addition, effective accountability for institutional 

misconduct can also be achieved by taking appropriate enforcement 

actions against culpable individuals who are responsible for the 

misconduct. Pursuing such actions against culpable insiders, where 

supplied by the record, is an important priority for the Federal ReVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00073 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
70 

serve. In addition, in cases of pervasive and persistent institutional 

misconduct, such as the Board’s recent enforcement action against 

Wells Fargo & Company, the Federal Reserve did not impose a fine 

but restricted the institution’s asset growth until the firm accomplishes effective remediation. 

RESPONSES TO WRITTEN QUESTIONS OF 

SENATOR CORTEZ MASTO FROM RANDAL K. QUARLES 

Q.1. Following up on my questions to you, I am very concerned 

that cost-benefit analysis fails to capture the human and economic 

cost of massive financial system failure. For example, in 2009, 

when I was Attorney General, Nevada had 165,983 people unemployed. That year, in a State of 3 million people, we had 28,223 

personal bankruptcies, 366,606 mortgage delinquencies and 

421,445 credit card delinquencies. In addition, 121,000 Nevada 

children’s lives and educations were disrupted by the foreclosure 

crisis. We had more than 219,000 foreclosures between 2007 and 

2016. 

Do you believe that cost-benefit analysis disproportionately benefits industry, since the costs of compliance are easier to calculate, 

while the benefits of a sound financial system are more difficult to 

measure? 

You noted that the Federal Reserve underestimated the human 

costs of a potential financial crisis prior to 2008? Please describe 

some of the ways that Fed underestimated the costs of the Crisis 

and how you would have assessed them knowing what you know 

now? 

How will the Federal Reserve’s new ‘‘policy effectiveness and assessment’’ unit consider the benefits of avoiding a future financial 

crises? How many people work in the unit? Who are they and what 

is their background and expertise? 

If they were employed at the Federal Reserve prior to the Financial Crisis, what was their role? 

If they published anything on the stability or risks in the financial sector between 2004–2008, please provide those documents. 

A.1. Cost-benefit analysis is intended to provide an objective assessment of the net costs and benefits to society from a pending 

regulation. This takes into account the myriad impacts of a regulation, including those on consumers, businesses and financial intermediaries. The fact that some of these impacts, such as the cost of 

compliance, are easier to quantify does not imply that the cost-benefit analysis will favor any particular group. 

As I noted in my testimony, the Federal Reserve underestimated 

the likelihood of a crisis prior to the financial crisis. Indeed, it is 

in response to these shortcomings that the Federal Reserve has 

worked with other agencies to significantly raise prudential standards, such as capital and liquidity of financial institutions, thus 

lowering the probability of another crisis. 

The Policy Effectiveness and Assessment section will follow established methods and consider the benefit of avoiding a financial 

crisis by considering the impact of increased safety and soundness 

on the reduced probability of a crisis, and the economic losses given 

a crisis. 

71 

Currently, the section has a manager in place (an economist by 

training) and the team consists of a small number of Ph.D. economists and support staff. As with all Federal Reserve economists, 

their professional profile and publications are available on our public website at https://www.federalreserve.gov/econres/ 

theeconomists.htm. In addition, we recently hired additional Ph.D. 

economists, and these individuals will be joining the team in the 

coming months. 

Q.2. Under S. 2155, the Federal Reserve would have the discretion 

to apply financial stability rules to banks with between $100 billion 

and $250 billion in assets. Such discretion especially requiring tailored rules to each institutions—opens up banking regulators to 

lawsuits. For example, SIFMA sued the CFTC over the definition 

of ‘‘as appropriate’’ when it came to setting position limits. 

Are you concerned that giving the Federal Reserve discretionary 

authority to implement financial stability rules for banks—rather 

than relying on a bright line threshold from Congress—will open 

the Fed to lawsuits by banks that are selected for additional oversight? 

A.2. The Federal Reserve Board (Board) has developed experience 

in tailoring its prudential regulations and supervisory programs 

based on factors such as the size, systemic footprint, and the risk 

profile of individual institutions. 

The Board remains committed to transparency in its rulemaking 

process and believes it is important to provide the public with an 

adequate justification for its rules. The public would have the opportunity to comment on any proposed rule, which would provide 

the Federal Reserve with important information, focus, and feedback, including whether the proposal is appropriately tailored to its 

intended purpose. 

Q.3. Former Deputy Treasury Secretary—and Fed Governor— 

Sarah Bloom Raskin called this ‘‘reach down’’ authority afforded to 

the Fed, ‘‘legislative fool’s gold.’’ She knows the Fed will wait until 

it’s too late to regulate banks in the $100 to $250 billion band. 

What do you think of her comments? 

A.3. In the absence of Enhanced Prudential Standards for institutions under $250 billion, the Federal Reserve maintains broad supervisory and regulatory tools to ensure firms continue to adhere 

to prudential safety and soundness standards. These tools include 

a rigorous supervisory program with standards for internal stress 

testing of capital and liquidity as well as risk management frameworks. A firm with $100 billion to $250 billion in assets is still expected to ensure that the consolidated organization and its core 

business lines can survive under a broad range of internal and external stresses and that it maintains sufficient capital and liquidity, as well as operational resilience, through effective corporate 

governance and risk management. Moreover, under the Economic 

Growth, Regulatory Relief, and Consumer Protection Act, the Federal Reserve has discretion to determine which enhanced standards 

to apply to an institution between $100 billion and $250 billion. I 

expect that the Board will seek public comment on the application 

of those standards to this group of institutions. 

72 

1 5 U.S.C. 601. 

2 12 U.S.C. 3506. 

Q.4. As of 2016, the financial sector accounted for 20 percent of the 

GDP and 25 percent of corporate profits. Do you believe that the 

financial sector’s outsized grasp on profits has a chokehold on the 

overall economy? 

A.4. Our responsibilities with regard to the financial sector are to 

ensure that the financial entities we supervise operate in a safe 

and sound manner, and to promote financial stability. We take 

these responsibilities very seriously. Currently, we see financial 

conditions as generally supportive of continued economic expansion, consistent with the attainment of maximum employment and 

price stability. 

Q.5. As your team addresses and analyzes the cost-benefit analysis 

of any proposed rule, how will they calculate the cost of having a 

financial sector with outsized and increasing power, influence, and 

wealth? 

A.5. As part of the rulemaking process, the Board considers the 

economic impact, including costs and benefits, of its proposed and 

final rules. As part of this evaluation, staff will take into account 

the benefits accruing from improvements in the safety and soundness of Board-regulated institutions and U.S. financial stability, 

the costs imposed on the regulated entities, as well as potential effects on the overall economy. In addition, the Board provides an 

analysis of the costs to small depository organizations of its rulemaking consistent with the Regulatory Flexibility Act 1 and computes the anticipated cost of paperwork consistent with the Paperwork Reduction Act. 2 In adopting the final rule, the Board seeks 

to adopt a regulatory option that faithfully reflects the statutory 

provisions and the intent of Congress, while minimizing regulatory 

burden. 

Q.6. I represent Nevada, which is within the San Francisco Federal 

Reserve District. We are one of the most diverse districts in the 

Nation—with many Latino and Asian Pacific American families. 

We value that diversity because it leads to innovation, economic 

growth, and stronger connections with other nations in our globally 

connected world. 

A recent report by Fed Up, ‘‘Working People Still Need a Voice 

at the Fed: 2018 Diversity Analysis of Federal Reserve Bank Directors’’, found that there is inadequate diversity at the Federal Reserve. It specifically cited the San Francisco Federal Reserve as one 

of system’s least diverse regional banks. The report states, ‘‘Despite 

covering some of the most demographically diverse counties in the 

United States, 100 percent of the San Francisco Fed’s Board of Directors come from the banking and financial sector. The directors 

are 78 percent white and 78 percent male.’’ 

As the Vice Chair of Supervision, what steps have you taken to 

promote diversity with the Fed’s supervisory, regulatory and enforcement staff? 

A.6. The Board’s action to approve the Diversity and Inclusion 

Strategic Plan 2016–2019 reflects the Board’s strategic initiative on 

diversity, inclusion, and equality. The implementation of the plan 

73 

involves the active involvement of 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 division is required to establish a diversity and inclusion 

scorecard. The purpose of the 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 addressing the division of Supervision and Regulation’s and related 

divisions’ challenges and achievement of their goals. 

Q.7. What steps can the Fed take to promote diversity within the 

financial system, especially with respect to the firms the Fed regulates? 

A.7. As directed by section 342 of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd–Frank Act), the Board 

continues to request from the entities we regulate a submission of 

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 provides opportunities to discuss leading practices and challenges in addressing diversity in the financial services industry. In 

an effort to increase the submission of diversity information, the 

Board is collaborating with the other financial regulatory agencies 

to develop symposiums, webinars, and other support initiatives to 

provide a variety of forums to address what is needed to advance 

diversity in the financial and banking industry. 

Q.8. How closely do you work with the Fed’s Office of Diversity and 

Inclusion? Please give a couple of examples. 

A.8. In my role as Governor and Vice Chairman of Supervision, I 

am available to the Director of the Office of Minority and Women 

Inclusion (OMWI) to meet and 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 

Board’s leadership nomination criteria and process are inclusive. 

Additionally, a meeting schedule has been established for the 

OMWI Director and Deputy Director of Supervision Policy to discuss a range of issues within the OMWI purview. 

Q.9. How will you work to end the outsized representation and influence of the banking and business sectors among the Regional 

Bank Boards of Directors? 

Have you identified directors with nonprofit, academic, and labor 

backgrounds that could also serve? 

A.9. I, and my colleagues on the Board, are committed to increasing diversity throughout the Federal Reserve System (System). The 

Board focuses particular attention on increasing gender, racial, and 

sector diversity among Reserve Bank and Branch directors because 

we believe that the System’s boards function most effectively when 

they are constituted in a manner that encourages a variety of perspectives and viewpoints. Monetary policymaking also benefits 

from having directors who effectively represent the communities 

they serve because we rely on directors to provide meaningful 

grassroots economic intelligence. 

74 

In vetting candidates for Class C and Board-appointed Branch 

director vacancies, the Board considers factors such as professional 

experience, leadership skills, and community engagement. The 

Board also evaluates a candidate’s ability to contribute meaningful 

insights into economic conditions of significance to the District and 

the Nation as a whole. As part of this process, the Board focuses 

considerable attention on whether a candidate is likely to provide 

the perspective of historically under-represented groups, such as 

consumer, community, and labor organizations, minorities, and 

women. 

Although there is room for improvement, the System has made 

significant progress in recent years in recruiting highly qualified, 

diverse candidates for Reserve Bank and Branch director positions. 

For example, in 2018, approximately 56 percent of all System directors are diverse in terms of gender and/or race, which represents 

a 16 percentage point increase in the share of directors since 2014. 

As previously mentioned, in addition to gender and racial diversity, the Board also seeks candidates from a wide range of sectors 

and industries to serve as Reserve Bank and Branch directors. We 

currently have consumer/community and labor leaders serving on 

boards throughout the System, and we gain invaluable insight from 

directors who are affiliated with other types of organizations, including major health care providers, universities and colleges, and 

regional chambers of commerce, among others. 

Q.10. If the Consumer Financial Protection Bureau continues to 

drop lawsuits against predatory online loan companies, like Golden 

Valley Lending or drop investigations against companies like World 

Acceptance Corporation, one of the biggest payday lenders, does the 

Federal Reserve have the enforcement authorities and resources 

that would allow its staff pick up the slack and protect people from 

unfair, deceptive and abusive lending practices? 

A.10. As prescribed by the Dodd–Frank Act, the Federal Reserve 

has supervisory and enforcement authority for compliance with section 5 of the Federal Trade Commission Act (FTC Act), which prohibits unfair or deceptive acts or practices (UDAP), for all State 

member banks, regardless of asset size. The Federal Reserve is 

committed to ensuring that the institutions we have authority to 

supervise comply fully with the prohibition on unfair or deceptive 

acts or practices as outlined in the FTC Act. 

Under the Dodd–Frank Act, Congress granted supervision and 

enforcement authority to the Consumer Financial Protection Bureau (CFPB) for all other banks, thrifts, and credit unions with assets over $10 billion, and their affiliates, as well as nonbank mortgage originators and servicers, payday lenders, and private student 

lenders. As such, the Federal Reserve cannot supervise or enforce 

consumer protection laws and regulations with respect to institutions that are not within our statutory authority. 

Q.11. Mick Mulvaney, the OMB Director and the CFPB Acting Director appointed—illegally—by President Trump, has received more 

than $60,000 in campaign contributions from payday lenders. You 

recused yourself from any case involving Wells Fargo because of 

your ‘‘wife’s family’s historical connection.’’ 

75 

Do you think Acting Director Mulvaney should recuse himself 

from any decision on litigation or enforcement for any firm that has 

provided him significant campaign contributions? 

A.11. It is not our practice to comment on a non- Federal Reserve 

official’s decision to participate in or recuse himself or herself from 

a particular matter that does not involve the Federal Reserve. I 

have no comment on recusal decisions made by other Government 

officials. 

Q.12. If the Consumer Financial Protection Bureau’s political appointees refuses to police the consumer markets, will you let us 

know if predatory and deceptive practices are going unaddressed 

and increasing risks in the financial system? 

A.12. The Federal Reserve takes seriously our responsibility to supervise and enforce laws that guard consumers against UDAP in 

the banks for which we have statutory authority. As granted by the 

Dodd–Frank Act, the Federal Reserve supervises for compliance 

with the section 5 of the FTC Act, which sets forth consumer protections for UDAP, in State member banks, regardless of asset size. 

For these banks, we conduct UDAP reviews regularly within the 

supervisory cycle. Further, examiners may conduct a UDAP review 

outside of the usual supervisory cycle, if warranted by findings of 

a risk assessment. When Federal Reserve examiners find evidence 

of potential discrimination or potential UDAP violations, they work 

closely with the Board’s Division of Consumer and Community Affairs (DCCA) for additional legal and statistical expertise and ensure that fair lending and UDAP laws are enforced consistently 

and rigorously throughout the System. 

When violations are identified, the Federal Reserve frequently 

uses informal supervisory tools (such as memoranda of understanding between banks’ boards of directors and the Federal Reserve Banks, or board resolutions) to ensure that violations are corrected. In these instances, the supervisory information is confidential and cannot be shared with parties outside of the institution 

and supervisory agencies. 

Just as the Federal Reserve cannot share confidential supervisory information with respect to the banks that we supervise, neither can we share confidential supervisory findings of other supervisory agencies. 

However, the Federal Reserve has 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. In 2014 and 2015, we brought two 

enforcement actions requiring restitution for students who were not 

given full information about the potential fees and limitations associated with opening deposit accounts for their financial aid refunds. 

In 2017, the Board brought two public enforcement actions for 

UDAP violations. In October, the Board issued a consent order 

against a bank for deceptive practices related to balance transfer 

credit cards issued to consumers through third parties. The order 

required the bank to pay approximately $5 million in restitution to 

nearly 21,000 consumers and to take other corrective actions. In 

November, the Board issued another consent order against a bank 

for deceptive residential mortgage origination practices when it had 

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given borrowers the option to pay an additional amount to purchase discount points to lower their mortgage interest rate, but 

that did not actually provide the reduced rate to many of those borrowers. The enforcement action required the bank to pay approximately $2.8 million into an account to provide restitution to these 

borrowers. These are a few examples. The Board reports its general 

overview of UDAP and enforcement actions in our Annual Report 

to Congress. 

Q.13. Has the Federal Reserve leadership—either directly or 

through the Financial Stability Oversight Council—weighed in on 

the impact from the Trump appointed leadership at the CFPB’s decision to weaken fair lending enforcement, suspend the civil penalties fund and stop investigating into firms such as the hack of 

147 million people’s information held by Equifax? 

A.13. As you know, Title X of the Dodd–Frank Act transferred rulemaking authority for a number of consumer financial protection 

laws from seven Federal agencies to the CFPB. With regard to 

rules for which the CFPB is responsible for promulgating, such as 

those implementing the Fair Credit Reporting Act, the Board’s role 

in the process is on a consultative basis. We do coordinate in institution examinations as appropriate. The Federal Reserve does not 

have any oversight of the CFPB’s enforcement priorities, nor decisions regarding its organizational or structural design. These matters are solely the purview of CFPB’s leadership. 

Q.14. The Treasury Department, as you know, has released several 

extensive reports that include dozens and dozens of recommendations to revise the rules governing banks. 

Do you think there should be penalties for banks that fail to comply with the Community Reinvestment Act? 

What should they be? 

A.14. The Community Reinvestment Act (CRA) requires the regulators to encourage banks to help meet the credit need of their local 

communities. We do so by conducting CRA examinations, publishing CRA ratings and performance evaluations on our public 

website, and considering a bank’s CRA performance when evaluating applications for mergers, acquisitions, and opening branches. 

The applications process serves as a means of enforcing CRA. 

CRA requires that the appropriate Federal supervisory agency consider a depository institution’s record of helping to meet the credit 

needs of its local communities and to take that record and public 

comments into account in evaluating applications for deposit-taking 

facilities, such as for mergers, acquisitions, and branches. An institution’s most recent CRA record is a particularly important consideration in the applications process because it represents a detailed 

on-site evaluation of the institution’s performance under the CRA. 

The public nature of the ratings and the agencies’ consideration of 

CRA performance in the application process creates an incentive 

for financial institutions to work with its community to help meet 

its needs. 

Q.15. Which, if any, recommendations from the Treasury Department related to CRA do you disagree with? 

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3https://www.federalreserve.gov/newsevents/speech/powell20180406a.htm 

4Politico Pro, ‘‘Powell Doesn’t See Need To Loosen Rules on Biggest Banks’’, April 6, 2018. 

A.15. The Board’s staff is continuing to analyze the recommendations made by the Department of Treasury. I share Treasury’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 raised 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 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. 

For example, I agree that it is time to review changes to the definition of ‘‘assessment area,’’ which is the area in which a bank’s 

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 

communities that banks serve, while retaining the core focus on 

place. 

Q.16. Fed Chair Powell recently said that the Fed’s requirements 

for the largest banks are ‘‘very high and they’re going to remain 

very high.’’ 3 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.’’ 4

Why did the Fed issue a proposal last week that would revise the 

enhanced Supplementary Leverage Ratio (eSLR), which according 

to the FDIC, would reduce bank capital by more than $120 billion 

at the Nation’s largest banks? 

With banks making big profits, why would the Fed propose to reduce capital in a significant way that diminishes protections for 

taxpayers and the economy? 

If we are seeing regulations being weakened while the banking 

sector is very strong economically, what do you expect to see regarding banking regulations during an actual downturn or recession? 

A.16. The proposed recalibration of the enhanced supplementary leverage ratio (eSLR) standards is an example of the Board’s efforts 

to ensure that the postcrisis financial regulations are working as 

intended. Core aspects of postcrisis financial regulation have resulted in critical gains to the financial system, including higher 

and better quality capital, a robust 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 efforts. In undertaking this review and assessment, 

the Board is mindful of the need for the regulations not only to be 

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effective for maintaining safety and soundness and financial stability, but also to be efficient, transparent, and simple. 

The purpose of the eSLR proposal is to recalibrate our 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 SLR has become a generally binding constraint rather than a backstop to the risk-based requirements. If a 

leverage ratio is calibrated at a level that makes it generally binding, it can create incentives for banking organizations to reduce 

their participation in business activities with lower risks and returns, such as repo financing, central clearing services for market 

participants, and taking custody deposits, even when there is client 

demand for those generally low-risk services and to actually increase the risk in its portfolio since it bears the same capital cost 

for a risky asset as for a safe and sound one. 

I do not believe that the proposal would materially change the 

amount of capital held by U.S. global systemically important bank 

holding companies (G–SIBs). The $121 billion figure noted in the 

proposal represents the potential reduction in tier 1 capital required across the lead insured depository institution subsidiaries of 

the G–SIBs; however, these firms all are wholly owned by their 

parent holding companies. On a consolidated basis, G–SIBs 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 investors. Due to these limitations at the holding company level, the G–SIBs would be required 

to retain the vast majority of the $121 billion amount and would 

not be able to distribute it to third parties. The Board estimates 

that the proposal would reduce the amount of tier 1 capital required across the G–SIBs by approximately $400 million. That figure is approximately 0.04 percent of the amount of tier 1 capital 

held by the G–SIBs as of the third quarter of 2017. 

Q.17. 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 postcrisis financial rules to seek improvements. 

Will these modifications to postcrisis reforms be one-sided with 

a focus on deregulating the rules protecting people from dangerous 

behaviors from the financial sector? 

A.17. Core elements of the postcrisis financial regulatory reforms 

have made our financial system stronger and more resilient: higher 

and better-quality capital, an innovative stress testing regime, new 

liquidity requirements, and improvements in the resolvability of 

large firms. The reforms to regulation and supervision that have 

been put in place since the financial crisis have contributed to a 

financial system that better supports lending to borrowers and protects consumers. 

That said, it is the responsibility of financial regulators to review 

and revisit postcrisis regulations to ensure not only that they are 

effective, but also to see if the same outcomes can be achieved, 

where appropriate, in ways that are more efficient, transparent, 

and simple. More specifically, regulators should continue to tailor 

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rules to the different risks of different firms and ensure that our 

supervisory program is as efficient as possible, including work to 

reduce unnecessary burden on community and regional banks, 

while simultaneously holding our largest, most complex firms to 

heightened regulatory standards. As we consider possible changes 

to the postcrisis structure of regulation and supervision, we will remain focused on promoting the strength and resilience of the financial system. 

Q.18. Chair Powell has said not a single big bank rule requires 

strengthening. 

Do you agree? 

A.18. At this point, regulators have completed the bulk of the work 

of implementing postcrisis regulatory reforms, with an important 

exception being the U.S. implementation of the recently concluded 

international agreement on bank capital standards. Due in significant part to gains from core postcrisis reforms around capital, 

stress testing, liquidity, and resolution, we undoubtedly have a 

stronger and more resilient financial system. 

I believe that now is the time to step back and assess whether 

postcrisis regulations are working as intended and determine ways 

to improve them, not only to ensure that we are satisfied with their 

effectiveness, but also to explore opportunities as appropriate to 

improve the efficiency, transparency, and simplicity of these regulations, while maintaining the resiliency of the current system. 

Q.19. 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? 

A.19. 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, deficiencies in Government regulation of financial institutions and markets. In response, 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. As you 

know, prior to the passage of the Dodd–Frank Act in 2010, the 

Board had responsibility for writing regulations to implement 

many consumer protection laws. The Dodd–Frank Act transferred 

most of these responsibilities to the CFPB, and considerably expanded its consumer protection statutory authorities for supervision and enforcement, and granted the CFPB broad authorities to 

promulgate consumer protections regulations covering banks and 

nonbanking entities. 

Although the Board no longer has rulewriting authority for most 

consumer protection regulation, we remain committed to strong 

consumer protection to promote a fair and transparent financial 

marketplace, as we have for more than 40 years, 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. Through this division, we oversee the Federal Reserve 

System’s supervision and examination policies and programs for 

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the banks under our supervisory authority to ensure consumer financial protection and promote community reinvestment. 

The Dodd–Frank Act established the CFPB as a dedicated agency not only to consumer financial rulemaking, but also supervision 

for banks, thrifts, and credit unions with assets over $10 billion, as 

well as their affiliates, and for nonbank mortgage originators and 

servicers, payday lenders, and private student lenders of all sizes. 

Despite responsibilities for supervision that were transferred to 

the CFPB, the Federal Reserve continues to be dedicated to consumer protection and community reinvestment in carrying out our 

supervisory and enforcement responsibilities for the financial institutions and for the laws and regulations under our authority. We 

supervise 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. 

The Federal Reserve is committed to ensuring that the financial 

institutions under our jurisdiction fully comply with all applicable 

Federal consumer protection laws and regulations. For example, in 

the last few years, the Federal Reserve has 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. In addition, 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. 

At the Board, DCCA staff provide oversight for the Reserve Bank 

consumer compliance supervision and examination of approximately 800 State member banks and bank holding companies 

(BHCs) through its policy development, examiner training, and supervision oversight programs, including for banks’ performance 

under the CRA; conducting oversight of and providing guidance to 

Reserve Bank staff on consumer compliance in BHC matters; assessment of compliance with and enforcement of a wide range of 

consumer protection laws and regulations including those related 

to fair lending, UDAP, and flood insurance; analysis of bank and 

BHC applications in regard to consumer protection, convenience 

and needs, and the CRA; and processing of consumer complaints. 

DCCA also monitors trends in consumer products to inform the 

risk-based supervisory planning process. Quantitative risk metrics 

and screening systems use data to assess market activity, consumer complaints, and supervisory findings to assist with the determination of risk levels at firms. 

Q.20. The Administration has proposed in a November report stripping FSOC of its power to designate nonbank SIFIs—like AIG—for 

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5https://www.ft.com/content/680953c0-3e2a-11e8-b9f9-de94fa33a81e 

heightened supervision by the Fed. The report said this authority 

was too ‘‘blunt’’ of an instrument. 

Has the Fed acted as a blunt instrument in its supervision of 

nonbank SIFIs? 

A.20. As consolidated supervisor of nonbank financial companies 

designated by the Financial Stability Oversight Council (FSOC), 

the Board’s primary objectives encompass ensuring enterprisewide 

safety and soundness and mitigating threats to financial stability. 

The Board continues to strive for a tailored approach that reflects, 

among other things, the size, complexity, and business model of the 

supervised firm. When supervising firms significantly engaged in 

insurance activities, the Board conducts its consolidated supervision in coordination with State and foreign insurance regulators, 

collaborating through mechanisms including discussions of supervisory plans and examination findings, as well as supervisory colleges. We additionally have hosted multiple crisis management 

groups that included a variety of participants including State insurance departments, the Federal Insurance Office, and the Federal Deposit Insurance Corporation. 

Q.21. Or has the Financial Stability Oversight Council, or FSOC, 

helped to eliminate regulatory gaps in our financial regulatory system? 

A.21. Prior to the creation of the 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 films operating across multiple 

markets. The FSOC established a venue to facilitate the sharing of 

regulatory information and coordination to help minimize potential 

gaps and weaknesses. 

Notably, the FSOC must publish a financial stability report each 

year, 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 Government. 

Q.22. S&P Global warned earlier this month that leveraged lending standards were deteriorating, and that underwriting standards 

in this $1 trillion market continue to get weaker and weaker. One 

PIMCO analyst said, ‘‘I’m not sure the market can tolerate much 

worse.’’ 5 There used to be guidance in place to protect against 

these risks, but while at the OCC, Acting Comptroller Noreika 

withdrew its guidance on leveraged lending. And you have said 

that this guidance, because it was declared a rule by the GAO, is 

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6https ://www.americanbanker.com/news/feds-quarles-to-seek-more-tailoring-of-large-bankrules 

‘‘not something that should be cited in supervisory action or taken 

into account by examiner.’’ 6

So judging by your comment, the Republicans’ assault on banking guidance has already had a chilling effect on the Fed’s ability 

to constrain emerging risks, is that right? 

How do you plan to protect the market from systemic risk if 

you’re telling supervisors to ignore this guidance? What does the 

Fed plan to replace this guidance with? 

A.22. The Board has broad authority to supervise and regulate 

banking organizations to promote their safety and soundness. As 

part of that authority, Federal Reserve supervisors and examiners 

assess credit and other risks to the safe and sound operations of 

firms, including risks that may be posed by leveraged lending, and 

to direct the firms to address such risks as appropriate. As part of 

assessing credit and other risks, Federal Reserve examiners routinely evaluated the underwriting of leveraged loans prior to the 

issuance of the most recent leveraged lending guidance. The guidance was issued to provide clarity regarding safety and soundness 

issues that may be present in making such loans. The guidance 

was not issued as a regulation that would be enforceable. Rather, 

banking organizations should use it to better understand and manage the risks they are taking. 

The Board, Federal Deposit Insurance Corporation (FDIC), and 

OCC are discussing whether it would be appropriate to again solicit public comment on the guidance with a view to improving the 

clarity and reducing any unnecessary burden. 

Q.23. The Fed in 2016 proposed a rule to limit some of banks’ activities in commodities markets, with the rationale being that 

banks’ owning, trading, and moving commodities might post a safety and soundness risk to the banking system or allow banks to 

wield outsized power in certain markets. 

How does the Fed have time to revisit so many rules that aren’t 

even fully phased in yet—the Volcker Rule, the leverage ratio, riskbased capital rules—when you haven’t even completed work from 

the recent past that was based on years and years of study? 

Since the election we have heard nothing about this rule being 

finalized or about any progress on the rule. Has this rule been 

abandoned, and if so, why? 

A.23. 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, acaVerDate Nov 24 2008 09:13 Jul 26, 2018 Jkt 046629 PO 00000 Frm 00086 Fmt 6602 Sfmt 6602 L:\HEARINGS 2018\04-19 ZZDISTILLER\41918.TXT JASON
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demics, 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. 

Q.24. A recent NY State Comptroller report reported that Wall 

Street bonuses showed a dramatic 17 percent increase from last 

year. Bonuses have increased by 34 percent over the last 2 years, 

and the average bonus for Wall Street traders is now at the second 

highest level ever recorded—behind only 2006, the year before the 

financial crisis began. 

We also know, from the Financial Crisis Inquiry Commission and 

other sources, that out-of-control bonus practices were a major driver of the 2008 financial crisis. Top executives at Bear Stearns and 

Lehman took out almost $2.5 billion in bonuses in the years before 

those two companies failed, and never had to repay a dime. After 

the crisis, multiple surveys showed that more than 80 percent of 

financial market participants agreed that irresponsible bonus practices were a major contributor to the short-term risk taking that 

brought down the financial system. 

Section 956 of the Dodd–Frank Act instructed bank regulators to 

reform bonuses at financial institutions, by eliminating ‘‘take the 

money and run’’ bonus practices that encouraged irresponsible risktaking. Prior to your confirmation, regulators were close to completing rules that would have placed new limits on big bank bonuses. Yet to all appearances the Federal Reserve and other regulators appear to have abandoned that effort completely, even as bonuses skyrocket back to precrisis levels. 

When will the Federal Reserve implement Section 956 of Dodd– 

Frank and reform bonuses? Why has this rule been delayed so 

long? 

A.24. In June 2016, the Board, OCC, FDIC, the SEC, National 

Credit Union Administration, and Federal Housing Finance Agency 

(the Agencies), jointly published and requested comment on a proposed rule under section 956 of the Dodd–Frank Act. This joint effort proposed several requirements to address incentive compensation arrangements. The Agencies received over 100 comments on 

the 2016 proposed rule and are considering the comments. I do not 

have a projected date for completion of this rulemaking. 

The Federal Reserve, along with the other Federal banking agencies, issued Guidance on Sound Incentive Compensation Policies in 

June 2010 to address incentive compensation programs at financial 

institutions. This guidance is intended to assist regulated firms in 

developing appropriate incentive compensation programs that do 

not encourage inappropriate or excessive risk taking. 

The Federal Reserve continues to evaluate incentive compensation practices as a part of ongoing supervision. This supervision 

has focused on: the design of incentive compensation arrangements; 

deferral and risk adjustment practices (including forfeiture and 

clawback mechanisms); governance; and the involvement of the 

firm’s controls and control function groups in various aspects of incentive compensation arrangements. 

84 

Supervision focuses on ensuring robust risk management and 

governance around incentive compensation practices rather than 

prescribing amounts and types of pay and compensation.